Google: It's About Strategy, Not Products
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Remember when Michael Jordan left the basketball court to play baseball? As an avid Bulls fan, I was a little perturbed. Not that I thought he shouldn’t retire – after all, the man had helped them win three championships at that point and had every right to go out on a high note. It was more about him doing something different rather than considering the same game in a different venue such as coaching basketball. I wanted to tell him, “Basketball is your game. Stick with what you do. We will miss you – but at least it will make sense.”
Now, I want to say the same to Google (NASDAQ: GOOG). The company's initial focus of being the dominant web search engine has allowed them to branch into similar services along the same vein, such as email service, the Google Docs office suite, and now the Google+ social networking service. The company isn’t content with staying put in their ‘game’ and is seeking to tap the tablet market. While I predict that what they sell might not find favor with consumers, the way they are selling will secure revenue stability and stock performance.
What Has Happened
Large tech companies such as Google and Yahoo! (NASDAQ: YHOO) have traditionally had limited success trying to compete with their own innovations. This is the case because, just as in physics, effort spread over a wider area has little impact in contrast to focused force onto a small one. Both tried creating their own social media products but neither became as widely accepted as Facebook (FB) because that’s all Facebook does.
This hasn’t stopped Google from trying. The company has acquired an assortment of strategic products that have panned out; the $1.65 billion purchase of YouTube was before user-generated video platform was popular for marketing. It’s takeover of Blogger was also ahead of the game. These examples show that Google has a track record of smart growth decisions. But these are all additions to its main service – a search engine.
Google’s first attempt at getting out of the computer was when it acquired Android in 2005 with hopes of entering the phone business. The focus on the patents rather than the actual handheld phone made Google's Android operating system the smart choice by a large variety of handset makers, including Samsung and HTC.
Staying with this strategy would have been good – but not good enough for Google. Even though it could keep Android as an "open" platform, it hoped to make a special phone with bells and whistles that could better compete against Apple’s iPhone. In 2010 it launched the Nexus One, a co-branded smartphone built by HTC. The ‘Google Phone’ was canned after only a few months due to lack of interest by consumers.
But Google still wants to play ‘baseball’ as evidenced by its recent move. Google reportedly plans on selling co-branded tablets running its Android operating system. The tablets will be manufactured by partners such as Samsung and Asus and bear the Google logo.
While tablet specifications are on the hush-hush, it is not anticipated to have any groundbreaking features. It will, however, attempt to create a seamless integration of all things Google, including the new Google ‘Play’, a digital content service from Google which includes an online store for music, movies, books, and Android apps and games.
What Will Happen and Why
It is said that Ray Croc, the man behind fast food giant McDonalds (NYSE: MCD), once asked at a lecture to college students, “What business am I in?”. The students quickly answered, “The hamburger business!” Ray smiled and corrected them by saying, “No, I’m in the real estate business.” McDonald's makes its money by buying/selling commercial property, as well as renting the property to franchisees and collecting a franchise fee. In essence, McDonalds could sell anything, and even if the product flopped, McDonald’s would still survive.
This concept is why Google will succeed no matter what ‘game’ it plays or no matter what it offers.
First, almost 95% of Google’s Revenue comes from advertising. Companies see how much Google is used for almost everything and want to ride that wave to market themselves. Google has capitalized on this to create a rock solid foundation of revenue it can use to try and tap new markets such as phones and tablets.
Second, Google’s method for creating new products and market entry has proven successful in eliminating risk. Its ‘buy vs. build’ strategy allows it to be more profitable than other companies attempting to create their own tools/products. Take Yahoo! as an example. Yahoo has focused on generating applications and software in house, and has paid the price with steadily lost market share over the past couple of years.
Finally – and this is the true brilliance behind Google’s strategy – it will sell these products on its own platform. It plans on launching an online store to sell co-branded tablets running its Android operating system. It will also sell other tablets such as the Samsung tablet.
In other words, Google has followed McDonald’s path and has invested in the ‘real estate’. By opening an online store, it doesn’t matter what it sells, it will still generate revenue. More revenue from its own products, to be sure, but again, it will get paid regardless. What is more, just like the Nexus phone, it really won’t matter whether the Google tablet actually overtakes Apple’s iPad. It is simply another way for Google to spread the exposure and acceptance of its Android operating system. If the product fails, the platform will still remain.
Google has set up multiple streams of income with almost no risk or chance of failure.
Apple, the largest company in the world by market cap, considers Google to be one of their primary rivals not because of the products it sells, but because of its strategy. Google is unafraid to face head on its competition with Facebook for online advertising dollars. It will also give the iPad a run for its money. And even if it fails, Google still will have seen some revenue that would offset cost.
Google has earned its top-ranking and investors would be wise to jump into Google stock. Its strength of leadership and strategic decisions will ensure solid performance.
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