Saturday, July 29, 2006

A Google PC would not add shareholder value

Richard Brandt speculates on the possibility of a Google PC. My view is that in the foreseeable future there is little business value in Google venturing down this path - though as Richard points out, Google does have the capabilities to pull off such a product.
Firstly, there is no compelling reason for Google to venture into a lower margin hardware oriented business which is extremely competitive. In my view it would find it much easier to generate customer lock-in by using its capabilities in software solutions. It has already done so and arguably the lock-in exists because Google's services are universally accessible without regard to the hardware or OS they are being accessed from.

Secondly, even if a reason for such a move emerges in the next few years, I would prefer a 'Google Inside' strategy - not dissimilar to the kind of deals Google is doing with Dell. Fact is hardware prices are going to continue falling as competition and range of devices increases ( pocket pcs, mobile phones etc). Given rising incomes across most economies, it is clear that PCs will continue to become more affordable over time. For this reason I question the value in a stripped down mega-cheap Google PC. The other factor at play is that it is extremely unlikely that people are not going to want to use a PC they purchase for non-google tasks. There is a significant amount of software written that users would want to be able to run on any PC they buy, A Google or nothing PC would therefore not be as attractive a proposition even at lower prices.

In my view Google can get much better ROI for its shareholders by focusing on higher margin software oriented solutions that leverage network effects and integrate well with each other. A mega cheap google PC would have to have thin margins, uncertain takeup and be very exposed to falling prices of general purpose PCs and that would make it a questionable business move for Google at this point in time.

That said, I think a lot depends on how Vista plays out. If the user response to the launch is lukewarm ( as I suspect it might be ), Google may sense the possibility of taking on Microsoft on the desktop due to its exposed position and competitive instincts may dictate it going down a conforntational route by trying to offer its own OS or PC. I hope it doesn't though. What Google shareholders would care about is not whether or not Google beats Microsoft in any particular area but whether it is a business that consistently generates high margins and returns on equity. And the hardware business where a resurgent HP and a stumbling but still powerful Dell are likely to be long term leaders, the smart strategy is to keep the focus firmly on software but deliver richer and more integrated services over a non proprietary web based platform.

I like the idea of PCs coming with a "Google Inside" sticker in the future :)

5 Comments:

Blogger Richard said...

You make some good points. Certainly, it may become completely unnecessary to design a special PC. H-P could easily come out with a Linux PC itself and load it with Google software inside.

But that depends on certain factors. The first is whether PC makers will want to participate in the plan. Google has a goal to get the internet to as many people as possible. The ideal will not be to create a stripped down cheap PC but a very advanced cheap PC. Without Microsoft software in it you can knock a lot of money off the price and still use the latest microprocessors. But it would be a low-margin business that will cannibalize PC nakers' high margin stuff.

And if it is easy to load Microsoft products, including the OS, it's still a powerful machine.

However, for most of us, the Google software will suffice, and that means it won't need hardware upgrades as soon, will not go obsolete as quickly, and will not turn into a sluggish mess after three years.

If it just has a good Microsoft-compatible word processor, photo editor, and maybe a couple other things, it will suit the needs of 90% of users. You get everything else you need off Google's servers.

Google can afford to sell PCs at cost. The goal is not to make money off the venture, but to get more people online and to turn more people to Google software.

You speak like an investor, worrying about ROI. But for Google products, the ROI is zero. The money comes from the ads. And I think Google will stick with just this form of revenue longer than people think. So far, a small percentage of ad dollars have moved to the online business, but it is the fastest growing category. And imagine Google delivering relevant ads to broadcasters--through the Google PC.

6:11 am  
Anonymous Curt Monash said...

Hmm. Good points on both sides. But lower margins aren't necessarily a barrier to entering a business, even if Microsoft's experiences with XBoxes and MSN has been uninspiring profitwise to date.

I do think Google would be deathly afraid of ever being perceived as competing with Dell, et al. So a Google-oriented PC would be a lot safer from that standpoint than a Google-"manufactured" PC, and not only because of the lower cost of goods sold (which is a variable cost anyway if you outsource manufacturing, as Google surely would).

12:23 pm  
Anonymous Paul Tsang said...

I think both sides have missed the purpose of a Google PC.

If you look at Google it is not just a search engine, but thousands of interconnected cheap computers to form one super computer. Google could decide to continue adding servers, but why do that when you can get consumers to buy it and build that super computer capability for you?

Consumers will pay for a Google PC, effectively funding Google's computer expansion, ultimately enabling Google to have better search capability and for this capability to be otimised for their searching or storage needs.

Effectively they would have a massive grid computing network for free....

8:22 am  
Blogger Piyush said...

Paul,
You make a good point about google effectively being a vast grid. However, access to that computational resource is already available through a variety of non proprietary devices and you don't need a google PC to leverage that. In effect, we already have google PCs. The point I was making was that hardware is inevitably getting more powerful and cheaper all the time and people will not generally pay for a google PC when there are alternatives in cheap PCs that allow access to google services anyway. This would just dilute google's margins. A better strategy would be for google to ensure that its services are available across a range of PCs and devices ( and in multiple languages) in an agnostic way - which is exactly what it is doing.

9:43 am  
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