Growth5 Blog

Wednesday, November 18, 2009

Maps & Google's "Less Than Free" Business Model

Great post from Bill Gurley of Benchmark Capital about Google's emergence in Maps/GPS and how that in part has led to what Bill dubs their "Less than Free" business model.

The highlights:
1. "...when I read this week that Google was including free turn-by-turn navigation directions with each and every Android mobile OS, I had an immediate feeling that I was witnessing a disruptive play of a magnitude heretofore unseen."

2. Originally, Google "licensed data from the two duopolists that ruled the mapping business – Tele Atlas and NavTeq."

3. "On July 23, 2007, TomTom, the leading portable GPS device maker, agreed to buy Tele Atlas for US$2.7 billion... shortly thereafter, on October 1, Nokia agreed to buy NavTeq for a cool US$8.1 billion."

4. Google has spent that last couple years building their own turn-by-turn database. "This October 13th, just over one year after dropping NavTeq, the other shoe dropped as well. Google disconnected from Tele Atlas and began to offer maps that were free and clear of either license. These maps are based on a combination of their own data as well as freely available data. Two weeks after this, Google announces free turn-by-turn directions for all Android phones."

5. "Android is not only a phone OS, it’s a CE OS. If Ford or BMW want to build an in-dash Android GPS, guess what? Google will give it to them for free. As we noted in our take on the free business model, “if a disruptive competitor can offer a product or service similar to yours for ‘free,’ and if they can make enough money to keep the lights on, then you likely have a problem.”

6. "While it is obvious that this maneuver creates a problem for the multi-billion dollar GPS market, it also poses real challenges for the leading smart phone players – RIM’s Blackberry and Apple’s iPhone. Without access to their own mapping data, these vendors now face an interesting dilemma. Do you risk flying naked without free navigation or do you suck it up and swallow the above average royalty fee for each and every handset? Neither option is stellar. This problem isn’t nearly as daunting as the one now faced by the Windows Mobile and Symbian teams. As software providers, they are lucky to get a per unit royalty equal to that extracted by the GPS data guys. If they are now forced to integrate this data merely to keep their product competitive, their gross margin just went negative. Ouch!"

7. Why is Google so interested in maps? "The geographic taxonomy is a wonderful skeleton for a geo-based ad network. If your maps are distributed everywhere on the Internet and in every mobile device, you control that framework."

8. Less Than Free. Why would the carriers partner with Google? "...because Google will give you ad splits on search if you use that version! That’s right; Google will pay you to use their mobile OS. I like to call this the “less than free” business model. This is a remarkable card to play. Because of its dominance in search, Google has ad rates that blow away the competition. To compete at an equally “less than free” price point, Symbian or windows mobile would need to subsidize. Double ouch!!"

9. Google could implement the same "Less Than Free" business model for Chrome OS. "If Sony or HP or Dell builds a netbook based on Chrome OS, they will make money on every search each user initiates. Google, eager to protect its search share and market volume, will gladly pay the ad splits. Microsoft, who was already forced to lower Windows netbook pricing to fend off Linux, will be dancing with a business model inversion of epic proportion – from you pay me to I pay you.”

10. Google's GPS is not going to be as good as what is already out there. I suspect subsequent versions will get better and better, especially with user input - "...when a product is completely free, consumer expectations are low and consumer patience is high. Customers seem to really like free as a price point. I suspect they will love less than free.”
Everyone knows Google owns search. What is impressive is how Google keeps finding innovative ways to provide additional efficient functionality to broaden their search capabilities. For the carriers and eventually the netbook makers, what's not to like about getting paid to implement Google's search technologies. "Less Than Free" is a great sales pitch, isn't it?

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