App Internet: Explaining The Google/Verizon Riddle

Have you wondered why the odd couple of Verizon and Google have teamed up to propose tiered pricing for wireless Internet access? It's a way for Google to fight off App Internet.

The next wave in technology will consist of applications that seamlessly leverage the power of the local device (a smartphone, a PC, a tablet), and the power of the Cloud. iPad apps are the best early example. This model will challenge two old approaches: 1) the Microsoft model of applications running locally, and 2) the Web/Cloud model with applications running remotely. App Internet incorporates elements of both and combines them to create an improved experience.

Despite its efforts with Android, Google makes approximately 98% of its revenue and 100% of its profit from old model two:  Web/Cloud. And that approach heavily relies on the segment of basic technology that is improving in price/performance at the slowest rate:  the network. In contrast, processors and storage (the technologies powering local devices) are improving at much faster rates.

Google wants you to run your applications (search, mail, calendar) at a remote server, and in the process continually move all your bits back and forth across the network (with ad impressions delivered with each to and fro). This bandwidth-hungry approach makes Google a powerful ally of Verizon. And it explains why Google wants to raise network prices in the future and potentially give itself a network cost advantage -- because its model won't ultimately keep up in price/performance or popularity with App Internet.

Comments

Weak analysis

I disagree. Here's why.

Google had one of the first apps (Gears) before they were called apps. As an organization they have more apps knowledge about running cloud / local software than pretty much anyone else.

Their cost structure is mostly built labor, then on power consumption, then on hardware costs. To make the argument that a low-level cost is driving their strategy is like saying Forrester is changing strategy because of office rent costs.

Google has no interest in a tiered Internet where they are beholden to carriers for carriage. They want to commodify carriage as a competitive layer of the value chain, just like they want to commodify creative.

Google and the network

Google's business model rests on shipping bits between thin clients (browsers) and heavy servers through a pipe that the company doesn't own. Therefore:

1) Google wants that pipe to be an ever-cheaper commodity.
2) The pipe providers (AT&T, Verizon, Orange, et. al.) will fight to retain pricing power through tiering.
3) Google will align with them to ensure that it gets preferential pricing (potentially based on Google's high volumes) in an era of tiering.

Google sees the writing on the wall. It is is proactively moving to protect the portion of its value chain that is gaining the least improvement in price performance through technology change -- the network. This is Google's achilles heal and that's why we find the company in bed with the likes of Verizon.

Why Google wants net neutrality

Hi George, thanks for the reply and consideration. I think we agree on much of the discussion.

I agree with you that Google's business model rests on shipping bits between clients and servers through a pipe the company doesn't own (but increasingly leases if you look a the dark fibre agreements they've been making for 5+ years). Therefore:

1) Agreed: Google wants the transfer to be a commodity.
2) Agreed: the pipe providers will fight to retain pricing power through tiering, though tiering is only 1 tactic and many others may be used.
3) Disagreed: there is no evidence for this. And aligning with the pipe providers means an all-or-nothing bargain for Google -- either align with them all end up with a balkanized end-user experience based on geography and pipe ownership.

I don't know what writing on the wall you mean here. Google is the most profitable company in revenue / employee in the world.

Again, I don't find it convincing to suggest that they are driving partnership strategy because of a small part of their cost structure.

I think this is just a mobile deal to get their Android OS as widely distributed as possible.