Comment by _jgvg
8 years ago
Another way that I like to express that is "create a desert of profitability around you".
I once had a strategy professor define the Google business model somewhat like that, where "Google tries to make every other business around it free or irrelevant". It results in a few different effects:
- By reducing the cost of other links of the value chain, there is more money available to spend on the links you actually generate revenue on. This shifts profits along the value chain to that link. One example is dramatically reducing the cost of phones and internet access, thus allowing customers to spend more time and money online, which generates revenue and profits for Google
- By making the other links free or irrelevant, you reduce the odds that a competitor in those links will strengthen their position and will extract more profits from the rest of the value chain. One example is using Android to prevent a monopoly on the smartphone side. If Apple had a monopoly or near monopoly, it would be able to extract larger economic profits from the other links on the value chain, including Google
A desert of profitability shifts consumers to you, and keeps competitors away.
Exactly, most people don't realize this simple strategy and worship at the altar of Google for giving "free" software.
e.g Chrome is free and google wants to push for web technologies only because their cash cow (Web Advertising) can keep generating profits as long as there are more web users specially the ones whose behavior can be easily tracked on their browser.
> Exactly, most people don't realize this simple strategy and worship at the altar of Google for giving "free" software.
Yeah, people should stop idealizing and worshiping companies. Apple is only pursuing "privacy" because it tried and failed miserably at user monetization, but it won't think twice about handing over all your data to the government (like they did in China) if that's the best business options.
They're all companies, they're here to make a profit.
That's one reason why I find it easier to trust companies than to trust governments. I know exactly what companies want, so I can predict how they'll act.
Companies are that "friend" who will always get money from your wallet, whenever they have a chance. Governments are those friends who swear they are on your side and want to help and protect you, but will sneak their fingers into your wallet whenever you're not looking.
I think it’s more nuanced than that. Culture and values do matter in some companies, and, they are used in daily interactions. This will yield different results. Apple is no saint, but much more aligned with my values than google for example.
Governments are in the business of creating monopolies.
- By reducing the cost of other links of the value chain, there is more money available to spend on the links you actually generate revenue on. This shifts profits along the value chain to that link.
By this logic, the biggest force in the universe preventing micropayments by tying media to the tawdry, corrupting mechanism of advertising, is Google.
A desert of profitability shifts consumers to you, and keeps competitors away.
Cities are supposed to impoverish the regions directly around them in this way, as well.
> By this logic, the biggest force in the universe preventing micropayments by linking media to the tawdry, corrupting mechanism of advertising, is Google.
No, it is users being willing to pay. The vast majority of users are far more ok with being shown ads than paying the equivalent of the cost of the ad to have it go away.
The vast majority of users are far more ok with being shown ads than paying the equivalent of the cost of the ad to have it go away.
What if the ad were not in the picture at all, and you had low friction micropayments? There are YouTube channels which eschew advertisements and get most of their money from Patreon instead. There are other channels that have been demonetized against their will and have gone this route as well. It's workable, and yet, Patreon is far from the lowest friction it could achieve.
If there was some party able to make micropayments work, and able to make them not ever work, it would be Google.
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Thing us that our easiest way to pay online are credit cards.
But credit cards suck for the kind of small payments the web warrants.
Also, what is the chance that we would pay and get shown ads anyways?
For me it is not ads, full stop, that are the problem. but distracting/disturbing ads unrelated to what i am reading at the time.
> Cities are supposed to impoverish the regions directly around them in this way, as well.
This doesn't make any sense. Cities exist as trading hubs: where people trade labor, services and goods.
Why are you bringing cities into this anyway? Makes no sense at all...
This doesn't make any sense. Cities exist as trading hubs: where people trade labor, services and goods.
This is also true. However, the centralization causes various forms of impoverishment -- which you might also describe as "specialization." Cities develop zones around them that lack many services, but concentrate others. Think of the places where there are lots of warehouses. If you are in a city to be connected to some kind of a hub, the fact is that not all of that city's area is going to be equally well connected.
Think of what happens to towns near large cities. This has been studied by social geography since at least the 70's.
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My first thought was of all the wealthy suburbs surrounding even relatively poor cities like Detroit. Cities definitely don’t create a desert.
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> Cities are supposed to impoverish the regions directly around them in this way, as well.
Just because you can specify a business model, doesn't mean it's automatically viable, or moral, to execute in any context.
> “Cities are supposed to impoverish the regions directly around them in this way, as well.”
Where’d you hear that?
Where’d you hear that?
I read it in an Indian social geography paper while writing an undergraduate Geography "101" paper. (The course number was actually 1)
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The content market has pretty much always worked by the precise inverse of micropayments: aggregation, bubdling, and regular serial subscriptions. The addition of advertising made market size itsef, rather than the content, the goal.
Irony is that it was the Master of the Channel himself who came up with the falsehood that "content is king": Viacom's Sumner Redstone. Maybe he believes that himself, but it doesn't make it the truth.
See also Google’s efforts to commoditize content: https://en.m.wikipedia.org/wiki/Viacom_International_Inc._v.....
It’s not as simple as that. Google did not go out to commoditize content. Technology created a new distribution system that allowed them to dominate the distribution of content.
If you read the case, many of the videos Viacom was asking Google to take down, were uploaded by Viacom themselves. So everyone was scrambling to get more eyeballs, that ultimately led to commoditization.
Also referring to the parent post, “desert” is not the right analogy when you create surplus around you to keep out competition. I think the knowledge industry is more like a religion, where the information is free but there are still strong structures that support it.
In case of religion, these structures are supported by supportive communal relationships. In technology, by massive network effects.
I think that Google was more worried about Microsoft dominating smartphones, not Apple. Microsoft would be tempted to use smartphone dominance to steer search traffic to Bing rather than Google.
> I think that Google was more worried about Microsoft dominating smartphones, not Apple.
Maybe initially, before the iPhone. But the iPhone was the Dreadnaught of phones: everything that came before it became instantly irrelevant (look for HMS Dreadnaught).
> Microsoft would be tempted to use smartphone dominance to steer search traffic to Bing rather than Google.
Just as Apple would as well, unless Google pays, which it does.
Google also use to pay Mozilla Firefox millions. I don’t know if it still does.
> One example is using Android to prevent a monopoly on the smartphone side.
yeah, good point. i think it helps us understand the Android ecosystem, its SDK, its user base, etc.
it doesn't seem like Google, a search and advertising company, had a natural reason to enter the mobile phone OS market. and they didn't set out to create an "insanely great" mobile OS experience, either for the users or for the developers.
instead, the strategy was apparently to just shoehorn a camera OS into the mobile phone market, offer it for free, grab as many users as possible, and thereby disrupt/restrain Apple.
and it has worked quite well for Google. but Android has subjected users and developers to a pretty bumpy ride. a lot of people went along for that ride because the upfront costs appeared to be lower than Apple/iOS. i don't know about the longer term costs though.
Yep, one strategy analysis that I (sadly) rarely see being done is evaluating the value chain.
Essentially, you look at all the links on a value chain and look at how competitive each one of those markets are. The links with the least competition will capture most of the excess profits in the chain, and the links with the most competition tend to be commoditized and have zero economic profits (which are different from financial profits).
Taking Google's online ads value chain, for example:
Chipset & component makers > device makers > OS makers > browser makers > ISP/carriers > online platforms > content creators > advertisers > ad platform > users
(You could rearrange this in a few different, but still valid, ways)
What would happen if there was a single device maker? Or a single OS maker? Those would be able to yield monopoly pricing, capturing most of the profits in the value chain.
Now look at those links: in how many of them Google operates now in a strong way?
- Device makers (Pixel)
- OS makers (Android, ChromeOS)
- Browser makers (Chrome)
- ISP/carriers (Fi, Fiber)
- Online platforms (YT, Blogger, G+, sites, etc.)
- Content creators (indirectly, sponsoring)
- Ad platform (Adsense & Doubleclick)
Now look at where it makes money:
- Ad platform (Adsense & Doubleclick)
All those other businesses exist to protect the revenue-generating business.
nice.
one of those links i personally find interesting is "content creators."
on the top end, it appears that a handful of the apps in the Google Play Store make the lion's share of the revenue (e.g. Facebook, Google itself, and some really strong game companies).
at the same time, i've heard estimates that 50% of the independent app creators earn less than $500 per month. and it's getting worse.
in short, the android app market was quickly populated by a huge number of independent app creators (who presumably thought it would be a good, durable, new line of business). but, for the most part, these app creators became a low-income-neighborhood/swamp around the top app creators.
but Google still (indirectly) benefits from this arrangement because it offers the appearance of a free, open, lucrative, land of opportunity -- a healthy marketplace.
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FWIW, the expression "create a desert of profitability around you" is more popularly expressed as "create an economic moat".
The ideas are more different than the analogies are. A moat would be things like patents, data, expertise, etc that a competitor would need to get to match you and which are hard to develop. That doesn't have anything to do with the profitability of nearby market niches.
Exactly! A moat is less efficient than a desert. A moat is highly susceptible to niche entrants who might expand into your main market after, but a desert leaves no to little money on the table for anyone else.
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The problem with this argument is that it is a gross simplification of reality.
Terms like "market", "nearby market", "niche" etc are all abstractions the same way a map is an abstraction of an actual territory. They help us reason clearly but they should not be used as a substitute for the real thing ala "the map is not the territory".
A "desert of profitability" is essentially a battle tactic -- a tactic where you delay the use of your moat (fortress, trench etc) by igniting trouble elsewhere, usually in neighboring lands that enemies must traverse before the war reaches your own land.
IOW, it is a tactic used in conjunction with other tactics, it is not a strategy; all it does is buy you time. Eventually, the technology landscape will shift and such economic moats, no matter how deep, will lose their relevance.
Those aren't equivalent concepts. A moat can refer to any number of strategies to protect your business from competition.
* By reducing the cost of other links of the value chain, there is more money available to spend on the links you actually generate revenue on*
Ah, a light-bulb goes on when wondering why Google spends on CDN and DNS services. (The additional internet telemetry-streams are nice-to-have but probably not the actual point, economically speaking.)
But wouldn't that work against Google app engine? Who would pay lots of money for cloud services if it's impossible to make a living from the results?
Also these big companies have so many competing interests - how do these empires manage internal conflicts of interest?
Perhaps the App engine is intended to aid in creating that desert of profitability.
Google app engine isn't the biggest source of revenue for google.
Don't know how much they make but there is a lot of money in cloud services, just ask Amazon
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> One example is using Android to prevent a monopoly on the smartphone side. If Apple had a monopoly or near monopoly, it would be able to extract larger economic profits from the other links on the value chain, including Google
In the case of Apple vs Android I'd say Apple is doing pretty good and are arguably doing substantially better than Google in spite of not having followed this strategy themselves.
Apple absolutely does follow this strategy: it's not presently very profitable to be a supplier of small electronic components, or a contract manufacturer, or an app developer, or an Apple retail store employee. At least in the case of app development, Apple puts significant effort into making their dev tools powerful and their development experience easy, with the goal of bringing in as many devs as possible and keeping the market commoditized.
The difference is that most of Apple's complements are B2B suppliers and so are rather invisible to the general public, while many of Google's complements were formerly consumer-visible markets. So it's much more obvious when Google turns the web browser or ISP market into a commodity than when Apple turns the electronic supplier marketplace into a commodity.
Calling their suppliers compliments lacks understanding of what Joel meant. You don't use apple's contract manufacturer with your iPhone - its not a compliment product. iPhone apps however are compliment products, and apple has successfully dropped the price of most to $0.99 or free.
The strategies are orthogonal. Google's interest is not in making money from smartphones, it's in preventing Apple from having a monopoly wherein they can charge Google unlimited amounts for access to mobile users.
But Google still pays Apple $3 billion a year....
https://www.cnbc.com/2017/08/14/google-paying-apple-3-billio...
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> In the case of Apple vs Android I'd say Apple is doing pretty good and are arguably doing substantially better than Google in spite of not having followed this strategy themselves.
They follow a different strategy: vertically-integrated walled garden.
"Other links" means things other than smartphones. You read the comment incorrectly, I think. They're saying Apple would have more power over other actors (including google) if they had a smartphone monopoly.
Apple is not making money from links.
Desert of profitability is an evocative phrase, but remember that deserts can be beautiful.
It means free stuff or low prices for consumers. This is another consequence of the "invisible hand" which is sometimes used to justify capitalistic competition.
A commodity market working well is also a desert of profitability.
The opposite of a desert of profitability is economic rent.
> “The opposite of a desert of profitability is economic rent.”
Or perhaps an Amazon ;)
I don’t know if the analogy makes any sense, I just couldn’t resist
> It means free stuff or low prices for consumers.
The "free stuff" is an illusion, a monopolistic sleight of hand. Consumers are subsidizing "free stuff" in one market by paying excessive rent in the neighbouring market. In the end, consumers pay more, not less.
> This is another consequence of the "invisible hand" which is sometimes used to justify capitalistic competition.
These deserts are not a feature of competition, they are an attempt to avoid competition by shrinking the pool of viable competitors.
> A commodity market working well is also a desert of profitability.
No, it's the opposite of that. A commodity market working well is what you get when monopolistic tricks such as "deserts of profitability" have failed, and you are forced to compete the old-fashioned way.
> The opposite of a desert of profitability is economic rent.
Again, the exact opposite is true. Deserts of profitability exist to protect economic rent. Show me any "desert of profitability" and I will show you the economic rent that is subsidizing it.
None of your arguments make any sense when you take in account the fact that such business model has enormously benefited consumers.
It just doesn't make any sense.
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> One example is using Android to prevent a monopoly on the smartphone side. If Apple had a monopoly or near monopoly, it would be able to extract larger economic profits from the other links on the value chain, including Google
Your example actually shows the opposite and that's because conventional wisdom is often wrong.
Conventional wisdom states that there is a direct correlation between market share dominance and excess profits which is why anti-trust laws target monopolies to protect consumers from price-gouging, but this characterization is not always the case, as Apple has proven by not pursuing a market-share focused strategy.
Apple enjoys 87% of smartphone profits from a mere 18% of all shipments [0].
[0] https://www.investors.com/news/technology/click/apple-rakes-...
They weren't talking about profits in the smartphone market. Everyone seems to have read OP wrong.
They were saying that if Apple had a monopoly on smartphones, they could extract more value from adjacent markets (google search, etc)
You are correct if you believe the term "adjacent market" represents an actual thing.
If you do not believe it is an actual thing, then an adjacent market is no more real than a map is real. An adjacent market is merely just a mental aid, it is not somewhere you or I can schedule a visit to.
At the end of the day, a hypothetical Apple monopoly in the "smartphone market" would mean consumers would have less money to spend on other things like google search (to use your example), apps & games, Netflix subscriptions, etc all of which exist in "adjacent markets".
My gripe is that the use of jargon here is very misleading as it has lead you and others to conclude that there is a dichotomy -- between a market and its adjacent(s), where none exists in the real world where all of this matters.
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Thanks :)
How are you disagreeing with him? Just because the luxury/high-end part of the market is making most of the profits doesn't mean a luxury company wouldn't extract even more money with few competitors.
The gp talked about a threat of a smartphone monopoly from Apple, a threat that never existed to begin with. The argument is revisionist at best.
1. Before the iPhone, Nokia enjoyed a large market share on mobile phones based on Series 40, Series 60, Maemo, etc. Essentially they had several OSes. There was also BlackBerry which had several editions of one OS but was huge as a "smartphone" for checking email.
2. Before the iPhone went on sale, Steve Job's target was 1% of all phone shipments in the original 2007 keynote:
957 mobile phones in 2006. Goal: 1% of market share = 10 million iPhones in 2008. [0]
3. Prior to the public unveil of the iPhone, Eric Schmidt who was a board member at Apple, frequently recused himself from board meetings focused on the iPhone due to the conflict of interest from Google's own mobile phone efforts. IOW, there was no monopoly threat to quelch because both companies were working almost simultaneously.
Monopolies sometimes get overused as a metaphor as in this case where the gp talked about them in the context of excess profits. My point being you don't really need to control market share to enjoy the bulk of an industry's profits as shown by Apple. Heck, even the terms market share, industry etc are proxies for determining (abuse of) market power. Their overuse/overreliance as a measure of power can be misleading when trying to reason about the effects of competition.
[0] https://www.engadget.com/2007/01/09/macworld-2007-keynote-li...
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That's because for Google the loss in per-unit sales of cheap phones versus $1000 iPhones is entirely made up by the data they're collecting from Android users.
Not entirely. The largest phone markets - China and India - don't have integrations into Google. They took the open source version of Android to use with their own phones.
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another analogy is simply the Feudal Castle system
What course is that