.

 

Expanding into Multiple Related Sectors Reinforces Market Power in Core Data Platform Businesses

By spreading into multiple related data-driven business sectors, the dominant data platforms reinforce market power in their core businesses.   Expansion into new sectors adds to their overall storehouse of user data, while choking off other sources of data for potential competitors.

Google has been the most aggressive player in this, expanding from its core search advertising business into almost every imaginable space where users operate online (and increasingly offline), from watching videos, to emailing friends, to buying products, to using their cell phones, to updating their calendars. Google’s reach into all these activities allows it to develop an integrated profile of more individuals with greater breadth and depth than any potential rival.

The promotion of free products online becomes what analyst Bill Gurley calls the creation of “moats” around Google’s “economic castle:” online search advertising.  Gurley argues:

Android, as well as Chrome and Chrome OS for that matter, are not “products” in the classic business sense. They have no plan to become their own “economic   castles.” Rather they are very expensive and very aggressive “moats,” funded by the height and magnitude of Google’s castle… Google is also scorching the earth for 250 miles around the outside of the castle to ensure no one can approach it.[i]

Moving into these new online sectors is therefore less to create new revenue-generating ventures than to scoop up new data and, as importantly, prevent potential rivals from gaining a critical mass of user data where they might challenge where a company is dominant, as with Google in search advertising.  This is analogous to how the U.S. Court of Appeals in 2001 described Microsoft’s actions where that company’s expansion into web browsers and other so-called online “middleware” products was less about dominating those Internet sectors than “to meet the threat to Microsoft’s monopoly in another market (operating systems).”[ii]

Google has moved heavily into e-commerce, from launching a Google Advisor site[iii] to offer mortgages, credit cards and other financial services from partner companies to expanding its Google Shopping service where companies pay fees to be listed in shopping searches[iv] to its recent launch of Google Shopping Express promising same day delivery of products from partners like Target and Costco.[v]  The goal for Google is less to compete with Amazon in revenue from such sales (since every indication is that Google runs these e-commerce programs with deep deficits) than to capture a far deeper profile of user purchasing data.  Every click of a button at a checkout counter through a Google shopping program delivers data that can help Google track nearly the whole lifecycle of financial behavior from what goods and terms people use to search for products to what ads they click on associated with those search terms to which offers they download to where they then make a purchase and redeem any offers.[vi]

The battle for control of the mobile phone and tablet market highlights the dynamics of this new kind of data-driven fight, where companies enter various markets less to generate revenue in that sector than to secure dominance in its existing area of market power. The phone/table market has four behemoths – Google, Apple, Amazon and Microsoft – competing for control, yet Google pushes out Android phones and tablets mostly to maximize its collection of user data, particularly location data, rather than to maximize profits from device sales; Amazon is involved in selling tablets at a loss or near breakeven point largely to drive users to its e-commerce offerings;[vii] Microsoft entered the market for the same reason it bothers to compete at a loss with Google in search engines--to protect its Windows operating system and productivity software as a standard for home and business use; only Apple's business model is primarily based on actually making profits on its revenue from tablet and phone sales directly.

 

[i] Bill Gurley, “The Freight Train That Is Android,” above the crowd (Mar. 24, 2011), http://abovethecrowd.com/2011/03/24/freight-train-that-is-android/.   Gurley’s language is playing off of a metaphor first promoted by Warren Buffett.

[ii] United States v. Microsoft Co., 253 F.3d 34, 60 (D.C. Cir. 2001)

[iii] “Making Financial Comparisons Easier with Google Advisor,” Google Official Blog (May 19, 2011), http://googleblog.blogspot.com/2011/05/making-financial-comparisons-easy-with.html

[iv] Cameron Scott, “Google Launches Trusted Stores Program,” PC World (June 7, 2012, 5:10 PM) http://www.pcworld.com/businesscenter/article/257184/google_launches_trusted_stores_program.html

[vi] See more in discussion by the author at “Google Without Links: Could It Swallow E-Commerce?”, Huffington Post, June 8, 2011, http://huff.to/1qX43rz

[vii] “Amazon loses money on each Kindle Fire sold (on purpose),” Christian Science Monitor, Nov. 21, 2011; http://www.csmonitor.com/Innovation/Horizons/2011/1121/Amazon-loses-money-on-each-Kindle-Fire-sold-on-purpose