Excepting the patent and panic-driven Motorola deal, prior to yesterday’s acquisition of Nest for $3.2 billion, the previous largest deal Google’s history was DoubleClick for $3.1 billion 2006. Beyond the similar dollar figures, it’s a deal worth considering for what it says about Google then and now.
With the acquisition of DoubleClick, Google solidified its hold on online advertising, putting the final touches on one of the most successful business models in tech history. As Horace Dediu has documented, the more people use the Internet, the more money Google makes, and that’s a pretty good wave to be riding. In the succeeding eight years, Google has certainly undertaken any number of initiatives, but the core business of the company hasn’t changed. Still, this has given Google a remarkable amount of freedom to pursue all kinds of businesses, from phone operating systems to residential fiber, with the understanding that as long as it increased Internet penetration, it was good for the bottom line.
Still though, there have been ever-so-perceptible cracks in the armor. Revenue and profit from Google’s own sites have dramatically outpaced revenue and profit from Google AdSense sites, after previously moving in lockstep. Revenue-per-click continues to drop, driving Google to not only try to increase the number of clicks, but also to ramp up their data and profile efforts, in an attempt to increase the value-per-click. Moreover, a surprisingly large amount of Google’s ad revenue is driven by just a few adwords.
Beyond, that, there are two other longer-range concerns with Google’s business model:
- The growth rate in Internet penetration is set to peak in 2016. Were Google’s revenue and profit continues to track Internet penetration, then those metrics would peak as well
- A great number of Internet users today were not raised with computers; it’s fair to question how many of those clicking on Google ads falls in this group. As a new generation comes online, will ads continue to be effective at the scale Google needs them to be? I’m cautiously optimistic that advertising does not inevitably result in a terrible user experience, but there is certainly a point at which it does
In short, if you consider the three business models that are capable of being the foundation of multibillion-dollar businesses – consumer devices, ad-supported consumer services, and business software-as-a-service – Google had just about maximized their potential in the ad-supported consumer services model.
In my estimation, this deal is not about getting more data to support Google’s advertising model; rather, this is Google’s first true attempt to diversify its business, in this case into consumer devices.
Certainly Google has already done a lot of work in this area, from self-driving cars to Glass to any number of internal projects. But, especially in the consumer market, technology is not nearly enough. With Tony Fadell and his team, Google is getting some of the best product people on earth. Just as importantly – because product is not enough either – they are also getting an entire consumer operation, including customer support, channel expertise, retail partnerships, and all the other pieces that are critical to making a consumer device company successful.
That is why I fully believe Fadell and Google when they say Nest will remain its own operation, and am inclined to give them the benefit of the doubt with regards to Nest data. This deal is not about the old Google, but about what is next; it’s a second-leg for the Google stool, and it’s arriving just in time.
Some additional notes:
- Apple: Not unexpectedly, many commenters are painting this as a loss for Apple, but I don’t think that’s true at all. I give a lot of credence to this report in Recode that Apple was never interested. Apple has a very simple business: they make personal computers, and they make accessories for computers. Certainly said computers are becoming ever more personal, and the accessories ever more smart, but they have never and, for the foreseeable future, will never be a diversified company. How many times does Tim Cook need to tell us that Apple focuses on just a few products? It’s funny how no one listens.
- Microsoft: This transaction really has nothing to do with Microsoft, which I suppose is all that needs to be said, but it is interesting that this in fact makes Google a “Devices and Services” business. That, famously, is Microsoft’s new strategy, but, in classic Microsoft fashion, the devices they are focusing on are the ones that were groundbreaking half a decade ago, and their services even older.
- Facebook: This transaction has even less to do with Facebook than with Microsoft, except to note that Facebook is where Google was when they acquired DoubleClick. They are just now figuring out how to make money, and will spend the next several years consolidating and growing that business. That’s fine: it’s the natural progression of any company. Maybe in eight years they’ll be buying what’s next.
- Amazon: All of those devices need to be bought somewhere. Oh, and services need to be hosted.2 Jeff Bezos is a smart dude.
Previously: Business Models for 2014