Google and the Limits of Strategy

John Gruber is not impressed by the suggestion that Google’s new Pixel phone, which the company introduced at a keynote yesterday, is the first time the company has competed head-to-head with the iPhone:

Google has been going head-to-head against the iPhone ever since the first Android phone debuted. You can’t say the Nexus phones don’t count just because they never succeeded.

Google then-VP of engineering Vic Gundotra devoted his 2010 I/O keynote to ripping into the iPhone and iPad, pedal to the metal on “open beats closed” and how an ecosystem of over 60 different Android devices (a drop in the pond compared to today) was winning, saving the world from a future where “one man, one company, one device” controls mobile. (Gundotra tossed in “one carrier”, which was true at the time, but looks foolish in hindsight.) He even compared the iPhone to Orwell’s 1984. Really.

The only thing Orwellian here is Google’s attempt to flush down the memory hole their previous attempts to go head-to-head against the iPhone. Watch the first 10 minutes of Gundotra’s 2010 keynote — the whole thing is about beating the iPhone.

Gruber is both right and wrong: yes, Gundotra’s rhetoric was stridently anti-Apple, but at the end of that keynote everyone in attendance received an HTC EVO 4G; when it came to the zero-sum game of actually putting phones in people’s pockets, Apple’s competitors (then) were companies like HTC, Motorola, and especially Samsung. Granted, those manufacturers’ phones ran Google’s Android software, but then again Google’s software ran on the iPhone, too; in fact, at the time of Gundotra’s speech, Google Maps, YouTube, and Google Search were all built into iOS.

As we know today that wouldn’t be the case for long: two years later iOS 6 dumped the YouTube app and, more famously, changed the default mapping application from one based on Google to Apple’s own.1 The proximate cause was not Gundotra’s speech, though: in fact, Apple had purchased a mapping company called Placebase in 2009, and a few months later Google had introduced turn-by-turn navigation; it was Android-only.

Google Versus Android

Very few people know for sure who exactly is to blame for the Google-Apple breakup. Yes, Steve Jobs was livid that Android phones looked a lot like iPhones, but remember, Google purchased Android two years before the iPhone came out (and a year before Eric Schmidt joined Apple’s board) as a hedge against Microsoft; once the iPhone came out, why but for pride would you build a phone any differently?

Where Google went wrong was with that maps decision: making turn-by-turn directions an Android-exclusive differentiated Android as a platform, but to what end? So that HTC et al could sell a few more phones, and pay Google nothing for the privilege?

The truth is that when it came to making money Google and Apple were not competitors in the slightest: Apple was a vertical company that expended R&D and capital investment to design and build devices that included significant material costs, and then sold those devices in a zero-sum competition against other manufacturers. Yes, marketshare was important, but so was profitability: Apple traded off reaching the entire market in favor of creating a differentiated experience that customers would pay a premium for that far exceeded the (significant) marginal costs of each iPhone.

Google, meanwhile, has always been a completely different kind of company — a horizontal one. Nearly all of Google’s costs are fixed — R&D and data centers — which means profitability goes hand-in-hand with marketshare, which by extension means advertising is the perfect business model. The more people using Google the more that those fixed costs can be spread out, and the more attractive Google is to advertisers.

This is why favoring Android in any way was such a strategic error by Google: everything about the company was predicated on serving all customers, but Android by definition would only ever be on a percentage of smartphones. 2 Again, it’s possible Apple would have built its own Maps product regardless, but Google’s short-sighted favoring of Android ensured that for hundreds of millions of potential Google users the default mapping experience and the treasure trove of data that came with it would belong to someone else.

This is where that infamous Gundotra speech matters: I’m not convinced that anyone at Google fully thought through the implication of favoring Android with their services. Rather, the Android team was fully committed to competing with iOS — as they should have been! — and human nature ensured that the rest of Google came along for the ride. Remember, given Google’s business model, winning marketshare was perfectly correlated with reaping outsized profits; it is easy to see how the thinking and culture that developed around Google’s core business failed to adjust to the zero-sum world of physical devices. And so, as that Gundotra speech exemplified, Android winning became synonymous with Google winning, when in fact Android was as much ouroboros as asset.

Google’s Assistant Problem

In yesterday’s keynote, Google CEO Sundar Pichai, after a recounting of tech history that emphasized the PC-Web-Mobile epochs I described in late 2014,3 declared that we are moving from a mobile-first world to an AI-first one; that was the context for the introduction of the Google Assistant.

It was a year prior to the aforementioned iOS 6 that Apple first introduced the idea of an assistant in the guise of Siri; for the first time you could (theoretically) compute by voice. It didn’t work very well at first (arguably it still doesn’t), but the implications for computing generally and Google specifically were profound: voice interaction both expanded where computing could be done, from situations in which you could devote your eyes and hands to your device to effectively everywhere, even as it constrained what you could do. An assistant has to be far more proactive than, for example, a search results page; it’s not enough to present possible answers: rather, an assistant needs to give the right answer.

This is a welcome shift for Google the technology; from the beginning the search engine has included an “I’m Feeling Lucky” button, so confident was Google founder Larry Page that the search engine could deliver you the exact result you wanted, and while yesterday’s Google Assistant demos were canned, the results, particularly when it came to contextual awareness, were far more impressive than the other assistants on the market. More broadly, few dispute that Google is a clear leader when it comes to the artificial intelligence and machine learning that underlie their assistant.

A business, though, is about more than technology, and Google has two significant shortcomings when it comes to assistants in particular. First, as I explained after this year’s Google I/O, the company has a go-to-market gap: assistants are only useful if they are available, which in the case of hundreds of millions of iOS users means downloading and using a separate app (or building the sort of experience that, like Facebook, users will willingly spend extensive amounts of time in).

Secondly, though, Google has a business-model problem: the “I’m Feeling Lucky Button” guaranteed that the search in question would not make Google any money.4 After all, if a user doesn’t have to choose from search results, said user also doesn’t have the opportunity to click an ad, thus choosing the winner of the competition Google created between its advertisers for user attention.5 Google Assistant has the exact same problem: where do the ads go?

Google’s Shift

Yesterday’s announcements from Google seem designed to take on the company’s challenges in an assistant-centric world head-on. For good reason the presentation opened with the Google Assistant itself: pure technology has always been the foundation of Google’s power in the marketplace.

Today’s world, though, is not one of (somewhat) standards-based browsers that treat every web page the same, creating the conditions for Google’s superior technology to become the door to the Internet; it is one of closed ecosystems centered around hardware or social networks, and having failed at the latter, Google is having a go at the former. To put it more generously, Google has adopted Alan Kay’s maxim that “People who are really serious about software should make their own hardware.” To that end the company introduced multiple hardware devices, including a new phone, the previously-announced Google Home device, new Chromecasts, and a new VR headset. Needless to say, all make it far easier to use Google services than any 3rd-party OEM does, much less Apple’s iPhone.

What is even more interesting is that Google has also introduced a new business model: the Pixel phone starts at $649, the same as an iPhone, and while it will take time for Google to achieve the level of scale and expertise to match Apple’s profit margins, the fact there is unquestionably a big margin built-in is a profound new direction for the company.6

The most fascinating point of all, though, is how Google intends to sell the Pixel: the Google Assistant is, at least for now, exclusive to the first true Google phone, delivering a differentiated experience that, at least theoretically, justifies that margin.

It is a strategy that certainly sounds familiar, raising the question of whether this is a replay of the turn-by-turn navigation disaster. Is Google forgetting that they are a horizontal company, one whose business model is designed to maximize reach, not limit it?

I don’t think so. In fact, I think this profound strategy shift springs from a depth of thinking that is the polar opposite of the hot-headedness of the former Android leadership. It is not that Google is artificially constraining its horizontal business model; it is that its business model is being constrained by the reality of a world where, as Pichai noted, artificial intelligence comes first. In that world you must own the interaction point, and there is no room for ads, rendering both Google’s distribution and business model moot. Both must change for the company’s technological advantage to come to the fore.

In this respect Google is like the bizarro-Apple: the iPhone maker has the distribution channel and business model to make Siri the dominant assistant in its users’ lives, but there are open questions about its technology prowess when it comes to artificial intelligence specifically and services generally; moreover, efforts to improve are fundamentally stymied by the company’s device-centric culture and organizational structure.

Google’s culture and organizational structure, meanwhile, are attuned to its old business model, the one that equated marketshare with profitability, and which achieved that market share with a product development approach predicated on iteration and experimentation on top of the positive feedback loop that comes from massive amounts of data.

Phones couldn’t be more different: the Pixel is what it is, which means it has to be great on day one, and it has to be sold. The first means an organizational structure that delivers on the promise of focused integration, not willy-nilly experimentation and iteration; the second means partnerships, and outbound marketing, and a whole bunch of other things that Google has traditionally not valued. Indeed, you could see the disconnect in yesterday’s presentation: while Pichai was extremely clear about the company’s new direction, the actual product demonstrations quickly devolved into droning technical mumbo-jumbo that never bothered to explain why users should care.

This is why, much like Apple, I can be both impressed by Google’s strategic thinking and yes, courage in facing this new epoch, even as I am a bit bearish about their prospects: technology alone is rarely enough, and the only thing more difficult than changing business models is changing cultures.

  1. Google search still ships as the default, and Google pays dearly for the privilege []
  2. One could argue in Google’s defense that Android had the potential to wipe out the iPhone just like Windows wiped out the Mac; that, though, is a complete misunderstanding of history (albeit a commonly held one). Many of us were confident in the iPhone’s market resilience even then []
  3. And further refined in 2015’s The Facebook Epoch []
  4. In fact, thanks to Google’s instant search results, the button doesn’t really exist anymore []
  5. And, by extension, said advertisers don’t have the opportunity to build a customer relationship that potentially makes winning that ad auction far more valuable than the single transaction that may have resulted, which always made the price they were willing to pay much higher than it would be in the sort of affiliate model that may work in some Assistant use cases []
  6. And no, the Nexus devices don’t count; they had neither the business model nor the infrastructure to suggest they were anything but what Google said they were: public reference devices that offered the idealized Android experience for enthusiasts for a relatively low price. Unlike Nexus phones the Pixel is launching with carrier support, top-of-the-line specs, and a price to match. The only thing missing is a multi-million dollar advertising campaign, which I suspect we’ll hear news of shortly. []