Google’s bigger game:

Discussion in 'More News from Your Google TV News Team' started by Rickaren, Sep 2, 2011.

  1. Rickaren

    Rickaren New Member Staff Member

    Nov 20, 2010
    Likes Received:
    Trophy Points:
    Indiana, Logitech Revue
    Google’s bigger game: The subplot behind the Motorola acquisition

    September 2, 2011

    “Having at least one area where we can do integrated hardware and software and learn from that probably produces better products.” – Google’s Eric Schmidt, speaking about the company’s Motorola acquisition yesterday.

    Guest Commentary: Many people in the tech industry would assume that Schmidt was thinking about mobile phones when he said that. But the real homerun is the set-top box, and I think he knows it. Let me explain.

    Over the last few weeks much has been written about Google’s acquisition of Motorola Mobility. There has been a ton of speculation about the reasons behind the acquisition. Much of it centered on the patent portfolio, which is clearly of great strategic value, but was it really worth $12.5 billion?

    Other negative commentary has centered on the problems Motorola introduces for Google within Android’s growing partner ecosystem. There also have been a number of concerns expressed about the accompanying gross margin pressure this will bring to the search giant’s own P&L.
    While I have no doubt these points are valid and the concerns legitimate, there is an ongoing question in my mind around this whole thing not really being exactly what it seems on the surface. There is more to this than meets the eye. And the conclusion I have reached is that Google is actually playing a much bigger game here than most people realize.

    The mobile market is an extremely important segment. We are moving into the Post PC Era and as studies have shown, the volume of devices is likely to continue its 10x growth for each subsequent generation of technology, which means the stakes are very high indeed.

    At this point in the proceedings it’s also clearly a two horse race. It’s Apple and Google with everybody else being a distant third – -hence the validity of the patent acquisition strategy. Acquiring Motorola’s patent portfolio helps Google defensively, that’s for sure. But defense has never really been Google’s style and it’s a move that puts it current partner ecosystem on edge, even in the best case.

    Apple versus Google

    The biggest difference up to now has been in the go-to-market strategies of Apple and Google.
    [​IMG]Apple's iPad

    Apple has built the world’s most valuable company by selling devices, the iPhone and iPad, relying on their own keen sense of style to win at the point of sale.
    Google, on the other hand, wins when people actually use the device. (Not that Apple doesn’t want usage, they need it for satisfaction, loyalty and all of the things that have made them what they are). The difference here is that Google needs usage to generate revenue. To gain usage, Google must have adoption, and to do that under their current strategy they need multiple partners delivering devices on their Android platform into the ecosystem.

    Under these terms, they actually benefit greatly from driving the unit cost of the devices down as low as possible. Granted, their device partners still need to make money, but unlike Apple, the device for Google isn’t the end, it’s a means to an end. So given those stark differences, why would Google want a device business of their own to drive to zero?

    All of this leads me to the conclusion that the Motorola acquisition isn’t just a simple matter of playing defense. Instead, I think it is a swing-for-the-fences move, which is more characteristic of the Google persona.

    Yes, it has a defensive element in it, which is important, practical and well-considered but also could have been gained for much less than the price Google is paying. The real play here is for usage, and lots of it, in a far larger ecosystem than the current mobile environment.
    [​IMG]Google's Trojan Horse could be Motorola's set-top box business

    It’s a battle for consumer activity, as much of it as you can possibly collect data from and inject advertising into. This means online, where Google dominates, as well as social media and entertainment, where it doesn’t.

    The real swing-for-the-fences move here is Motorola’s set top box business. It’s the ace in the hole. Google isn’t simply trying to play the game, they are trying to change the rules.

    What This Means For the Cable Television Industry

    For the last several years, there has been constant talk and vigilant watch for “cord cutters” being conducted by both the cable providers as well as the television networks.
    [​IMG]Cord Cutters are those who would leverage YouTube, Hulu, Netflix and all of the other myriad available online video content providers to satisfy their entertainment needs and subsequently leave the ranks of cable subscribers in droves.

    To date, this hasn’t happened, although the speculation has served to place Google and others in a somewhat adversarial role to the cable industry.

    Given that the whole cable industry revolves around a concept known as affiliate fees, Google has often wound up being the enemy to the status quo, which means it’s frequently viewed as the enemy of the content providers as well.
    For those who don’t travel in these circles everyday, affiliate fees are the share of the monthly subscribers’ bill that goes directly to the content providers.

    Disney, for example, gets a healthy per subscriber fee each each month from the Comcasts and Cablevisions of the world for providing programming via channels like all of the various incarnations of ESPN, Disney Channel, ABC Family and others. This is also true for Fox, Time Warner, HBO et all.

    In total, affiliate fees represent somewhere north of $32 billion per year that moves from the cable providers to the content providers. Protecting this status quo normally results in the cable and content player, lining up against the online players. This has resulted in initiatives like the well-publicized “TV Everywhere” programs that have appeared to consumers under brands like Comcast’s Xfinity.
    As good as the status quo may be, it’s clear and admitted with vehicles like TV Everywhere, that the Internet will have a place in the ecosystem. The debate is how big, how fast and with whom.
    The alliance between the cable providers and the content providers is always an uneasy one at best. There has been a long history of both sides going guns drawn over affiliate fees.
    Typically these ugly disputes reach the public such as last Fall when Fox cutoff the feed of the first game of the World Series to Cablevision, thereby effectively blacking out the first game from approximately 3 million New York metro area cable subscribers. Prior to that, Disney had threatened, although relenting at the eleventh hour, to withhold the Oscar telecast from Cablevision in March of 2010.

    The cable providers however are increasingly caught between the proverbial rock and a hard place. Estimates from cable analyst firm SNL Kagan put industrywide subscriber losses last quarter at some 450,000, an all time high.

    Although some cord cutting may be buried in here, overall consensus blames the situation on the current economic environment. This would seem to leave very little room for price increases from the providers to offset the subscriber losses.
    [​IMG]In the meantime, almost in perfect harmony, most of the content providers were discussing strong growth in their affiliate fee revenue in their most recent quarters. News Corp, for example, saw affiliate fee revenue rise 7 percent domestically and 30 percent internationally. Viacom reported a 19 percent increase on a global basis.
    Disney chief Robert Iger announced that ABC was now on pace to collect between $400 million and $500 million annually in affiliate fees for the previously free to air network. He also said that he believed this was inline with what the other content providers (read NBC and CBS) were doing.
    Prior to this latest round of increases the major cable providers’ affiliate fees represented anywhere from 37 percent to 45 percent of their video subscriber revenue. All in, this is serving to put more than a passing amount of pressure on the cable providers. To this end, fueled by the Motorola acquisition, it may well be the most unlikely of heroes: Google to the rescue.

    Google’s new BFF

    Newly armed with long-term cable friendly relationships courtesy of the Motorola salesforce, Google may now be positioned to be the cable providers’ new best friend. It’s in a position to help the cable providers gain leverage like never before when it comes to the issue of affiliate fees.
    [video=youtube;NaWITyKBww0]http://www.youtube.com/watch?v=NaWITyKBww0&feature=mfu_in_order&list=UL"]http://www.geekwire.com/wp-content/uploads/2011/09/mileyandmandy-300x169.jpg[/IMG[/video]The Miley and Mandy Show on YouTube

    Previously thought to be putting the subscriber revenue at risk, Google now comes bearing gifts. Not only does it bring Moto’s IP friendly technology, but also plans for a more complete and tightly integrated phone/tablet strategy, a ton of technological know-how and a vast, comparably low-cost content network of its own.
    Google isn’t going to get into the content creation business, but it is the mega content aggregator for the online world. It has also been only somewhat stealthily going about opening up new opportunities for content by cultivating relationships with the independent content producers and offering [URL="http://www.slashgear.com/google-to-invest-millions-on-celebrity-youtube-channels-18134541/"]celebrities their own channels [/URL]on YouTube.

    It has also gone a step further in trying to tame its own wild west of content, YouTube, by acquiring Next New Networks to provide a platform to help support and structure higher quality, lower cost, independent content creation.

    These content assets, coupled with Google’s prodigious suite of platforms, bundled with Motorola’s next generation of capabilities would bring myriad new capabilities and consumer content offerings to the cable providers.

    Partnering with Google, and integrating the Android world of smartphones and tablets more seamlessly into the experience, would add more potentially chargeable services for cable providers in addition to helping to relieve some of the longer-term pressure being created by affiliate fees.
    Revenue sharing opportunities from things like search, online advertising and private app stores, would complement cable providers’ existing triple play offerings (video, Internet, telephony) thereby helping them grow ARPU, Average Revenue per User, in a new value-added way as opposed to just a straight across-the-board price increase.

    In a world of limited new subscriber growth, this would be an attractive option, especially given that the new content and services likely would function under the internet-style service models, meaning no huge up-front capital investment but rather a more risk-friendly incremental pay-per-use model.

    [B]The Benefits to Google[/B]

    Google’s gains are potentially enormous. Executed properly, this move not only could have tremendous financial benefit, but it strategically vaults Google past Apple and Facebook in significant ways.
    At the highest level, integration of this sort greatly opens up web-centric content to the living room, increases the utility of the mobile devices, and significantly increases Google’s ad targeting opportunities while enabling the overriding fiscal goal of serving more ad impressions.
    The most fundamental reason that Google will not give up on integrating with the television is yjay it quite simply holds the highest growth potential for the company.
    It holds a significant dual opportunity for them. If they can successfully change the game, they can not only serve more ads, but they can also increase the value of each ad served by using the integration with the traditional channels to shift advertising dollars away from television and into this new world.
    [URL="http://www.geekwire.com/wp-content/uploads/2011/09/oldtv.jpg"][IMG]http://www.geekwire.com/wp-content/uploads/2011/09/oldtv-300x226.jpg[/URL]Traditional TV may be a growth industry for Google (Photo: Steve Stein)

    Google’s free-to-the-consumer, advertising-sponsored business model has been tremendous online, but the size and value of the online advertising market is still dwarfed by the traditional television market. This is a condition that is not all that likely to improve through the middle of this decade.
    According to forecasts released earlier this year by Interpublic Group of Co.’s Magnaglobal, in one of Madison Avenue’s most closely watched forecasts, television was slated to garner 34 percent of the total U.S. ad spend in 2011.

    The online equivalent comes in at just barely over half of television at 17.3 percent. Even though online is growing faster and projected to expand to 22 percent of U.S. ad spend, totaling $47.4 billion by 2016, television will still dominate, growing to a 38 percent share with a total take of $81.3 billion over the same period.

    Given this type of expected outcome, coupled with the inevitable conclusion that advertising value of time spent on the web will continue to lag time spent with television at an even greater rate, anything Google can do to help transfer not only eyeballs, but the inherent dollar value of web-centric advertising is a double win for them.

    Partnering with the cable companies gives Google the key pieces that it needs to accelerate this convergence. It provides Google a gilded path into the living room with a fundamental service channel, and a large existing audience that is already locked into a core portal – which is otherwise known as the electronic program guide or EPG.
    The ability to be one touch away from the key interface for navigating the living room entertainment environment shouldn’t ever be underestimated. He who controls the EPG, controls the game.

    If Google can gain at least access, if not partial control, of the EPG it will have fundamentally changed the rules of the game. It’s been tried many times before, but never has the potential path for broad adoption been so clear.

    If Google can accomplish even part of what we’ve talked about, it would instantly and dramatically leapfrog Apple in the entertainment space while gaining a new found advantage in mobile devices.
    As they are changing the rules, you should also expect the game to become socially integrated through Google+, thereby using a direct and tangible daily activity for all of us, namely channel-surfing, and making it fully socially enabled.

    This would deal a real blow to Facebook.
    All in, the acquisition of Motorola Mobility could truly be a stealth, swing-for-the-fences move that will take years to play out but could create a new level of integration and greater potential for disruption than we have seen in a long time.

    It could also create an endless array of possibilities for consumer entertainment.


Share This Page