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The Critical Path #85: Achilles' Heel

An update on Airshow, the state of Apple retail, and beginning dialogue on the open question of what is Google’s greatest weakness

via 5by5 | The Critical Path #85: Achilles' Heel.

  • Eric

    Very good show. The Achilles heel is despite new products / services the absolute majority of revenue comes through ad sales. Google has perhaps been inventive but the commercial exploitation is lacking. Where I feel they have been original (Pixel / Glass) I don’t think it’s proven these are markets. That said, maybe Glass is just about pushing the exposure of online further forward, to monetize time spent online. Not a fan, their actions do not match their words. I think Facebook closest in terms of opportunity to disrupt but lacking the ability. A cleaner search engine could come along and disrupt but cannot under estimate Google’s innovation in infrastructure – but this more incremental than step change. Apple has disrupted 3 plus sectors and profited from this. Google only one that has made internal and external impact. I think they are far more vulnerable than analysts think. Although online continues to grow, if their online ad sale get hit they are in trouble, and will not be able to support these multiple other activities that contribute little to nothing to the bottom line.

    • JaneDoe12

      Although online [ad sales] continues to grow…

      Yes, ad sales are growing fast. From 2008 – 12, they grew at an accelerated rate, but costs and expenses grew even faster. And beginning in 2009, operating income had a decelerating growth rate. To me, it looks like Google is doing a lot more work to get the ads. I don’t know if this is related to the increase in mobile devices – i.e., search is being used, but small screens can’t display as many ads.

      In Google’s annual reports, the biggest driver of cost is “cost of revenue” (which doesn’t tell me much), followed by SGA (selling, general, admin). Capex is not a big item. Here is their revenue, total costs/expenses and operating income. Below are a few cost/expense items.
      (numbers in thousands)
      2008 2009 2010 2011 2012
      Revenue 21,796 23,651 29,321 37,905 50,175
      Total Costs & Expenses 15,164 15,338 18,940 26,163 37,415
      Operating Income 6,632 8,312 10,381 11,742 12,760
      (EBITDA)

      Costs and Expenses
      Cost of Revenue, 8,622 8,844 10,417 13,188 20,634
      Capex, 2,358 810 4,018 3,438 3,273
      SGA, 3,749 3,651 4,761 7,313 9,988
      etc (not listed)

      Google annual reports: 2007 – 2009 (pp 80, 82, link here) 2010 – 2012 (pp 53,56, link here)

  • Les_S

    Maybe the whole point of Google Glass is to create a perception about Google and nothing more. The answer to what purpose it serves is what effect it has had. They must see some strategic value in the project and maybe selling the product is not the point. Google does have a track reord for putting a lot of effort in an area where the value is really someplace else. No reason why that isn’t true here.

  • Les_S

    Achilles heel? How much value is there in advertising to advertisers really?

  • Les_S

    So Google uses open source and contributes to the open source community. But of those who contribute to the open source community who garners the most value from that effort? Where does that value accrue? What if you could invert how that value is accrued?

  • obarthelemy

    Google’s greatest weakness in Mobile is that they don’t care a whole lot.
    They’re not making much direct money (licenses, PlayStore…), and even the ad money isn’t that good, though letting go of that would mean they’re no longer a one-stop shop and might open the door to global competitors, and there might be an upside later on (home automation…)
    Android must be a fun project for them, they’re innovating lots, and competing with both historical incumbents, Apple, newcomers, and partners that are free to tweak and fork Android whichever way they want. Now that they’re at 75% market share, the fighting spirit must be getting a little bit harder to kindle though.
    Also, it must feel good to be the Mobile market’s Good Guys; without them we’d be stuck with backwards, expensive, 1984-ish Apple (the irony !), and Mostly Clueless everyone else.
    At this point, it would take a Windows 8-sized blunder to put Android’s dominance at risk, and even that would be fixed by switching Launchers. The bell has tolled for all other OSes/ecosystem, bar iOS which, since it has proven unable to compete on innovation, will have soon have a try at competing on price. That skirmish will be the last interesting event before Mobile ossifies à la PC market.

    Apart from gleefully watching Android wipe the floor in the mobile market, what excites me as an Android fan is whether Android can have an impact on the desktop/laptop market. I’ve started replacing a few Wintel PCs with $40 Android sticks, to mostly positive feedback. I’m making myself an experimental Android netbook… soon.

  • Bill Esbenshade

    Remember the great Steve Jobs quote, “you gotta start with the customer experience and work backwards to the technology.” So what makes for a great customer experience?

    1. Great product — design, look, feel, operation (product use experience)

    2. Something that’s really easy and intuitive to use (product use experience)

    3. Something that accomplishes exactly what you want it to, affordably, conveniently, and easily (product use experience)

    4. Great bang for the buck (purchase/use experience)

    5. Easy, convenient, and affordable service (service experience)

    6. Something that’s easy to customize and doesn’t pigeon-hole users (product use experience)

    7. A product/service that’s ad free and immersive (product use experience)

    8. A product/service that respects the user’s privacy (product use experience)

    Apple seems to do well on all these criteria. Adherence to these criteria prevents overshooting products in terms of functionality and reliability, and keeps Apple products affordable and focused on a specific job-to-be-done (promoting downmarket moves when appropriate).

    Google’s ad-based business model allows it and its partners to offer a “good enough” product re attributes one through five, but this ad-based model makes it difficult/impossible for Google to offer a “good enough” product re attributes six through eight, at least for a significant number of users.

    Apple’s most valuable “service” isn’t an email service or a search service or some other traditional web service. Apple’s most valuable service is its neutral gatekeeping role — allowing user privacy, customization, and an ad-free experience. The services Google “gives away” aren’t really free — the “cost” is a degraded user experience in terms of ads, less customization/choice, and less privacy. This may be “good enough” for some users, but it will likely never be good enough for many others.

    • obarthelemy

      How people can, with a straight face, say that Google offer less customization/choice, is really funny.
      Examples of stuff Android lets you customize:
      – the launcher (my parents get one with gigantic buttons and humongous font)
      – icons
      – the keyboard (my Note has a pen keyboard, there are a lot of innovative alternatives)
      – widgets (my gizmos have a home with agenda, mail RSS and to-do… not icons, the actuals emails, RSS items, to do list items…)
      – default apps: mail, browser, launcher, music, video…
      – App Store: flick a switch, and you can install anything from anywhere
      – lock screen
      – notification bar
      – and more

      Most of the other points (affordability, features, …) are similarly bogus.

      • http://www.noisetech-software.com/Home.html Steven Noyes

        There is a difference from highly customizable to easy to customize. The number of people I have had to help “un-customize” their Android handset is simply stunning. There is no doubt Android is easy to customize. There is also little doubt it provides a huge amount of hang yourself and even brick your phone (at least require a complete reset) with apps you can down-load from the Play store (yes, I have seen this).

      • obarthelemy

        Yep. Android is not customizable enough and too customizable at the same time. Android is sooooo bad

      • DanMiles

        This comment from obarthelemy is actually very insightful. Android is like a car that lets you customize which pedal is a brake and which one is gas (too much customization), but doesn’t let you customize your radio (always tuned to Google radio station with ads). Different Android vendors configure gas/break pedals differently out of the box.

      • obarthelemy

        examples ?

      • DanMiles

        I know you are being deliberately obtuse, but I would try to dumb it down for you. I would like to configure Android to not serve Google ads, but there is no option to do that.

      • obarthelemy

        I know you are being deliberately obtuse , but Android doesn’ t serve google ads. Apps do that.

      • DanMiles

        Same difference. Ads appear on an Android device, and there is no option to turn them off.

      • obarthelemy

        Or not: becsuse the issue is the app, not the OS, you can
        1 get another app or
        2 often, get the paid version of the app or
        3 root and install adblocker

        are you sure you should be handling other people’s phones?

      • Kizedek

        He didn’t say that, but I can understand your being a little defensive.

        Incidentally, thanks for your first example of customization: I didn’t know about “Zoom” in iOS. I didn’t look it up or anything, but your post prompted me to click on Settings, and I found it in just three finger presses and activated it with the fourth: Settings/General/Accessibility/Zoom toggle. I like it! I’m keeping it enabled now, so that a three-finger touch Zooms my screen.

  • Wolf

    Horace, you had mentioned on this show that the Genius Bar is ‘only a cost for Apple.’

    I’m not challenging the claim, but do you have a link to data that reflects that?

    • http://www.asymco.com Horace Dediu

      No, but I do not think they charge for the service. Do they?

      • M

        Horace,.. I am fairly confident that the Genius Bars are more than break even. They charge for parts and labor on anything that isn’t under warranty,.. Maybe they get credit internally for warranty work hard to say,.. But the Genius Bar people have definitely left me with the perception that they are expected to make money. I actually would rather they not feel this way,.. That is my one gripe with retail is the pressure they put on sales,.. Attach rates for AppleCare previously for .Mac etc,.. And the Genius Bar,..

        There is only so much that people can do and retail is Apple’s primary customer touch point,.. Store growth has been linear while Apple sales growth has been exponential for over ten years. Retail store growth may be limited by the development of the internal culture. So the linear rate of store growth may well be wise,.. But the store footprint relative to the customer service/relations relative to the customer/product base has been falling for a long time. This has made for some very harried employees,.. And extremely full stores.

        It is a great problem to have,.. But a problem,.. And a growing one.

  • poke

    I’m not sure the distinction you make between Google and Microsoft’s attitudes to software is true. Sure, Google uses some open source software and contributes to those open source projects, but it doesn’t usually open source its own software. Actually, the difference is probably in the other direction: Google’s source code is even more protected than Microsoft’s, because it never leaves their servers.

    • http://www.noisetech-software.com/Home.html Steven Noyes

      I think Horace said a similar thing. Google “open’s” their competitors source code by either offering a free service or the actual code.

      MS: Office, Google: Google Docs – Check.
      MS: Windows, Google: ChromeOS – Check.
      Apple/MS: iOS/WP7&8, Google: Android – Check.

      In the case of Google Docs, much of the actual code is proprietary while the service is free in exchange for user data. Likewise, Google holds all of their big data items from the data to the tools and algorithms very close. The idea is Google would be very vulnerable to a company that opened up that technology and monetized in a different way.

      • obarthelemy

        Actually, I find Android a much better competitor than Chrome vs Windows.

  • Bruce Corbett

    Horace, I was fortunate to have time to listen to the 3 hr Google IO opening address. It was very informative and I was really hoping to hear your analysis of the new software innovations and directions they announced. I have listen to most of your podcasts and have learned a great deal. The event was not about google glass and I notice that the reporting of the event was very light on the information revealed via the address. I hope you have time to view this key address. I think you would identify the disruptive elements of the address and help us all to better understand the new competitive components that were introduced.

  • NateF

    Perhaps Google Glass (or future products like it) could “grow up” to be an alternative to a desktop display or a TV for those who lack adequate space to accommodate a large screen, yet still want the extra screen area that a large screen provides (for, say, doing work that benefits from the greater screen real estate — e.g. development, movie editing, statistical analysis, etc. — or just watching movies/TV.)

    A Glass-like device coupled with something like the Leap Motion (as opposed to Glass’s diminutive slider controls) for interaction might also be preferable to manufacturing ever larger-screened iPads, let alone non-interactive TV and desktop displays.

    As a smartphone alternative/replacement, however, Google Glass seems to over serve. An always visible, real time overlay of, say, map directions (one of Glass’s proverbial applications) is nice to have, but is it necessary to get you from point A to point B? By comparison, audio-only directions, which we have today, are far less visually distracting and they interrupt you only when you need to make a turn or when you’ve reached your destination.

    As Horace suggested in the episode, a ‘smart watch’ would seem to make more sense here. A watch could display some data at a glance (notifications, weather, brief map directions perhaps, etc.) and more importantly, it would provide a simple and quickly accessible interface to Siri (via a built in mic or by plugging in existing earbuds with mic/remote, or with some future wireless earbuds with mic/remote). Using the familiar and compact form factor of a watch, rather than distracting and odd-looking glasses, as the delivery mechanism for voice-based services (which Siri and Google Now primarily are), you would probably reach more people, too.