Technological Layers and Layer Ownership

This ars technica article outlines in extraordinary detail what is at risk in the smart phone wars. It discusses the various different layers involved with the smart phone industry. These layers are extremely important. Control of a layer allows you to move into another layer and can help you extract monopoly rents* from those layers as well. My friend Sean was complaining about bloatware** earlier today that comes a computer supplier. They are actually attempting to get into a different layer. If a PC company is able to provide support which can allow them to get money from a customer on a returning basis, monthly or yearly, they can help ensure return purchases on more expensive purchases as well as getting a lot more money out of first sale. Additionally, the manufacturer may also be using the bloat ware they install to subsidize the cost of the product you bought. If a third party asks to have software pre-installed the manufacturer could ask for money to put it on, which may be passed to you as a consumer, so you could get a computer at a slightly lower price.

Ars Technica, isn’t the only group of people that views this phenomenon as a stack with different layers in it. This is actually an economic model as well. Which was used in the original Microsoft EU case explaining how these different layers can be leveraged to foreclose on a new market.

Another way of looking at this is in a traditional manufacturing sense. When you are making a car you have many different suppliers. You have paint, tires, batteries, steel, etc… There are several different ways to make it cheaper for you to produce a car. You can become vertically integrated, with a very high production level, where you make the steel, tires, paint and the full car. If you were extremely good at producing steel you would be able to get the steel at cost whereas traditionally you would have to pay a higher cost so the producer could earn a profit.

We can see this same sort of thing happen within IT. There is serious concern with corruption of content and content providers, like Comcast, purchasing a wide range of companies. If they control the material and access to the material they could control what people can access and impact society in a serious manner.

I don’t think that Comcast is going to be able to significantly impact the smart phone layers as they have with TV. However, a company like Google or Apple definitely could. Google is actually attempting to get into every single layer in this market. They tried to purchase wireless spectrum (they are also installing a super fast network in Kansas City), they are going to purchase Motorola, they have an OS and they are an app provider.

I think that other technology companies are aware of this. This is part of the reason why Google is being attacked on all sides. While until Google gets a hold of Motorola, they will be mostly in the top most two layers, OS and Applications. Google is clearly trying to move into every layer possible. This will allow them to have the greatest likelihood of a customer going onto a website and click an ad to give them money.

To prevent this, almost everyone is suing Google or some aspect of their technologies. Google is trying to get around this. They want the control.

I’m going to be gone for a little while. My brother is coming into town and I’ll be in Amsterdam for the next few days and then Munich this weekend. Hopefully I’ll have a post up Thursday or early next week.

Further Reading: The New ICT Ecosystem by Martin Fransman

*monopoly rents means higher prices from controlling the market. It allows a manufacturer to sell a product for a higher price than they would be able to do under a competitive market. Microsoft is able to do this with Windows. However to protect themselves from other OS providers undercutting their prices, MS sells the same OS at lower price points. They give discounts to students and charge a lower price in poor countries. This allows them to increase their monopoly to new markets.

**excess software which slows down a computer or smart phone.

Google’s Anti-Trust problems III

In my last two posts (one and two), I’ve been discussing the current problems as well as potential problems that will be facing Google in the antitrust arena. Yesterday I mentioned I was going to discuss Windows Media Player (WMP) and how this pertains to Google. However, I realized I need to go one step back first. First, we need to look at what happened with Netscape and Internet Explorer (IE). Initially Netscape was THE internet browser. It was the browser to program websites to be displayed on, IE wasn’t even really on the radar. Also, at this time with the web, these programs were being sent out by CD, it would take an extremely long time to down load this application. Why? because it was over a telephone line. A modem that was getting about a tenth or less of the download speed you have now with whatever your broadband connection is. That and your mom would probably pick up the phone to call some one while you were trying to download the software, or while playing War Craft 2 against a friend.

Since the medium of delivery for the browser was over CD it was a level playing field for both browsers to compete. You’d get one in the mail for whatever browser, Netscape, IE, AOL, etc. However, Microsoft realized the importance of this market. They figured out a way to leverage their desktop monopoly to foreclose on the browser market. They started installing IE onto all of their operating systems. Then went as far to integrate everything together to ensure market dominance. It worked because of slow connections and the fact that people are lazy. If something already works they will use it.

Flash forward about 5 years. MP3s have gotten popular through Napster and other digital Peer 2 Peer file transfer systems and the next big market is music players. Winamp was a major player at this time and WMP was not really any sort of competition for it either. In Windows XP WMP got a major over haul and was at least able to compete with Winamp. Microsoft decided to bundle the software in the same manner they had done with IE.

This is where the story changes though. The EU filed suite against this claiming this was anticompetitive. At this time the iPod had just come out and there was no reason to expect the product to come to the PC. It seemed like it was a long way from happening. Plus, even if the iPod was going to PC it was still going to be a niche market. So, the law suit. We all know now that because of the pace of technology and the fact that there were other factors involved with the selection of the music player it prevented market dominance of Microsoft. Without the requirement for iTunes with the iPod who knows what player would have won the market.

How does this relate to Google though? Well, looking at the search engine suit from Korea I mentioned yesterday, I think this has some pretty significant implications. Using a platform to control the method in which you use other functions can be shown to be anticompetitive. Google search engine is the first for mobile phones, however, I see no reason why it will be the last.

More on this topic in my next blog.

Google’s Antitrust Problems II

I think that I started this discussion at just the right time. According to cnet, South Korean officials have raided a Google office over anti-competitive practices relating to Android. They claim that it’s anti-competitive to force companies to use the Google search engine with Android if they want Google applications and the Google logo on the device. Personally, I’m not really sure how this is anti-competitive, or at least why Google is being singled out for this. Apple does the same thing, as does Nokia and Microsoft. When I still lived in the US, I remember Verizon forcing Bing on me and changed my default internet settings on my Blackberry (granted Korea couldn’t go after that one) but the idea to me is bizarre.

However, this is a great way to discuss how Google, in a broader sense, is at risk for antitrust action from many national governments. In my last post I explained the idea of market foreclosure, which Microsoft used in an attempt to capture a monopoly in the server market as they had in the PC market. South Korea will most likely be arguing that Google is using a captive audience to force their search engine on their users. In the bigger picture, I think this sort of tactic will likely be used for other markets. For example, Google is using their large market share, and the social capital they’ve gain from being a trust worthy site, to build email products, then office suites, map and geolocation services (with recommendations), and of course blogging sites like the one you’re currently reading. Since I have a google account, from way back when Gmail first was created, I’ve gotten all these additional features for free. i haven’t had to do anything and they just appear as services that I can use.

Even if I’m not logged in to Google and I go to Google.com there’s a huge selection of services that I can use without logging in. However, they become more powerful as soon as I log in. Google is using their monopoly of search engines to leverage users to use other products they’ve created. Let’s say Yahoo! decided to try to create an office suit in the same manner as Google and basically try to emulate Google in every way with all of their products. I’m sure that some of the users there would take advantage of the free document services. However, I also believe that Yahoo! and Google cater to different portions of the market. Yahoo! has become the defacto home page to an older crowd than Google. Which could mean that the users of Yahoo! may not want the same products. I have a Yahoo! account, which I only use for Fantasy Hockey and Football. I never use it for email, I never search the web using Yahoo! I only use Google. Why? Because it gives me the results I want.

So, now that we understand that Google has been leveraging their search market share to move into other markets what kind of impact does that have? I think that it will actually prevent other people from using other services out there. However, I think that with internet systems there is no real reason to keep with one product family over another. It’s a matter of trust. I think that people trust Google more than other companies, which is why they are willing to use them for other products. I couldn’t imagine people using a Facebook Docs the same way that people use Google Docs.

In my next post I’ll discuss more of these implications of these topics. I will also compare some of the Google products to Windows Media player and how something that seems like a big deal today, may not be a big deal in a year or two. Technology moves so fast.

Google’s Anti-Trust problems

When Google announced the planned acquisition of Motorola Mobile investors weren’t exactly thrilled (see here here and here). Most of those investors are concerned over a lot of the issues i discussed in my last few posts (here and here), patents and potential issues with Android’s future. There are also discussions online about different types of antitrust and privacy probes that Google is being subjected to.

Some of these privacy probes are from the EU, such as the German probe into the Google Maps cars connecting to open networks and keeping records of these networks. Another recent issue comes from Google Ads itself. Where Google was advertising for illegal pharmacies. This one Google settled for $500 million, which may have been an effort to keep away antitrust investigators or at the very least prevent their attorneys from being distracted.

In the previous article it notes that European regulators are looking into Google’s ad practices to see if they are being anti-competitive. This could be a legitimate concern. Google has been purchasing a large number of ad related companies recently. However, in the long run I don’t think that purchasing of companies will make that much difference as it’s very easy to get into the internet ad game. New companies will be springing up on a routine basis.

I think that the EU will eventually look at Google in the same manner they looked at Microsoft in 2004. They were using an economic analysis tool called foreclosure. It’s a fairly simple manner of looking at markets and market share. Let’s say you have a monopoly in some market like desktop operating systems. You also know that the desktop market isn’t the only market out there, there’s another market related to servers. What are servers? Well they serve different functions but some of them are webservers, so when you go to a website that has some animation or data to be pulled there’s a webserver there that is connected to the website. This webserver pulls the required data to be displayed and in many cases actually creates the desired images. Other cases are for databases. The computer is extremely fast and can handle a massive amount of data processing at a time. Facebook for example uses a large number of them.

So, you already have control over the desktop market, and you want control over the server market. You can make it easier or harder for your desktop machines to connect to another machine. Basically you control the language in which that happens. You can make it easier for competing operating systems to decode your language. If you want to make it easy to connect a windows desktop to a linux server, you basically give the linux OS guys the lanugage and words to use to make the connection happen. If you don’t want them to connect you make it very difficult so they have to create their own rosetta stone to figure out how to connect to your machines. (I know this isn’t a very technical way to describe what’s going on here, but not everyone is computer literate that reads my blog)

Through this leveraging of your monopoly on desktop computers you can push your way into another market. In some ways Google is doing exactly this. In my next blog I’ll discuss a little bit more about what happened with Microsoft and how Google is attempting to foreclose on other markets using their search engine monopoly as a starting point.