Google Takes Stricter Approach to Costs
on.wsj.com
on.wsj.com
From a Lean (as in Lean Manufacturing) perspective, I see two mistakes: a focus on reducing costs and increasing use of control to do that.
The problem with a cost-oriented perspective is that is too narrow. For example, suppose you're known for making great hamburgers. If you look at costs, you might say, "Well, beef is our biggest expense, so let's focus on reducing that cost." But the easy ways to do that reduce quantity and/or quality, which also reduce value delivered. Instead the thing to do is to focus on reducing waste or increasing effectiveness, both of which increase value delivered per dollar of expenses.
And the problem with adding control structures as a mechanism is that is slows everything down. You want employees asking, "Am I doing the right thing for the company?" rather than having them pray to the gods of the executive suite every time they need to make a decision.
I think a large part of what made Google so successful is that they approached most problems like engineers rather than MBAs. Looks like there will be opportunities for others to pick up that torch.
My great hope is that the new funding rules will make startups accessible to the general investing population. That would, in principle, obviate the desire of existing companies with mature, successful businesses to go out and start unrelated new efforts. Conglomerates aren't very popular these days and haven't been for a long time; it would be nice to see these companies stick to what they're good at, pay their shareholders richly, and then let those shareholders decide whether they want to go invest that income in something else (and if so, in what).
Well, a man can dream, right?
http://www.microsoft.com/Investor/EarningsAndFinancials/Fina...
If the CEO was a Morgan Stanley alum, maybe, having a CFO from that background doesn't seem to be all that strong of a signal of anything.
Could you elaborate why you don't think the CFO is a strong signal?
I don't think the CFO having a history in a large financial firm is strong signal for the same reason I don't think the Chief Counsel having a history in a large legal firm or -- even for a firm that isn't a tech firm -- the CTO having a history in a large tech firm is a strong signal: its a background tightly connected to the specific domain of responsibility.
OTOH, a CEO or COO being drawn from a specific industry other than the one the firm is operating in, or any C-level drawn from an industry both different than that of the firm and not tied to the specific domain for which they are responsible, may be a strong signal.
If I were a Google competitor -- or a prospective investor -- I'd take this whole attempt to read tea leaves into a narrative with a grain of salt.
> From a Lean (as in Lean Manufacturing) perspective, I see two mistakes: a focus on reducing costs and increasing use of control to do that.
I don't see any real evidence in the article that either of those mistakes are being made, except, with regard to increasing use of control, the reference citing "two people" to vague unspecified increases in approvals for certain kinds of expenses.
> The problem with a cost-oriented perspective is that is too narrow.
Sure, a purely cost-oriented perspective is too narrow. But the information in the article doesn't really support the proposition that that is what is going on at Google.
> Instead the thing to do is to focus on reducing waste or increasing effectiveness, both of which increase value delivered per dollar of expenses.
What little concrete information is given in the article seems to indicate an increased focus on identifying the concrete results that expenses are intended to serve (e.g., the reference to tying hiring to particular plans to achieve concrete goals related to revenue, user-acquisition, etc.) which seems to be a focus on effectiveness, rather than a narrow focus on costs.
Though, really, the article doesn't support a strong conclusion on anything.
Is that really a "trend" we're going to cite to justify this narrative?
Besides, it makes no sense. Even if their revenue growth has stalled out at 20%, their operating costs are only ~35%[1]. You'll very quickly get diminishing returns cutting that, and you still won't be able to maintain anything that keeps investors pleased.
Honestly this seems more like a story written off a press release from this "Bernstein Research".
[1] https://investor.google.com/earnings/2015/Q1_google_earnings...
An efficient google can keep more irons in the fire.
With search, I show intent, frequently looking to purchase something. However, as google's results have become worse and worse at surfacing useful information for me, I increasingly rely on my bookmarks, or other favorite places to start. Because the search is not getting better at the same rate that the internet is getting bigger, I find I don't bother with extensive search-based shopping, and instead hit standard review sites or shopping sites.
This wouldn't be such a problem if I still got to _those_ sites through advertising, or search, but I don't do that much at all.
IMO, google really needs to change their tactics with search in order to put themselves back into the purchase intent stream a bit more.
"Mr. Page said he looks to Berkshire Hathaway Inc., the insurance-focused conglomerate run by billionaire Warren Buffett, as a model for how to run a large, complex company, [...] "
I recall hearing a guest on the a16z podcast say something along the lines of 'high-growth tech companies eventually become big boring banks,' but I can't remember who said it. Is there a notable quote to this effect?
Do you read Buffet's yearly letters? They're great.
"Indeed, we are far more conservative in avoiding risk than most large insurers. For example, if the insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a significant profit for the year because of its many streams of earnings. We would also remain awash in cash and be looking for large opportunities in a market that might well have gone into shock. Meanwhile, other major insurers and reinsurers would be far in the red, if not facing insolvency."
Smart.
https://en.wikipedia.org/wiki/American_International_Group#L...
The credit facility was secured by the stock in AIG-owned subsidiaries in the form of warrants for a 79.9% equity stake in the company
It might be good for executives and other employees to take excess risks, but it probably isn't good for shareholders, they generally lose a substantial amount of their investment in an emergency bailout, most of it in a bankruptcy.
Good. The legitimate use of taxpayer money in propping up for-profit organisations should be to prevent a broader social problem, not to guarantee the ROI of investors.
A bailout is basically just redirecting the assets of the healthy part of the economy towards a part of the economy that has lost confidence, oftentimes at a profit (the government profited from the TARP bailout). The government does this using its power to tax. Berkshire does it through the power of Americans' insatiable demand for candy, sugar-water, freight transport, and peace of mind. Having large cash reserves just lets it participate in these deals where you would otherwise need a state-sized actor, much like how the Rothschilds owned much of 19th-century Europe.
They where v popular in the 60/70's until the wheels came of and corporate raiders starting breaking them up.
Of the big emerging business lines at Google - Android/Play, GFiber/Loon, YouTube, self-driving cars, Nest & home automation, enterprise Google Docs, and AppEngine/Cloud - YouTube is the only one where the money comes from advertising.
This is a major shift from the Eric Schmidt years; Eric would always say "Our next billion dollar business is our last billion dollar business." Larry's plan is clearly to own a major portion of the technology industry going forwards, using capital from Google's first successful business (Search) to fund direct investment in new technologies, the same way that Buffett used the float from his insurance company to acquire additional cash-generating businesses. It remains to be seen how successful he is at this; tech is very different from the brick & mortar businesses that Buffett got rich at, and small startups often have strong advantages over well-funded incumbents. But "Google is an advertising company" hasn't really been true, in terms of corporate strategy, since Larry took over.
https://investor.google.com/earnings/2014/Q4_google_earnings...
At least at first, Google's "floundering" was always focused back onto advertisement -- e.g. Android to capture the mobile market.
Pay out massive dividends.
Only in the sense that:
(1) The shareholders have specified voting rights (which, to the extent that they want dividend payments, they can exercise those voting rights to get them), and
(2) The shareholders have a claim on the residual assets of the firm in the event of dissolution.
Of particular note, the way voting rights are structured in Google, the shareholders to whom Google "belongs" in sense #1 are predominantly the narrow band of insiders holding Class B (10 votes/share) shares, not the masses holding class A (1 vote/share) or Class C (0 votes/share) shares.
GFiber/Loon is arguably about increasing connectivity and internet access to Google services, and thus increasing ad revenue. Android also increases exposure to Google services and ad revenue. Indeed, one of the main justifications of Android and Play Services has always been that if Google can control the platform they can control where eyeballs go for ads.
Strategy is aspirational; revenue and profits are reality. Google is an advertising company. Larry may aspire to be the Emperor of San Francisco and Protector of Mexico, and there's little to prevent him telling people that he already is, but that does nothing to change the fact that he's really the CEO of an advertising company in Mountain View.
As opposed to the others, where the money doesn't come from anywhere.
So, in a sense, they are "money comes from ads" businesses, but in a less direct manner.
I suspect if cost cutting doesn't help pad the bottom line after the top line adjustments investors will start pressuring them to do something with their massive market share...which in the end could come as a detriment to their presence.
Google docs presented a neat opportunity to attack Microsoft where it hurts, and Google has more or less pathetically failed, and Google docs continues to suck. I would have expected docs with version control, a big-data capable spreadsheet... not docs. BigQuery at least is somewhat ok.
Maps, shockingly, has gotten worse. On iOS the current app sucks battery life, and is unintuitive to use. Microsoft and Apple have more user friendly maps apps, which nobody would have expected upon using the original maps.
With Glass, they invented an entirely new way to be a douchebag.
Android, nothing.
App Engine, nothing.
I'm not.
With all the venture capital pouring into Silicon Valley, how often have businesses to rival Google's Search Ads business been generated? Is it really surprising that Google hasn't managed, internally, to develop anything else on the same scale?
They might also consider acquiring companies that could benefit from using Google technology and infrastructure as a competitive advantage. They get software for free and hardware (esp datacenters) at or right over cost.
Being dependent exclusively on others for the success of your own business is insane. Having your own alternatives around (eg Android, Chrome) to keep everyone else "honest" is a very good strategy.
Look at it another way - if Android was a non-Google company then Google would be paying them in the ballpark of a billion dollars a year. If Google can develop Android for less than that, then Android is profitable even if it has no direct revenues.
User activity is the lifeblood for the Google business. It is what the revenues hang off, it is what improves existing products, it is what lets you measure what is actually going on, and it provides a ready place to introduce products and change existing ones.
It is called Siri. Also Google isn't the only player in search, maps, video etc so competitors like Microsoft, Nokia, and Facebook could pay for placement. If Google was entirely dependent on other people's mobile platforms, then those platforms can make decisions based on payments, as well as on their competitive views such as not wanting to make Google stronger. The latter would harm Google's business and future prospects.
Anyhow, I wasn't saying that Android is a lost cause for Google, just that it's incredible that it has yielded virtually (if none at all) profits. The biggest benefactor from Android has been Samsung and they have made it pretty clear they really really want (doesn't mean they can) swap out Android for Tizen. Every other Android OEMs are bleeding cash, even if Nokia had adopted Android it likely would have had to be sold eventually because of industry capitation in "dumb" phones. I think Google has sort of blown their golden opportunity with Android, it should be making them billions, instead it yields nothing. Google is an ad company first, but that's all they have. If I were an investor in Google, this would worry me. Maybe not for the next 10 years, but eventually. I think ad campaigns for millennials have become complex operations and just plane PPC and display won't cut it eventually.
You do know there are people outside US right?
As I mentioned, if Android costs less than a billion dollars a year to develop, then Google is ahead. It won't show up as a regular profit line, but they will be better off by the difference. It shows up in other ways too - Android gets Google's apps preinstalled. Defaults are extremely powerful as most users go with them. Google can essentially do whatever they want on Android. For example doing Google Now even required some changes to Android. A competitor platform would severely limit what could be done, and most platform owners would want that kind of functionality and knowledge of their users for themselves.
Think of Android as sending pennies a day back to Google's products for each user. On other platforms, the platform owner gets first bite, controls Google's access, requires payment, and reduces what Google gets back.
As for the Android OEMs, Google doesn't need them to succeed, and only that there is reasonable choice of devices available in the world. Heck it is actually in Google's interest for Android OEMs to just barely make it, as that means cheaper devices which means more users, and that those users have a bit more income left over to spend with Google.
Google is making billions on Android. Without it their future would be very much in doubt.
It's just like all the other free stuff they offer - it raises the bar for competitors, but it doesn't make them money. Saving money is not the same as making money.
The "free stuff" is not free. It is a place to deploy ads and encourage use of other Google services which then provides more places to deploy ads (aka revenue opportunities). Even if no ads are involved, the user activity is very valuable. Knowing what people search for, where they go, who they communicate with etc let Google make better products. For example when showing search results, which ones the users click on is monitored. If they keep clicking on the 3rd result then that one should likely be higher. The more traffic you get the better you can make your search results because the users tell you. Navigation data tells you what physical places are popular, which again reinforces the search results (eg Chinese restaurants in your town). Even seeing mis-spellings helps.
If you ask people who have tried multiple search engines why they use Google, the answer is usually the quality of the results. It is a vicious cycle and why Google has 70-80% of search traffic. Guess where that makes the advertisers go, and the more advertising demand the higher the rates that can be charged. The positive feedback loops around Google really help.
Android does not directly add to Google's bottom line. It does however add over a billion users to Google products, significantly reduces the costs to access those users, does not place those users under someone else's control, and helps the revenues of those Google products they use which does show up in the bottom line.
I'm not sure why this is controversial, it's in their financials.
In other words, having some (or many) of your eggs in someone else's basket is okay. Having all of your eggs in their baskets leaves you very vulnerable.
There are other big Google benefits to Android. It keeps people using Google services, including when they use other platforms. That makes the other platforms have to play nice with Google, and restricts the amount they can take away from Google. An iOS user who uses Apple for everything (mail, calendar, etc) is far harder for Google to monetise.
Companies that target the cost-leader position will have thin margins but make up for it in quantity. Google didn't lose anything in the Android victory over the mobile OS market, and falls in line with their strategy of making slim returns on every user (which adds up).
Which doesn't change that they're the cost leader of the market and didn't lose anything. Where do you think the thin margins per user comes from?
And the company is starting to diversify away from advertising with Cloud, Play, Express, etc.
1. IBM: main business used to be hardware, but now mostly IT services. This, believe it or not, is the most stable business. It's really hard to switch to another service provider for stuff your whole company relies on: payroll, inventory management, HR, etc.
2. Microsoft: main business used to be software, but moving to infra/productivity services. This is also as sticky as IBM's offering.
3. FB/Google: main business is selling advertisements, still looking for something to move to. If history repeats, it'll be some kind of services, but the multi-billion dollar question is, for what?
Yeah right. Nothing sends the morale soaring like the "necessary cuts".
If they were confident about continued revenue growth they wouldn't be feverishly worrying about the stock price.
They've shot themselves in the foot by reactively deflating other businesses they are afraid of to protect their cash cows rather than creating enough new value to replace it themselves.
or just a big one coming - the correction ("bust") is coming around next year, and thus advertising business will not grow until we are out of the correction several years down the road. So may be what Larry does is just that old "butten down the hatches", like some other companies are starting to do to.
> Some employees cite other examples of increased frugality, albeit at a workplace that is luxurious compared with most others. Travel, supplies and events all require more justification or approvals than in the past, according to two people familiar with the changes.
It doesn't look like they're interested in making drastic cuts just yet. The innumerable perks that Google offers its employees in the form of retreats, trips, food, play, etc. are what will be cut first. You can still keep morale up if you don't send your entire data center team to a cabin or Disneyworld twice a year, or if you don't send more people to a job site than you really need.
Since last year, many Google teams have had to submit plans describing how additional employees will produce specific business objectives, such as increased revenue or more users. ... In one ad-marketing group, new hires are tied to generating revenue, said a person who recently left the group.
While this might cut the cost in short term, it is also an anti-thesis of long term vision, exploration and playing in uncharted territory. How does a team make a proposal for scanning books or building email system or maps with no real business plan in this kind of environment? Most properties on Google don't make ton of money but they provide - what is known in business - "free parking" model. These properties have more subjective role in overall image of Google. Do we expect all these properties to stagnate moving forward? I hope Wall Street folks are not finally catching up with Google's visionary leadership. Don't they still have voting majority anyway?
It would be nice to hear about what Googlers think of this article and changes they have experienced.
If they want to make an impact, AirBnb, Spotify, Uber, Facebook, MongoDB, iPhone, AWS, those were the next big thing in the last 10 years. On all those topics they're on the second step. None of them were particularly hard, especially when you have the funding.
At least with that many talent, they have good chances of inventing a human-grade IA; with that much data they could decently feed their IA; with that much computing power they're ready to host the IA. If they don't, then they should have settled with the first 5000 employees who made the Search, Maps and Android.
What sucks for startups is when there's a google-subsidized free or below cost kind of crappy option for something at $0 or $50/yr, which crowds the market out for a $200/yr version. Or when something like Reader happens, which basically kills all innovation in an area, and then eventually gets killed on its own after those other competitors have died.
I'm kind of bitter because there are 2 big projects I'd love to do, but there's a crappy Google (or in one case, Google + a couple other companies) product in the middle of the field in the low price position.
TPS reports incoming Google!
Having grown up with Google, I had hoped to see Web ads as their first Unicorn and expected more of the side projects they let their employees work on "take off". It's certainly not for lack of trying; it would be very interesting to summarize Google's pushes into other markets and see why they have failed to expand their core competencies.
Google has in no way failed, but I have always expected another PageRank type success somewhere.
Anecdotally, I've noticed my campaigns getting a better CTR on Bing (perhaps their audience is less tech-savvy or just clicks on more ads?), and the CPC is lower to boot. If your market is a good fit for their audience, I consider advertising on bing to be a well-kept secret right now.
Unless Google has terrific rates on credit card charges (and they probably do, but certainly not that great), it's probably costing them more to bill me than they make.
Maybe there aren't that many low paying accounts and so it's not worth the man hours to work around, but it's always struck me as strange when there are 2 easy solutions 1) not bill accounts where the amount is < credit card fees, or 2) always bill a minimum amount (e.g. $5) which gets stored as credit and slowly used up.
So it's not all bad news...
http://investorplace.com/2014/07/goog-google-stock-split/#.V...
I think Google needs a new CEO. Somebody from inside. Before it is too late.
I think it would be a mistake to cut spending on innovation, you risk becoming irrelevant.
(I didn't get why this story didn't get upvoted more, it seems like an interesting shift.)