Nick Carr has an awkward role to play in the world. He is one of the most insightful thinkers about technology's impact on the world, but he has also chosen to be this era's most erudite technology curmudgeon.
In practice, this boils down to a love/hate relationship with Google, which Carr both understands on a really deep level and constantly frets about. You might argue (with reason) that those two are not mutually exclusive, but there is such a gap between the rigor with which he approaches the first and the hyperbole he uses in the second, that one has to wonder if the second is just for show.
Anyway, he's always worth listening to, and his post on the occasion of Google's tenth anniversary is no exception. Here, he explains why Google, the cathedral of free, gives away most of its products: to reinforce the market for the few products it charges for:
Google’s protean appearance is not a reflection of its core business. Rather, it stems from the vast number of complements to its core business. Complements are, to put it simply, any products or services that tend be consumed together. Think hot dogs and mustard, or houses and mortgages. For Google, literally everything that happens on the Internet is a complement to its main business. The more things that people and companies do online, the more ads they see and the more money Google makes. In addition, as Internet activity increases, Google collects more data on consumers’ needs and behavior and can tailor its ads more precisely, strengthening its competitive advantage and further increasing its income. As more and more products and services are delivered digitally over computer networks — entertainment, news, software programs, financial transactions — Google’s range of complements expands into ever more industry sectors. That's why cute little Google has morphed into The Omnigoogle.
Because the sales of complementary products rise in tandem, a company has a strong strategic interest in reducing the cost and expanding the availability of the complements to its core product. It’s not too much of an exaggeration to say that a company would like all complements to be given away. If hot dogs became freebies, mustard sales would skyrocket. It’s this natural drive to reduce the cost of complements that, more than anything else, explains Google’s strategy. Nearly everything the company does, including building big data centers, buying optical fiber, promoting free Wi-Fi access, fighting copyright restrictions, supporting open source software, launching browsers and satellites, and giving away all sorts of Web services and data, is aimed at reducing the cost and expanding the scope of Internet use. Google wants information to be free because as the cost of information falls it makes more money.
There’s one more twist. Because the marginal cost of producing and distributing a new copy of a purely digital product is close to zero, Google not only has the desire to give away informational products; it has the economic leeway to actually do it. Those two facts — the vast breadth of Google’s complements, and the company’s ability to push the price of those complements toward zero — are what really set the company apart from other firms. Google faces far less risk in product development than the usual business does. It routinely introduces half-finished products and services as online “betas” because it knows that, even if the offerings fail to win a big share of the market, they will still tend to produce attractive returns by generating advertising revenue and producing valuable data on customer behavior. For most companies, a failed launch of a new product is very costly. For Google, in general, it’s not. Failure is cheap.
But while Google has an odd business model, it's not an unprecedented one. The company it most resembles is, ironically, its archrival, Microsoft. Just as Google controls the central money-making engine of the Internet economy (the search engine), Microsoft controlled the central money-making engine of the personal computer economy (the PC operating system). In the PC world, Microsoft had nearly as many complements as Google now has in the Internet world, and Microsoft, too, expanded into a vast number of software and other PC-related businesses - not necessarily to make money directly but to expand PC usage. Microsoft didn't take a cut of every dollar spent in the PC economy, but it took a cut of a lot of them. In the same way, Google takes a cut of many of the dollars that flow through the Net economy. The goal, then, is to keep expanding the economy.
The whole post is worth reading. Check it out here.