I read this post by Hal Varian on the Google blog and my first knee jerk reaction was what crap!! This seems more like a quickly put together office memo than a statement from the Chief Economist, much less coming from Hal Varian.
Here are some of my gripes about it:
Network effect
1. I think Google is what it is because of its people and that has a very strong underlying network effect. In the early years of Google, most of the tech companies were laying off workers right left and center. This led to Google getting the best and the brightest and not necessarily at the highest cost. So from a company point of view G! benefited a lot from the negative externality it imposed on other companies.
2. The initial batch of great people led to more great people joining Google, they led to more great people joining Google. More network effect.
3. Lots of creative people with small startups are in a race to sell their products to Google, some of them startup with a sellout to Google as their exit strategy. This makes Google a storehouse of innovation. Which again induces a positive externality.
4. I will be on the IM n/w that has most of my friends. DUH ? Did I miss something here?
5. The number of users affect the no of advertisers who would come to Google. Thats one of the most common stories people talk about when they talk about two sided networks.
I fail to realize how he misses these points especially for a company like Google, most of whose wealth is lying around in Intellectual capital.
Switching cost
1. It has been proven time and again that there is significant switching cost in online services even though it is assumed not to be so. I won't join a new mail service even if they paid me to, because everyone mails me on Gmail and I am used to the interface. My mails are archived here etc etc. They amount of money they pay me for which I will be indifferent to switching will be my switching cost (~$250. Come on, I am a poor grad student and this is a HIGH switching cost). There is a significant cost even though the alternative is just a click away.
Economics of Scale
1. The only this that works in these information goods driven companies is the initial capital you can put into your product, aka setup cost. The more money you have the better you are. (Hint hint: Google market cap). The marginal cost is zero. You can product a gazillion copies after the first one, almost for free. Why does he even talk about economics of scale here ?
I personally think Google is a great company. The biggest reason I can think of is its GREAT EMPLOYEES.
And yeah some bit of luck and accidental good timing.
PS: For those of you didn't know Hal Varian is one of my favourite economists, but this article by him is badly reasoned. Period.
Here are some of my gripes about it:
Network effect
1. I think Google is what it is because of its people and that has a very strong underlying network effect. In the early years of Google, most of the tech companies were laying off workers right left and center. This led to Google getting the best and the brightest and not necessarily at the highest cost. So from a company point of view G! benefited a lot from the negative externality it imposed on other companies.
2. The initial batch of great people led to more great people joining Google, they led to more great people joining Google. More network effect.
3. Lots of creative people with small startups are in a race to sell their products to Google, some of them startup with a sellout to Google as their exit strategy. This makes Google a storehouse of innovation. Which again induces a positive externality.
4. I will be on the IM n/w that has most of my friends. DUH ? Did I miss something here?
5. The number of users affect the no of advertisers who would come to Google. Thats one of the most common stories people talk about when they talk about two sided networks.
I fail to realize how he misses these points especially for a company like Google, most of whose wealth is lying around in Intellectual capital.
Switching cost
1. It has been proven time and again that there is significant switching cost in online services even though it is assumed not to be so. I won't join a new mail service even if they paid me to, because everyone mails me on Gmail and I am used to the interface. My mails are archived here etc etc. They amount of money they pay me for which I will be indifferent to switching will be my switching cost (~$250. Come on, I am a poor grad student and this is a HIGH switching cost). There is a significant cost even though the alternative is just a click away.
Economics of Scale
1. The only this that works in these information goods driven companies is the initial capital you can put into your product, aka setup cost. The more money you have the better you are. (Hint hint: Google market cap). The marginal cost is zero. You can product a gazillion copies after the first one, almost for free. Why does he even talk about economics of scale here ?
I personally think Google is a great company. The biggest reason I can think of is its GREAT EMPLOYEES.
And yeah some bit of luck and accidental good timing.
PS: For those of you didn't know Hal Varian is one of my favourite economists, but this article by him is badly reasoned. Period.
