Seeing No Evil

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Do you have a preference in the Apple vs. Google war? Still hating Microsoft? Thomas Hazlett and Russ Roberts reveal how remarkably similar is the strategy both Apple and Google follow, to make the illusion of Apple vs. Google so compelling.

All great market innovations challenge entrepreneurs to do two things: (a) get other firms
to help create specialized products, and (b) maintain sufficient control to guide the
process while extracting a generous portion of its returns. These tasks carry obvious
tensions. Builders of complex ecosystems handle them differently.

The iPhone/iPod/iPad/iTunes product space embeds numerous Apple-set restrictions.
Buyers purchase devices on the proviso that they lock-in for applications purchased down
the road. So long as the innovator incentivizes its developers to bring exciting new stuff
to market, while producing slick, iconic handheld devices that insert themselves into the
dreams of teen-age girls and boys, vast riches ensue.

Google’s structure features more semi-independent partnership layers. But calling it
“free” or “open” is less an economic description than a stroke of marketing genius.
Google’s enterprise is to capture new game to feed to its vaunted search engine. That
product enjoys overwhelming dominance – perhaps 75 per cent market share — due to its
competitive superiority. No other firm can rival its popularity. Moreover, the firm’s
innovation cluster brilliantly scales – its lead over rivals becomes more formidable as the
web expands.

Because the market position of Google Search is so secure, distributing “free” access to
Android is simply another form of Apple-like tie-in. Once the customer web searches,
Google reasonably expects to profit. And no “open platform” governs. Google prices
access to its engine – with its proprietary databases, secret algorithms, and private global
transport network – to maximize firm profit.

The Apple and Google models are two sides of the same coin. Both leverage innovations
in the smart phone market for revenues in ancillary services. Apple has in many respects
the more ambitious mobile plan, integrating heavily into hardware design and
manufacturing, and has been an industry disruptor forcing Google to mostly play catchup.
It makes its economic demands explicit, requiring iPhone users to patronize the App
Store and iTunes. Google need not be so fussy; with what the U.S. Department of Justice
would likely characterize as “dominance in the search market,” it simply leaves
customers to their own devices.

Since January 1, 2007, when the iPhone was announced (Android launched later in
2007), Apple shares have risen about 200 per cent while Google shares have slightly
declined. Lots else is happening, but mobile strategies are clear pivots for both firms.
Because the bottom line is the bottom line, not market share, the game so far belongs to
Apple. Google just plays.

But it is playing to win, and on terms not so different than Apple’s. Resistance to
openness is not futile — it’s ubiquitous. What looks “open” or “free” is a misdirection
hand gesture, diverting attention from where proprietary products are inserted into the
chain, with returns surgically extracted. All the rest is “revolutionary” hype.

Hazlett discusses many under-appreciated facts of the Apple-Microsoft rivalry, another convenient illusion, and, for those considering net neutrality, Roberts offers the reality of the “network of networks” that has evolved qualitatively from the DARPA

Mistakes we make are generally looking at market outcomes and seeing them as somehow either mistakenly the result of some policy intervention–as in the case of thinking the Internet is a government project that came from DARPA, which is really a common view that I think is quite misguided. Why? The DARPA network had a lot of inputs that became useful in modern networks, but the network of networks today is all these products–computers, chips, software, wireless, applications. Not master crafted on some blueprint by the Department of Defense, nor designed to withstand nuclear attack, by the way. Vision incorrect. The idea that networks are open end to end, control only at the edges of the network: that’s in some sense an optical illusion. There is control that takes place at the core, but to the extent the illusion is correct there is an incentive for a lot of standardization within the core of the network in pushing innovation out toward specialized innovations. What does that mean for regulation–we should enforce rules like network neutrality that maintained that the only kind of innovation that can take place in terms of structure has to be on the edge–and that again is a misreading. Consumer products–the edge–content and applications, Mass market customers have access to directly. Google is highly integrated with core networks in terms of how it transports its applications around the world; world more productive for that. Many other edge applications integrating into faster transit to make their products better for end users. Akamai specializes in speeding up delivery, allowing all these application providers to avoid the traffic or congestion of the Internet. You want competition to not only deliver new products but new structures. Sometimes experimentation is going to be vertically oriented. That is not a sacrilege–just a religious belief, not one founded in economics.

All in all, a fascinating exchange that made me think again about why I prefer Google over Apple. But, I still don’t like iPhones.

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Filed under: Academia, Business/Economy, Podcasts Tagged: apple, darpa, econ talk, google, ibm, internet, russ roberts, steve jobs, thomas hazlett


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