Thursday, November 8, 2012

Google Maps for free is actually a good example of predatory pricing

Predatory pricing refers to pricing a product so low [or free] that you drive out existing competitors [who cannot bear the losses that you can], and also deter potential competitors from entering [again, because they cannot or do not want to bear losses].

France recently convicted Google Maps for unfair competition. I believe that Google giving away Google Maps for free is a perfect example of predatory pricing. If predatory pricing is illegal, then Google Maps cannot be allowed to be free. Note that I am not voicing an opinion on whether predatory pricing itself should be legal or illegal - I am only saying that assuming predatory pricing is illegal, Google Maps for free is illegal.

Why? Google most likely runs its Maps product at a significant loss - a comprehensive mapping service requires truckloads of software programming, energy, data centers, data collection, personnel, and so on. Naturally, this can only be proved if Google is forced to release its internal numbers about the cost and revenue of this product.

Sure, Google can argue that Maps provides Google with valuable data about its users, and that it is able to convert that data into some incremental revenue [and incremental profit] at its AdSense and AdWords products, but this conversion does not mean that the Maps product is itself profitable. Google probably cannot offer Google Maps profitably for free [currently].

Further, Google naturally can continue to bear losses at its Maps product because of its highly-profitable other businesses. Few companies have this luxury. In particular, smaller competitors who cannot provide a mapping product for free will naturally go out of business, because from a customer's perspective, a good product that is free is better than a good product that is paid.

Note that the inability of smaller mapping providers to offer a free mapping service does not result from any inefficiency in the way they run their businesses. Not does Google have a magic wand that allows it to sell Google Maps for free, and yet make profit, while others are unable to do so. Google is purposely making losses on Maps and it is doing so to attract customers away from other services.

Perfect predatory pricing.

3 comments:

  1. Update [13-Jun-13]: Now I also feel that if Google is making a net loss on Android, then Google's giving Android away for "free" might also constitute predatory pricing. After all, in effect, Google is pricing Android "below cost" in order to asphyxiate competitors [assuming the above]. Google has the financial firepower to bear the losses for years. Not all rivals have this luxury.

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  2. Update [7-Apr-15]: Are free chat/IM/messaging programs such as WhatsApp, WeChat, LINE, KakaoTalk, etc., an example of predatory pricing? We might be tempted to feel that being free for the first few years, in the search of a sustainable/viable business model, is the [legitimate] business model of these services. We have to acknowledge that this externally-funded period in which numerous such free programs/services remain free for a long time, working towards making a business model [and also, sometimes, waiting for critical mass to build up so that network effect kicks in], renders invalid any possibility of introducing a paid chat/IM/messaging program.

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  3. Update [7-Apr-15]: Another consideration that needs to be kept in mind, in addition to the above, is the adverse effect that these free chat/IM/messaging services had/have on paid chat/IM/messaging programs that existed prior to the widespread popularity of the new, free players. It is understandable that the business case for paid programs would've been rendered invalid when the free services came, and combining this with the fact that the free services weren't profitable back then, it could be argued that what they were doing was in some form predatory pricing, especially since their being free led to paid players being driven out of the market.

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