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Google-Dell Deal is Not Good News

According to the WSJ, Google is considering paying Dell up to $1 billion over three years to install Google software (presumably Google Pack) on new Dell PCs.  At first glance, this seems like good news: World domination!  In fact, it’s likely bad news, at least over the intermediate term.

First, $1 billion in operating expense is real money, even for Google.  Applying the $333 million per year tab (call it $250 milllion after tax) to 2006 estimated free cash flow of $2.5-$3.0 billion would reduce it by up to 10%.  It seems doubtful that Google would be able to generate enough incremental revenue from the deal to offset this, at least initially.  If Google were to extend the same program to other PC makers, moreover, the tab could run over $1 billion a year–with, again, no guarantee that it would result in offsetting revenue or users.

Second, despite the fact that this deal will likely whip the anti-Microsoft hordes into a frenzy–DIE, REDMOND, DIE!–it bears noting that the terms are strikingly different than those of Microsoft‘s software distribution deals: Namely, the money’s going the other way. Given enough capital, anyone could pay Dell to put anything on new PCs.  It doesn’t speak well of Google’s dominance and market leverage, therefore, that it might have to pay Dell $333 million a year to install software that it is already giving away for free.

Third, the users Google attracts through its Dell deals would come at a higher cost per user than all of its previous users to date–a trend that should not warm the hearts of Google shareholders.  Unlike most software that comes pre-packaged on PCs, Google’s software and services are already available for free to anyone who wants them.  One reason Google has been so astonishingly successful is that a lot of people have wanted its services, and the only reason Google would offer to pay Dell a cent is if it feels the word-of-mouth marketing wave has run its course.  Bottom line, the rumored deal terms suggest that Google’s next hundred million users are going to cost more to attract than the last hundred million, which means lower margins.

Could the distribution strategy be positive over the long-term?  Yes.  It could allow Google to get deeper hooks into users than through its search engine alone, and it could allow it to reach users (newbies) who never would have downloaded Google Pack.  It could also allow Google to hurt Microsoft by putting pressure on the amount Microsoft can charge for Windows, but aside from the satisfaction of undermining a former world domineer, this won’t help Google generate more cash for shareholders.

In any event, the rumored Dell deal is a long-term bet that would likely cost shareholders and the company significant cash flow in the intermediate term.  And although Google and its shareholders love to jawbone about the importance of the long-term (and they’re right to–really), in the shorter term, sadly, the latter have a habit of voting with their feet.

UPDATE: Several good comments below about how Google will be able to skim a revenue stream off the Dell deal from third-parties who want their software included in Pack.  I still don’t think this will amount to enough to offset the cost, but it’s worth considering.

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19 thoughts on “Google-Dell Deal is Not Good News”

  1. This deal is a fool’s deal. Google is still a small company. Spending a billion dollars for this deal is a fool’s game. Can someone show me the ROI developed around this? Alot of soft benefits in that calculation? Uh huh.

  2. Well said, Henry. Silly play to spend this kind of real money for OEM distribution. It’s a Hail Mary I’d expect from a company with 3rd rate software, zero reach and little creativity. I totally get that GOOG is trying to reduce their dependence on paid search, but this is a shockingly dumb way to do it. How about, oh I don’t know, using the fact that they are the Number Two site in terms of reach on the web to drive adoption via search — for free?

    They’re smart kids, but this one’s dumb.

    — Stuart

  3. Henry sure you just thought like an outsider 😉 Here is some insiders perspective. First, it is not the same PACK that is in negotiations with DELL. For, enterprise customers of DELL the PACK is different, lets call it a NEC PACK. GOOG has several partners(currently known) in the PACK. Lavasoft, Symantec and Real which give a trial licenses. Once user converts trial into perpetual license, GOOG gets a cut out of it(Greater than 50% as of the time of release of GOOG pack, not sure what it is now). The story doesn’t end here. A dozen engineers(not dropouts) are working on optimizing Star/Open Office which will go into GOOG PACK this year. If this DELL-GOOG pack succeeds, then expect some more partners to queue in front of GooglePlex.

  4. Star Office is a demandless product trying to find a home. It has been for ages. This is the latest attempt to throw something against the wall and see if it sticks. Somehow someone believes they are going to break MS by bundling it on a PC. Oh sure. Ever heard of MS Works? Can you say free and already preloaded?

    Google is running the risk of wasting precious dollars on projects which are very blue sky and do not dovetail into a cohesive strategy. The strategy should not be to break MS per se. Who cares about MS. They are irrelevant on the net and will remain so without some major phase shift in a break through capability. And since the majority of the world doesn’t work for MS, that is likely not going to happen inside the walls of MS.

    I am not privy to confidential discussions but I just cannot see this as anything but a waste of money. UNLESS, this is a deal where no dollars exchange hands unless the SW is monetized by the consumer. If that is the case, well, there is likely little downside risk of dollars exchanging hands without a quantifyable ROI.

  5. I’d have to agree with Patil and Robert Young on this one, Henry. Given the kind of cash flow Google is generating (assuming it continues at something approaching its current pace, of course), I don’t think $300-million or so is a lot to pay for access to all those Dell PCs. It’s true, Microsoft doesn’t have to pay — because it has 90 per cent of the market for desktop software. If Google adds StarOffice to this deal, the spinoff effects will be more than worth the $300-million.

  6. Thanks as always for the intelligent comments.

    I have no trouble believing that Google could amass a line around the block of folks who want their software included in Google Pack. But I doubt the company can make enough off this to support a reasonable margin while also paying Dell. All these third-party folks could also presumably go straight to Dell (and many probably already are), thus eliminating the middle-man. And if the goal of these third-parties is to sign up paying subscribers, they presumably won’t have that much of a leg-up being within the Pack on the PC than outside it.

    Regarding Star Office, I still don’t see it. Free office suites have been around for years and haven’t made so much as a dent in Microsoft’s monopoly. Wordperfect and Lotus came preloaded on several of the machines I bought from 1995 on and I never so much as opened them (nor did anyone else I knew). Will a small fraction of folks choose to use Star Office rather than shelling out for Microsoft Office? Probably. But a stripped down version of Office (or its components) just isn’t that expensive these days, and serious business users, in my opinion, will continue to pony up.

    Furthermore, whether or not Star Office begins to chip away at the Microsoft monopoly, I still don’t see how it makes Google any money. Are we all going to click ads from within spreadsheets and word-processing documents? Most business users would pay anything to avoid that. So even after Google adds Star Office to Pack, I still don’t see the offsetting revenue–especially when any Dell user who wants the software can download it right now for free.

    The point is that Google already has access to all those Dell PCs for free. More than half of Dell users already use Google for search (assuming the Dell demo matches the overall web demo). If Google now feels that it has to pay Dell to install free software because no one’s downloading it that’s not good news for shareholders. At the very least, what it means is that Google’s cost of distribution is going up.

    One more point: I would not have been shocked if the WSJ story had said that Dell was paying GOOGLE for the right to install the Pack, instead of vice versa. After all, the Pack is designed to help PC users, and what better way for Dell to distinguish its PCs than load them with software other PCs don’t have? The fact that so much money is going the other way, however, suggests that Dell not only doesn’t see much value to end users in pre-loading the Pack, but it thinks it should paid a lot to do it (and Google apparently agrees). Microsoft software, on the other hand, adds so much value that Dell has to pay Microsoft AND charge its own customers for it–even when there are free alternatives around.

  7. Henry, we buried those “DIE-REDMOND-DIE” chants long time ago already. These days, we just want to marginalize the importance or the role of os, get rid of various vertical integrations. Besides, it’s a very nice town. Have you visited there?

  8. I keep wondering if all of the GOOG anti-MS rhetoric is a hedge against MSFT using their dominance to wipe out GOOG.

    The cornerstone of the NSCP vs. MSFT antitrust case was that MSFT acted to wipe out NSCP only because they threatened MSFT dominance in operating systems.

    Simply wiping out a company just for fun is, apparently, perfectly legal. Its only illegal for a company to attempt to extend or protect its monopoly using its monopoly power.

    And before you say, “it would be impossible for MSFT to wipe out GOOG”, remember that virtually every single GOOG search is performed using and MSFT web browser (for starters). Remember that MSFT displaced the NSCP browser by amongst other things, essentially *paying* companies to sabatoge NSCP by giving them discounts on their Office and Windows bills.

    Real or imagined, it’s certainly possible that GOOG feels extremely threatened by MSFT. Suppose Mr. Schmidt’s past might make him at least a bit afraid? An axe to grind maybe?

    Apparently GOOG is allowing this fear to heavily influence their operating strategy.

    Throwing money and strategy cycles behind a dead-end like OpenOffice is asinine, unless it’s part of a wider plan to creating a looming threat of an antitrust case–at which point it would just be plain stupid.

    SI

  9. With Vista coming out sometime this year, I really think this is a reckless move on google’s behalf. I really can’t picture anyone using google desktop search on vista which has search built in. The google side bar, will have to compete Vista’s side bar. And office 12 is on the horizon. If microsoft releases a home edition (word, Excel and Powerpoint) for about $50 a pop, we can say good bye to Star Office.

    Off topic but I have a lot of issues with Star office. They did what a lot of dieing products are starting to do in a latch ditch effor to stay relevant, open source they code. (netscape did it, and sun soloaris is next). Just to be clear, I have no problem with open source products. While its great sun with star office gets the backing of the pro open source community, it also sucks that open source developers will spend time navigating and patching bad code from a bad product when its probably better to contribute to office programs that have been open source from the start. If the star office was reasonably successful, would sun have ever open sourced the code? I think not.

    End rant.

  10. There might be a bit of an endowment effect at work with Schmidt and OpenOffice, since some variant of an Office competitor is part of his legacy.

    Here’s an idea for Mr Softie: integrate the CustomizeGoogle Firefox extension in IE7, and have it configured to block Google ads by default once installed (the user can always turn the ads back on if they can find out how to do it).

  11. Oh, I’m anti-microsoft btw, and I don’t work for Google. I was being sarcastic.

    If Microsoft wants its share price to take a DEEP haircut, they could try NSCP trick. Hopefully, it will follow Ma Bell. I pray for that day, oh god, I pray. For the topic, two words, vista & emerging markets. Btw, what’s the incentive for upgrading to Vista again? Why are we buying another patch?

  12. I agree this move sounds like something driven more by fear than by greed. The timing of it is particularly telling, IMHO. Either way, with this strategy, Google is giving up their home field advantage in search to compete on Microsoft’s playing field. One in which Microsoft is undefeated on, and is going to take back with their new OS anyway. Vista will likely have at least a few features (maybe more than a few) that cause Google management and programmers some sleepless nights. Google may have to devote more money to playing defense in the future, whether it is to keep Microsoft and Yahoo at bay…or the Feds

  13. Speaking of Feds, also throwing in the Chinese issue, I believe US government (Congress + DOJ) AND the mob who protest about censorship are out of their mind. Somebody needs to remind all of these jokers that we’re talking about Google.com, not Google.org here.

  14. Javaflash: we’re talking about a company that gained (and subsequently squandered) its street cred with the small-but-influencial cyber-geek community by being the company that would “do no evil”. They asked for it (and that’s why this is a story… YHOO etc. have done what they’ve done for years).

    Now that Google’s evil, just like MSFT, ORCL, and all the rest, the geeks are going to back the guaranteed paycheck, aka MSFT.

    (Don’t get me wrong: as a stock, MSFT is not very interesting and I don’t see blockbuster growth that could possibly put a dent in the MSFT fortune ANY TIME SOON. If they could suddenly owned GOOG’s revenues they’d see what? Maybe +20% stock bump in the short term? Vista giving them a bump? I doubt it…)

    SI

  15. Maybe it is a dumb terminal? a no frills machine that runs on some customized flavor of linux? the apps are available from sunw and if it means users dont have to pay for OS and other apps and security software (firewalls/anti-virus etc.) since all is taken care of at the google end all the users need is a “free” browser and the computing power to support that browser………seen the tech. at work at sunw campus a couple of years ago………..furthermore the hardware resources required are also minimized…….the user gets a low cost/low headache solution…..no scans/upgrades/updates/worrying about security etc.

    $0.02
    rahul

  16. Google is getting desperate. Maybe its days are numbered.
    Google dekstop is built using activeX, technology that Microsoft abandoned long time ago in favor of .Net.
    What an idiot. If I am Larry page, I will fire the product manager for google dekstop. Ok, it may be tooo harsh. Well, at least send him/her back to school.
    For somebody who got paid gazillion, better use his/her brain.

  17. As GOOG CEO Eric Schmidt said on CNBC a couple days ago, the company is focused on: 1) getting its users to the information they want to know as quickly as possible, and 2) generating revenue through relevant advertisement. Regarding the MSFT-GOOG issue, MSFT is associated with its desktop applications and has the advantage, but Google is the default search for most people. Leveraging their search brand onto the desktop is a sensible way to get closer to more parts of its users information.

    However, even though the GOOG Pack is taking on MSFT, comparisons between the two are not necessarily relevant because their revenue streams are so different. Look at how this positions GOOG to compete w/ the new YHOO/EBAY partnership. The GOOG/DELL partnership gives GOOG deeper penetration into each individual users information, enabling the company to serve each user better and target them more specifically with ads.

    Plus, while $1 bn is a lot, the money must be invested somewhere, and this will give the company even deeper penetration. The next 100 mn users will be more expensive than the last 100 mn, but who has expected the company to grow at this rate forever?

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