The Google Inc (GOOG) Toll-Taker Model Is Wining Again

Page 1 of 2

Google Inc (NASDAQ:GOOG)’s Eric Schmidt recently predicted that there would shortly be one billion phones using the company’s Android operating system. That’s an impressive number and shows that the toll-taker model is winning again.

A Small Fee

Google rose to prominence because its search engine proved the easiest way to find things on the web. It became a real business by charging advertisers to display tiny ads next to its search results. It turned into a profit machine by opening its advertising technology to others.

Basically, it provides the technology and shares the profits for every ad shown through its massive partner network. The interesting thing is that many other companies make money through advertising on the web, but none have managed to succeed in the same way that Google Inc (NASDAQ:GOOG) has.

A Typical Business Model

For example, IAC/InterActiveCorp (NASDAQ:IACI) has built its business around subscription web sites and advertising. Its businesses include Match.com, Citysearch, CollegeHumor, and Ask.com, among many others. These sites attract millions and IAC uses that heft to sell advertising across its network of sites.

Google Inc. (GOOG)It’s been a good business for IAC, particularly since it opportunistically buys out of favor companies that it can turn around and up and coming ideas that it can expand. In fact, the top line has been growing nicely of late. With a growing dividend, it is a good option for income investors who wish to have a little exposure to the Internet.

A Lot of Effort

The thing is that IAC/InterActiveCorp (NASDAQ:IACI) spends a lot of time, effort, and money on its content. It has to, that’s what it is selling to advertisers. AOL, Inc. (NYSE:AOL) is another example of the same model. Google Inc (NASDAQ:GOOG), on the other hand, is just a toll taker. It isn’t building content to attract eyeballs—it lets others do that.

The search giant is using that same business model in the cell phone space. The company gives away its Android OS and, instead, takes a bite out of every app sale transaction. Yes, creating and maintaining the OS is and will always be costly. However, the bigger the user base of phones, the bigger the company’s profits.

Interloper or Partner?

Google Inc (NASDAQ:GOOG) has a plethora of “partners,” including Samsung and its Galaxy line of phones and tablet computers. It also counts Facebook Inc (NASDAQ:FB) as a partner. In fact, that company’s efforts to adjust the user interface of Android to highlight Facebook’s social network was welcomed by Google even though it makes Android less prominent.

Why? Google doesn’t care how its OS gets into customers’ hands, it just wants users to be on its platform. If Facebook gets customers to use Android based products, all the better.

Similar, but Different

Facebook, for its part, is in a similar situation as IAC/InterActiveCorp (NASDAQ:IACI) and yet has glimmers of Google Inc (NASDAQ:GOOG)’s model, too. For example, it has to create and maintain an environment that brings customers to its site. With a large customer base, it has two main ways to make money, selling advertising (the IAC model) and letting others piggyback on its platform (the Google model).

Allowing others access to its customers has been a double-edge sword. For example, Zynga Inc (NASDAQ:ZNGA) built its business by allowing Facebook users to play games. Such games have been a huge success for Facebook, allowing it to charge a toll for every in-game purchase.

A recent partnership with Netflix, Inc. (NASDAQ:NFLX) has the potential to be a similar winner, if Facebook becomes a video sharing and watching hub. Online gambling is another area that could be a big winner. And Facebook only has to sit back and collect the tolls.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!