For example, Google can give gmail away because it finances it through ad sales — scripts read a user’s email, then display ads based off key words within that email. Ultimately, as more of a user’s data comes to flow through Google, that ecosystem becomes more powerful.
What the future may hold for this “big data” isn’t clear, but there’s reason to be optimistic. Former hedge fund manager Stanley Druckenmiller said last week Google was one of his largest personal holdings, based primarily on the potential for big data.
A 2011 McKinsey report detailed this opportunity:
“The use of big data will underpin new waves of productivity growth and consumer surplus. For example, we estimate that a retailer using big data to the full has the potential to increase its operating margin by more than 60 percent. Big data offers considerable benefits to consumers as well as to companies and organizations. For instance, services enabled by personal-location data can allow consumers to capture $600 billion in economic surplus.”
Microsoft has spent billions trying to catch Google
For the last several years, Microsoft has invested billions in trying to catch up to Google in this realm. Notably, this includes the company’s investment in Bing, but also the significant upgrades the company has made to its email service and browser.
Office, unlike Google Docs, remains a paid service, but Microsoft Corporation (NASDAQ:MSFT) has created and integrated it with SkyDrive — its online storage system.
Of course, since these efforts have borne little fruit, the company has received a lot of criticism over these initiatives in the investment community. Yet, Microsoft Corporation (NASDAQ:MSFT)’s management remains undeterred.
Last November, Steve Ballmer addressed the subject, stating that even though the company has yet to see much in the way of profit, he remains glad that they made the investment.
Obviously, Microsoft understands the power of Google’s ecosystem — and that’s why they’re happy to sink billions in a quest to replicate it.
Investing takeaways
Based on Thursday’s closing prices, Google Inc (NASDAQ:GOOG)’s stock is trading with a price-to-earnings ratio near 27, while Apple Inc. (NASDAQ:AAPL) trades with a PE just over 10. Although Google appears relatively more expensive, the potential its online ecosystem holds justifies this high multiple.
If big data becomes the next great tech trend, there is no company better positioned to take advantage of it. Through its ecosystem, Google captures a tremendous amount of data, and that data capturing could prove to highly profitable.
The article Google’s Ecosystem Could be More Profitable Than Apple’s originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
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