Why Google Inc (GOOG)’s Bet on Social Mapping Is a Smart Move

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Google Inc (NASDAQ:GOOG) has officially announced the acquisition of Israeli social mapping company Waze for a price that has not been officially disclosed, but media reports have been talking about a figure in the area of between $1.1 billion and $1.3 billion. This looks like a defensive move, but a good defense is sometimes the best offense, and Google Inc (NASDAQ:GOOG) knows how to spot important trends in the tech industry.

Google Inc (NASDAQ:GOOG)

Bidding for Waze

Waze is an Israeli social mapping company that has 47 million users generating maps and traffic data from their smartphones. Just like Google Maps, Waze produces mapping navigation reports from automatic data obtained from user´s phones, but the big difference is that Waze users engage actively in helping each other when it comes to traffic jams, police checkpoints, detours and those kinds of things.

Waze brings a social, collective, approach to mapping, this is not only more engaging and fun to use, it makes maps much more accurate since they are permanently updated.

There have been strong rumors about Apple Inc. (NASDAQ:AAPL) trying to acquire Waze in the past; TechCrunch reported that Apple offered $500 million for the company last year. Waze is already a data partner for Apple Maps, and the Cupertino company suffered a big setback with its maps fiasco, so adding Waze´s features and expertise could be quite valuable for Apple.

It seems like Apple Inc. (NASDAQ:AAPL) wasn´t willing to spend as much as Waze wanted though, and that was the main reason why negotiations didn´t advance further. Now that Waze has been acquired by Google Inc (NASDAQ:GOOG), Apple has lost a big opportunity to reduce the gap when it comes to mapping quality, and the company will remain dependent on Google Inc (NASDAQ:GOOG)´s tremendously popular mapping apps for its devices.

Facebook Inc (NASDAQ:FB) has attempted to buy Waze too; the social network reportedly offered $1 billion for the mapping company. But Facebook wanted to shutter Waze’s Israel-based research and development center and transfer several key employees to Facebook’s U.S. headquarters, and this was a deal breaker.

Facebook Inc (NASDAQ:FB) is in the midst of a transformation, trying to prove to investors that it can effectively adapt and thrive in the mobile computing paradigm. Waze could have been very useful when it comes to providing user´s location in order to better target mobile ads, which is a key factor in mobile advertising. Now it´s in the hands of Google Inc (NASDAQ:GOOG), perhaps Facebook´s biggest rival, and the clear leader in the online advertising business.

At a valuation of between $1.1 billion and $1.3 billion, the deal sounds too expensive for Google considering that Waze has 47 million users, 32% of them active. In comparison, Yahoo! Inc. (NASDAQ:YHOO) recently paid $1.1 billion for Tumblr, which has 300 million monthly active users, and even that deal was considered expensive by many analysts.

When different companies are after the same target, there is always the possibility of the price becoming excessively high, especially in tech where the value of a company or a technology is strongly dependent on unknown variables like future growth prospects, so things are quite complicated when it comes to estimating a fair price for an acquisition.

In the eye of the beholder

However, it’s one thing to estimate a fair valuation for Waze on a standalone basis, and a very different one to say how much the company is worth as a part of Google´s gigantic empire. It´s not only about the direct revenue that Google can get from Waze, Google needs to keep users inside its sphere of services to continue dominating the online advertising business, and mapping is a key variable in that equation.

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