Googolplexing Google

Few days ago I read the news of Microsoft trying to align with Yahoo to face Google. I was not only surprised but also amazed by the immaturity of the industry being reflected through the action of the most successful and largest player in the Industry. Not being a mature industry is the exact reason Google should not think it is shielded from the booms and more specifically busts of the industry. Here I would like to draw a framework of how, even, Google with all its growth and earnings momentum can be Googolplexed (Googolplex is 10 to the power of 1000).

Two computer scientists think about the best algorithm to search for the relevant content and create Google. Google’s creation was also driven by the increasingly chaotic internet content. Well known players in the arena were busy with their own priorities like desktop solutions and universal portals with instant messaging, ignoring the ability to create a faster way of searching the increasingly large and fat world of internet content. It was same time when Microsoft was already facing criticism of trying to monopolize the desktop. This was a perfect time for Google creators to launch a search engine that was going to change the way people think about internet. Open source enthusiasts supported the search engine with all might and the information about this new search engine spread like a virus.

As a Linux enthusiast I got introduced to Google in 1999 and before 2001 Google was already a huge force in the internet space. The growth was powered by not only the superior algorithm, Google creators invented, but also by the perfect storm created by open source enthusiasts and the overall increase in rate of internet penetration and usage across the world. Google too realizes that common man’s viewpoint is important for its continued growth. This has kept all the Google offerings free to everyone. Google has intelligently created its own space in the internet advertisements and advertising brokering business to become a $100+B company. Google ads are today displayed on billions of web pages making Google a perpetual money generating mechanism.

Let’s analyze Google’s revenue a bit closely by doing a back of the envelope calculation.

World population:6.5B

World population using internet: 1.14 B
Assume 75% of world population using internet accesses internet every day = 75% of 1.14B = 0.855B

Assume every person accessing internet accesses 20 pages on an average with Google ads everyday. Therefore number of pages accessed = 17.1 B

Suppose Google’s conversion rate is 1% :
Clicks leading to revenue = 1% of 17.1 B = 171Million clicks per day

Assuming the average pay Google gets per click as $0.2, revenue per day = 171 * .2 = $34.2 Million

Yearly Revenue = 34.2 * 365 = $12B approx.

This is really a perfect example of the old saying that every drop makes an ocean. Now imagine the growth prospects. Suppose internet usage increases by 10% and penetration increases by 2%, this itself guarantees Google a revenue increase potential of 12% continuing doing what it is doing now. Google already has many things in pipeline apart from Google labs. Also the engine is becoming more intelligent increasing the potential to charge more per click. Google revenue is bound to increase more than 20% given most conservative numbers.

What can slow this enormous growth?

There are different ways to compete in this space:

Create an engine superior to that of Google with faster crawlers gathering information of billions of web pages (Use Google itself to create such list). Are thee any brains remaining in this space that think of challenging the Google algorithm (at least for intellectual curiosity)?

Now a more disruptive alternative, make web search extinct. Now this is a project that Google needs to start to work on for its own long term survival. If one comes with a model where search is no longer required this can make Google unhappy, unless Google diversifies its revenue stream by then. It might sound a dumb idea, but I am sure it wont be long that cyberspace will become virtual again.

Until then a big lesson for the Google competitors: “Every Click Matters”.

Information Age Agriculture

Though I may have become a part of today’s services sector boom, my roots are in farming. Agriculture has been the main profession of my family hailing from a one of economically backward regions of India, Udgir, in Latur district. My exposure to a life of an average farmer came from my stay in Udgir during my high schooling. I have seen extreme variances in the lifestyle of a farmer and other professions in rural Maharashtra. I have seen farmers sell their crops at pennies and depend on loan sharks for survival. Ironically the economically poor strata of the society forms the major voting bank for various political parties, but has never gained any benefit from the political process. My quest to find the root cause continues with my exposure to the big picture and to experts from this area. Here I have tried formulating a solution for our farmers. This is a conceptual draft and would need a very detailed analysis on every aspect before even thinking of an implementation plan.

Farming as an industry in highly populous developing nations is very fragmented and disorganized making it the most inefficient industry in these nations. This business idea is primarily for but not limited to the part of world with farmers owning very small pieces of land (preventing them from enjoying the benefits of economies of scale) and developing an information network among the farmers connecting them to the marketplace. Initial capital will be required to establish an infrastructure and create information based services for farmers to assist them in decision making related to operating a farm and selling their produce to the market.

This is a service that will help the farmers to form small cells based on geographic location and have a network of such cells across the region. This network will have an access to the important market information and will provide the farmers with important services that will help them in deciding on what to produce and how much to produce with useful forecasts developed by the system thus maintaining the supply and demand balance for the farming sector. The service will also attempt to eliminate the need of a middleman in the transaction and thus providing an economic benefit to the producers and consumers. The service will be highly scalable and can be easily integrated with other services and information that is helpful to the farmers. The service can also be extended to the derivatives market providing the farmers a protection from the downslide of the prices.

The main customers will be farmers across the region, creating their own marketplace. The Service will be web based with free access to the basic set and will be nominally charged for additional services. Advertisements will be major source of revenue. The website will have free material on educating farmers with latest techniques of farming. The website will have an extension service for livestock management as well. The greatest benefit farmers will gain is easy access to market and being able to keep the supply and demand in balance thus avoiding the currently usual surplus or deficit of a produce, creating huge loss to the farmers and consumers.

Much of the information used to build the system will be collected from the local universities and the related government agencies. The information will be intelligently tackled using a web based application framework. This market has constantly been a neglected market for long due to factors like initial investment, power of middleman and low marginal profits. The information age specifically the web based solution provides an excellent answer to this problem and thus one who takes the lead will have advantage. Once the brand name has been established it would be tough for the competitors to cut through this business model. Association and ties with the non-profit organizations in the region to promote the system would also be a key in capturing a greater market share.

Information sources will be the main suppliers for this business. The suppliers here are the related government agencies and the universities. The information required is mostly public information and in case any licensed information is required it will not be difficult to get given the nature of the service. The farmers will be encouraged to form cells and own a computer to access the services in case individual ownership of computers is not possible. Ties with computer manufacturers will be helpful in customizing the computers to the requirements of the farming industry.

The main cost will be developing the system and collecting the data from the different sources. The system will be developed in different stages of increasing scope. Initially limited services will be made available and as revenue starts building additional services will be developed and provided, keeping into consideration the overall profitability of the project. Given a world wide market in developing countries like Chine, Brazil, Argentina, Mexico, India and other nations the break-even should be achieved at a good pace.

Small farmers have been one of most neglected business class. The system is not limited to small scale farmers but it will immensely improve the economic conditions of these farmers giving them access to the capital through intelligent decisions using information, and thus raising the standard of living of this class of society. This would be a capitalist approach toward improving the living conditions of this class of people that forms a huge proportion of the developing nations.

My ultimate goal is to achieve a seamless integration of information about the entire world reducing the inefficiencies due to fragmented access or no access to information that can be used to make intelligent decisions. This project is part of this goal in to provide direct economic benefit to one of poorer classes of the society.

Walmart in India

Very positive thoughts on this topic have been all over the press, in recent days. As a retailing investor or an affluent consumer I would love this change. I am a great supporter of free markets and reduced regulations and would not mind buying Bharti stocks, at least for a short run. But there is a different perspective we need to consider before coming to a conclusion so that we have well rounded and holistic decision process.

Walmart is an operations Mecca. The company that taught the world the bascis of Supply Chain. But some things are more efficient being non-centralized. I am not saying that the current mom and pop stores are good, but they can be reorganized to make them more efficient. Walmart will create a new consumer society in India. I am not sure if India is ready for this switching from financial conservativism to becoming consumption driven. Given long term sustainability, walmartization in its current form would not help India, which has a good amount of work pending in reducing the huge variance in the current Indian social structure. One more questions to answer is, what happens to the mom and pops who run those million stores? Where can Indian economy absorb them? Well, Walmart must have worked great in a society where abundance is prevailing everywhere except in case of population, but in India there is a reverse situation. In theory consumption is great to keep the economy hot. But I believe it is true for economies that are large and very strong in their fundamentals. US has always been strong and knows the rules of the game. China on the other hand has progressed in a very structured way where Chinese consumers today, buy what they produce in china. Now let us see what happened to India. We started as an agro economy. We missed the boat for an industrial economy due to our delay in opening India for world and now we directly leap into the information based economy. India has successfully wrapped itself along with its poor infrastructure in this information age boom. The information layer is very thin though. Less than 5% of Indians depend on IT as a livelihood. Why aren’t we thinking about the remaining 95% and what is more sustainable to them. For this model to succeed long term, India, either has to be the only source of IT specialist (which is aggressively picking up in China and the Indo-Chinese regions, not to forget Eastern Europe) or increase its industrial capabilities (Tough as well to compete against the Chinese producers). My point is that it is not an easy choice in today’s competitive global dynamics, but this does not mean we can just avoid this long term view and take a short cut to success.

It is not a make or break situation yet. Let’s welcome Walmart and also create a basic framework where the mom and pop stores can compete against the giant (I can elaborate this point to further details on how to achieve this, in case anyone interested) and have a real free market to see who will sustain long term. Instead we are just creating an imbalance that will be very tough to reconcile in later stages.

Game of retail and financial global consolidation is a very risky game. Countries cannot avoid being part of it anymore but can plan it in a conservative way. Countries cannot expose themselves in a way that they become the shock absorbers for other economies. Think about what happened during the Asian financial crisis of late nineties (Ask Mahathir Md. about his feelings for George Soros). Also, it should not be a situation where India tries to reduce the inefficiency of the mom and pop stores just by having all that gain go in the pockets of a select few, rather than the intended mass of people.

Talking about efficiencies, let’s analyze this case further. High growth and inventories can hide any inefficiency in the system. The two extreme examples of this are US and China. US can afford to hide its inefficiencies by having more goods absorbed in the economy. US can afford to absorb more due to the strength of US economic model. In this case I am using the goods absorbed by the US economy as inventory of that country. China on the other hand has tremendous growth rate. No other bank in the world except Chinese banks can sustain a NPA (Non Performing Assets) of 20%+. This shows that high inventory and high growth can hide the inefficiencies. Which of these two elements are the fortes of Indian economy? If both are not why are we just creating something that worked for others and not tailoring our solution to our needs.

Changing India is a daunting task. One cannot turn a ship as easy as a boat and if one tries doing so there is a high risk of failure or a disaster. India is a gigantic ship to turn in all the measurable parameters. India needs an immediate change but my emphasis is on sustainable change that takes into considerations the entire system dynamics than the ones that just satisfy the economic needs of a minority segment (The booming IT class). To conclude, I am all for Walmart coming to India, but I would like to see that our leaders create a retail landscape that is flat and balanced.

Innovation and Intellectual Property Rights(IPR) - I

Whats up in China? McKinsey Quarterly published an article on Brazil's informal economy. The article compared the size of various informal economies across the globe. I was surprized to see China among the countries with very small informal economy. Last week I visited Beijing and had an opportunity to visit the market in Beijing. There was not a single thing that was orignal in the market. It was difficult to imagine China ranked that good in the Mckinsey article. does it mean that the Chinese informal economy is not informal at all or where do you draw line to seperate an informal economy. Does governments suppport make chinese informal economy legal? Do informal economies span national borders, as in Chinese case most of these goods are sold outside china?