Google-Dell Deal Still Not Good News (for Google)

This time, financial details aren't being disclosed, but assuming Google is forking over $1 billion over three years (as previously reported) to install a pack of software on 100 million Dell computers, this still isn't good news.  Here's what I thought about it back in Feb.  For the counter-argument, see the comments on that post.

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.

Comments

[KING TROLL]

FIRST!!!!!!!!! YEAH BACK IN ACTION HENRY.

I was so tired of John Battelle's shit. He kept deleting my posts.

[joe]

I don't understand why this is bad for Google? is a greater level of exposure bad?

its bad as per your assumption to the cost of the deal. we will not know the cost until we see it in the next few quarterly reports.

but a question remains... what is exposure worth? (especially when ur dealing w/a competitor that is potentially instantly exposed to over 80% of the desktops in the world)

just a thought.

[John Shiznit]

i aint no analyst but it sound like goog and dell are going to share revenue from a co-branded goog dell website. http://www.google.com/ig/dell
Under this scenario goog faces the possibility of giving away some revs. that they would have gotten anyway. Originally it was reported they would give goog 1 bil to put some software on their computadoras. Its the same thing, is goog really gonna gain enough mkt share to offset the bil.
Schmidt said the terms of the agreement were not material, so im assuming the figure goog is giving dell is less than a bil.

[Jeremy Johnson]

Doesn't look good for margins. I wonder if its possible that Google will eventually have the margins of a media company? Nah, couldn't be.

And by the way, Schmidt thinks everything is not material.