Ryan Avent and Paul Krugman have posts up this week about the economics of Google Reader. The model they’re using is basically one in which Google has high fixed costs and monopoly power in the RSS reader market, but they can’t price discriminate between high-intensity and low-intensity users, and even though the benefit consumers derive from the service could exceed the cost of production, network externalities make it artificially under-valued to any individual now, and thereby makes Reader unprofitable.
Now I understand that Avent and Krugman are just trying to model the economics of Google Reader, but it’s missing a sort of obvious empirical observation: by all appearances, Google has never even tried to make money off of Reader.
If you go to Google Reader right now, how many advertisements will you see? Literally zero. On a website where users spend hours staring at the screen, generating hoards of data about their interests, for a company whose entire business model revolves around targeted advertising. And if you go there (visit Reader now if you don’t believe me), you will see that Reader has an awkwardly large amount of space, on the top of the screen and on the right side, which is almost begging for advertisements. And you certainly won’t see a paywall.
It’s like if Microsoft built an awesome new product, and then just handed it out to everybody for free, with no advertisements, and no price. Like a service designed to make money, that nonetheless makes none, just ‘cuz.
Let me propose a different model than Krugman-Avent’s: some Google employees made a stupid mistake. That is all. They flushed a perfectly profitable service down the toilet — and damaged the reputation of the firm — for no other purpose than to shift resources from existing awesome products, into developing new, exciting, but untested and possibly not-so-awesome products.
Yes, Google has a monopoly power in the RSS reader market, but that should only make the service more profitable for them. That’s Econ 101.
Yes, Google can price discriminate. It’s very easy to do, actually. Though I’m not sure they’d actually want to do that. (That’s up to them.)
And no, there are no network externalities to speak of. Ryan implies that Reader exhibits network externalities, and Krugman seems inclined to believe him, but neither specifies exactly what those externalities might be. What do I, as a Google Reader user, get out of Google Reader as a direct result of other people using it, specifically? I can’t think of anything. The ability to say that I use Reader, and OMG you do too?? No, that is weak tea. Reader is not like Facebook or the telephone; it is much more like a toaster. I use it because it does what I want it to (help organize information and sift through it efficiently), not because other people use it (Facebook).
By the way, consider Reader’s lack of network externalities, side-by-side with Google+, which really does exhibit network externalities. Google+ is a useless service for most users, precisely because none of their friends use it; Reader is something anybody can start using today, whether their friends also use it or not. Google+ has been scaling Network Externality Mountain its entire life; Reader has been down in the valley, floating down the river. Hence BuzzFeed Network receives vastly more traffic from Reader than from Google+.
So, in sum: Google has a dominant market share in a product several tens of millions of people (at least) use and love; Google can price discriminate to their heart’s content, if they find that profitable; network externalities aren’t really a factor; Google has never even tried to make money off the service, even though it requires little or no development, generates hoards of data about users, and has ample room for on-screen advertisements; and despite all of the above reasons, somebody at Google is making a really dumb mistake by tossing the thing in the garbage. And they’re not even selling it, nor releasing the code to the public, they’re just scrapping it.
That’s the model I’m working with anyway. Call it the Bounded Rationality hypothesis.
PS — Now that I think of it, there are some positive externalities, but they aren’t network externalities. And they make me think Reader should be even more profitable than I’d previously thought. Reader actually makes other Google services more valuable, so each additional Reader user adds value not to Reader from the perspective of other users (a network externality), but to Google’s other services from the perspective of the additional Reader user herself.
For example, if I use Google Reader, I’m not really making Reader better for anyone else, but I am making Chrome better for me, because Chrome has several excellent extensions for Reader. Ditto for Google Search, which I’m now more likely to use, because I use Chrome (because of Reader), which has a nifty right-click-menu-based Google search button, and a URL bar that automatically searches using Google. I’m also more likely to buy an Android phone instead of a Razr, because Android phones sync seamlessly with Android’s sweet new Google Reader app. Etc. etc. These are externalities that should make Reader more profitable, not less. So color me baffled that they would scrap it.