The business logic of free services like Google’s search engine is best described by the phrase: when the service is free, the product is you yourself, writes HS’s financial reporter Juha-Pekka Raeste.
Flight tickets shopping is nerve-racking these days. Those chasing the best price have different advice on when and how to buy tickets.
The instructions vary from the browser’s secret incognitofrom the use of space to not buying tickets on Sundays. As the departure date approaches, many price hawks become depressed as the prices keep rising. Sometimes it’s a matter of seconds. When looking for a better price, even the cheapest price already found can get out of hand.
Google Flights, the flight ticket search engine service of technology giant Alphabet, recently announced a new application. It promised to offer the cheapest flight ticket on the selected routes – and to compensate the ticket buyer for the difference if the price of the ticket falls between the purchase decision and the departure of the flight.
However, Google Flights limited the compensation obligation to a maximum of $500 per year.
For consumers, the offer is attractive. Why not buy a ticket through Google Flights, if this guarantees that if the price of the ticket goes down, Google will pay the difference?
Like this a similar sales gimmick has traditionally been used by many home appliance stores. They promise the lowest price for the device model in question.
Home appliance stores, however, often find it helpful that the brand name of a large retail chain is often slightly different from what is basically almost the same model, and in that case you don’t have to pay a refund.
In plane tickets, the product is clearer.
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The proceeds can be collected later.
Google Flights there is another, perhaps even more interesting detail in the offer.
It does not charge a commission for the ticket purchase, either from the ticket buyer or from the airline. This is how it can offer the best price.
But why is Google willing to pay up to $500 a year for a customer to switch to its service if it doesn’t get even a small slice from either?
Short answer: exactly because. It wants to capture the market first. The income can then be collected later. That’s the whole business idea of a “free” service.
But in order to better understand the logic behind the free services of today’s tech giants, it’s good to take a couple of steps back.
Google I think the business logic of “free services” like a search engine is best described by the phrase “when the service is free, you are the product yourself”.
In other words, a service provider like Google requires you to hand over a certain amount of your data so that it can monitor your online behavior. It further sells this information in various packages to advertisers.
Another good analogy can be found in football.
Not a single technology giant like Facebook, Google, Microsoft or Amazon has grown from Europe. There are many reasons for this. In the United States, hacker-like activity, where you act first and find out the legality of the activities later, has been a typical way of working.
It is no coincidence that for years Facebook’s slogan “move fast and break things” was also written on the wall of the company’s headquarters, i.e. move fast and break things.
Google YouTube, owned by the parent company Alphabet, had time to grow into the world’s most popular youth music channel before Teosto reached some sort of agreement on what kind of compensation should be paid to rights holders for music videos.
At the same time, the smartphone market leader Nokia was wondering if its music application might violate the legislation of a country.
This difference in temperament between countries has been aptly described as the difference between football and American football. While football is all about beautiful goals and disciplined playing, the most important thing in American football is to conquer the field meter by meter.
In the same way, the Americans take over the market first. Profits can be made later, when you have reached a position similar to Facebook or Google, which in many sectors is almost a monopoly.
A similar goal can be seen in Google Flights’ compensation offer: When you offer superior service to consumers, take over the market first. After that, other operators can be offered various paid additional services, which enable them to better adapt to the conditions of the marketplace and succeed in the competition.
This is what Google has done, for example, with its Google Maps map and positioning service.
For Finns However, for those rushing to the Google Flights service already at this stage, clarification. Company offers its service at this stage mostly only for domestic flights of certain few American airlines and routes.
Google does not have a timetable for expanding the service, but its long-term goal is to extend the service to as many airlines and their flights as possible, Bloomberg says.
The obligation to compensate can also be reduced by the fact that US legislation gives the customer a good opportunity to cancel his flight so that the money paid is returned. In the United States, a purchased trip can be canceled within 24 hours of booking, if there are more than seven days until the departure of the flight.
In many cases, Google now only takes the burden of the time between the cancellation of the flight and the refund to its account.
Google Flights however, the promise of finding the cheapest flight may be a preview of how large technology companies are trying to take over the commercial mediation of entire industries.
Then the essential thing is to make an offer that sounds so good that neither airlines nor consumers can resist the temptation.
A textbook example of such an offer is how Microsoft’s MS-Dos operating system became the dominant operating system for PCs.
Microsoft’s entry into the de facto main operating system of computers is also one of the main reasons – if not the most important reason – why Microsoft has grown in terms of market value to the world’s second most valuable listed company.
Microsoft’s There are many stories about the “best ever” operating system deal between IBM and IBM.
In the early 1980s, Microsoft had gained a reputation as a producer of various software languages. In August 1980, IBM launched discussions of Basic, Cobol, Fortran and the licensing of Pascal software languages for IBM devices. In the meetings, IBM representatives also asked about operating systems.
At the time, IBM failed to reach an agreement on the new 16-bit operating system with the then market leader in operating systems, Digital Research Inc. (DRI), and asked for help from Microsoft From Bill Gates and From Paul Allen.
Allen knew that Tim Patterson Seattle Computer Products (SCP) had developed an operating system called Qdos, which could be used to develop a product suitable for IBM. According to Paterson, Qdos came from the words Quick and Dirty Operating System.
Microsoft first bought the license rights to Qdos for a pittance, and a year later, when Paterson had moved to Microsoft’s bread, the rights to the entire operating system.
Microsoft and IBM agreed to a $430,000 contract in which Microsoft was a software developer, providing IBM with an operating system called Dos, a set of software languages, and various testing and consulting.
A journalist familiar with the background of the agreement Michael J. Miller has told PC Mag in his story IBM surprised by the affordability of Microsoft’s offer. It is known that IBM was also fascinated by the fact that Microsoft did not demand royalties from IBM. Instead, Microsoft held firmly to the fact that it is allowed to sell the operating system to other device manufacturers as well.
When IBM started selling computers with different operating systems, the competing CP/M operating system cost the buyer $240, but Microsoft’s Dosin was available for $40.
The price difference was probably due to the fact that Microsoft did not have to pay royalties. It made IBM, then a giant in the hardware business, favor Microsoft’s operating system.
Bill Gates, Paul Allen and Steve Ballmer could have been satisfied with a royalty income of twenty million and a comfortable life. Instead, they wanted to rise to the top of the software company world.
When Microsoft had the right to sell the operating system to other manufacturers as well, it opened up the opportunity for the company to dominate PC operating systems.
Realization was the same as Google’s in its flight ticket app. First, you should give something away, almost for free, in order to gain an advantage in the market. Profits are collected only when you dominate the market.
Google’s purpose is to get people to use its services – from the Chrome browser to search engines, map services and e-mail applications – with so many hooks that it becomes really difficult to leave Google’s customer service.
In the same way, banks and insurance companies in Finland try to keep their regular customers with various package offers and discounts. The difference is that Google’s goal of taking over the market is global.
Correction 16.4. 7:44 am: Microsoft co-founder’s name is Paul Allen, not Dave Allen.
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