Android: The Ultimate Loss Leader (Also A Moat)

Bill Gurley doesn’t blog often. But when he does, his posts are often worth reading.

This is the case with the Benchmark Capital general partner’s piece this week on the threat posed by Google’s Android software for cell phones and tablets, and the software’s key defensive role for the Internet titan.

(Gurley’s last post was back in November.)

A lot has been written about the free software Android and the challenge it poses to Apple’s iPhone, RIM’s Blackberry and to Nokia’s emerging smart phone businesses. But “the world at large doesn’t fully appreciate the raw power of this juggernaut,” Gurley writes. “The more I see, the more I wonder if I too may have underestimated the unprecedented market disruption that is Android.”

Gurley cites Warren Buffett’s famous observation that the Oracle of Omaha looks for economic castles protected by unbreachable moats and concludes that Android may be one of Google’s most effective moats protecting its search advertising business.

AdWords is a castle, and Google clearly would like an uncrossable moat around it. But “what are the potential threats to Google’s castle?” Gurley asks. “Basically, any product that stands between the user and Google and has the potential to distract the choice of search destination is a threat. A great example is Firefox.”

Another example is the smart phone. “So here is the kicker,” he elaborates. “Android, as well as Chrome and Chrome OS, for that matter, are not ‘products’ in the classic business sense. They have no plan to become their own ‘economic castles.’ Rather they are very expensive and very aggressive ‘moats,’ funded by the height and magnitude of Google’s castle. Google’s aim is defensive not offensive.”

Google’s aim is 250 miles of scorched earth surround the castle and the “best I can tell, they are doing a damn good job of it.”

Here is the link to the blog.