Thursday, June 24, 2004

The Free Market at Work

Here's a textbook illustration of the dynamics of competition. Slashdot has a story up indicating that, following Yahoo's response to GMail, Hotmail will also be increasing user storage limits dramatically, from the current stifling 2MB to 250MB for free users, while paying users will go from 10MB to 2GB. Ask Jeeves is also expected to follow in Hotmail and Yahoo's shoes, by upping user storage limits to 125MB for free accounts. None of this would have happened had Google not shown the way forward.

There's a point raised by a Slashdot commenter that I think is worth keeping in mind when considering these upgrades, and it has to do with the size of the user bases of the various free email providers, and what that implies in terms of the cost of meeting the challenge offered by Google.

GMail's rollout ... [forces] other e-mail providers into costly capital expenditures. remember, 1gb of space initially for a couple thousand invitees is still less than 250 mb for millions of users. MS and yahoo's teams will no doubt be prodded to recoup their capital expenditures for all users, while gmail can stay lean and mean as long as it wants, while at the same time dictate the market structure.
Now, in the long term this is less important than one might think, as Google has every incentive to grow its market share to the fullest extent once its service is made available to the general public. In the short term, however, the raising of storage limits by the other email providers will have a significant material effect on their balance sheets - if you've been restricting 100 million users to only 2MB of storage and suddenly increase that limit to 250MB, you can confidently expect to see their utilized storage suddenly double or even quadruple in the space of a few weeks. Assuming you've been operating a lean infrastructure, what that means is that you're suddenly going to have to spend a lot of money upfront to avoid a marked deterioration in the service you provide. While this new capital investment can be written down over a number of years, the impact on cash flow is likely to be immediate and severe. While Microsoft has the deep pockets to handle this without breaking a sweat, I'm extremely doubtful that most of the other email providers do.

There's something else to keep in mind with the new storage limits being announced by Yahoo, Hotmail and the like: why might ask oneself why it is that these companies don't bother to go all the way and actually match Google's storage limits, byte for byte, instead of doling out 100MB, 125MB, 250MB or some other such allotment as to leave GMail looking an attractive proposition? There are two reasons I see at work here, the first and more trivial one being that GMail isn't actually available to the general public yet, even if invitations can now easily be had by those who know where to look. The second and far more important reason is that there are substantial switching costs associated with email addresses, and these tend to be all the greater the longer one's had a particular address; as such, even the prospect of 4 or 8 times more storage from Google might not be enough to lure one away from one's present provider if it means tracking down every last soul one's given one's email address to in order to notify them of one's change of provider. This rationale for staying put is especially powerful for those whose storage requirements are unlikely ever to approach even the less substantial limits provided by alternative services like Hotmail. As I've said, all of this is textbook economic theory, and it works out just as the textbooks say it should.

Now, for those who've persevered through this entire post, here's an offer: anyone want a GMail account? I have two invitations to give out. If you're interested just email my GMail account [natürlich] and I'll send one your way - this will be on a first come first served basis only, so please don't complain if you're too late to come to the party.