The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

12 December 2007

Online storage and Google

DigiTimes reports that Google could make "very real profits" via the offer of online storage -- even if it were free (advertiser-supported). In fact, Google could make even more money than the storage makers.

Complete article below, and link to DigiTimes here.

-- David M Gordon / The Deipnosophist

Has Google cracked the code for storage profitability? asks iSuppli
Eric Mah

Google's rumored plan to offer an online storage system has been called "the virtual hard disk drive (HDD)." However, such a virtual HDD system could mean very real profits for Google, earning a much higher margin than the actual hard disks sold by Seagate Technology and others, according to research firm iSuppli.

Media reports indicate that Google is set to offer a service that allows users to store files from their hard drives on its servers. Not only could the service provide much-needed storage space for users whose HDDs are clogged with music, video and images, it could also allow subscribers access to their files from any PC, simply by entering their password on the Google site.

Reports indicate Google plans to provide some free storage, with additional space allotments available for a fee. While pricing isn't known, the Google storage service reportedly could be released within a few months.

While such a service would be useful for consumers, it could be very lucrative for Google.

"Google's plan has simple economics: It can make more money in the storage business than the companies that actually make HDDs," said Krishna Chander, senior analyst, storage systems for iSuppli.

The concept of online virtual storage is not exactly new. Yahoo, Xdrive and others have been offering similar services, typically 5GB of free storage, with more space available for a fee.

However, Google could one-up these competing services by offering as much as 50GB of free storage, Chander estimated. Google could generate significant returns from this free service by placing advertisements on the storage-service website. Chander estimated that about 4.2 million users eventually may employ the Google online storage system. Assuming Google collects US$50 per user per year in advertisement revenues collected from users of the free version of the system, the revenues potential is about US$210 million annually.

On the expense side, Chander estimates that it would cost Google US$0.25 per gigabyte for those 50GB of free storage. Google may have to install storage capacity of about 210,000TB. This will require the purchase of about 210,000 1TB-capacity HDDs, representing a gross expense of about US$52.5 million.

"This would represent a good return for Google," Chander said. "While a typical HDD supplier makes about an 18% gross margin for a desktop PC-class hard drive, Google could command a gross margin of 75%. This would give Google more than four times the rate of return compared of the HDD suppliers."

Google's profits could be significantly higher, depending on its fee structure for storage exceeding 50TB.

Google could also pursue other avenues associated with this free storage capability. For example, users could rent ruggedized PCs with minimal storage at airports, coffee shops and malls, and then access all their personal files from the Google service. This would allow users to reduce the amount of lugging of notebooks across cities and during travel.

Google could charge a rental fee of about US$0.05 per minute for using the rental PC and accessing the Internet. Such a system could be feasible if Google buys out the telephone booths or kiosks that AT&T and other telcos will abandon in 2008 due to lack of profitability.

Google faces some challenges in implementing such a service, including files that lack configuration control and privacy, password and security protection.

However, Chander said Google should prove to be a quick learner and will resolve these challenges as time progresses.


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