Before I jumped into the tech biz back in 1993, I spent the first chunk of my career in the real estate business (retail real estate asset management, to be exact), and in that domain, they often speak of two different types of real estate developer models: horizontal developers and vertical developers.
Horizontal developers specialize in acquiring unimproved land, and their value-add is going through the zoning, permitting, entitlement and infrastructure development process so that, what was once acres and acres of dirt and trees, is now "stubbed out" and ready for vertical development.
For example, what was once raw, un-zoned land might now look like this:
- Three residential sub-divisions of 47 lots each with varying size lots;
- A retail development site sized and zoned to accommodate a neighborhood shopping center;
- A two-story commercial office building site;
- Open space for parks and walkways
More often than not, beyond the essential infrastructure of roads, plumbing, electricity and the like, these horizontal developers don't actually develop the actual home or shopping center, but rather, make their money selling the ready-made slices to a "vertical" developer, such as a home builder or a shopping center developer, who specializes in developing, marketing, monetizing and managing this class of asset.
The key takeaway is that the nature of development, the actual customer and the lifecycle of yield realization is very different for horizontal versus vertical developers, which is why it's very common for developers to focus on one domain or the other.
However, when you get into the domain of large scale developers (think: Kauffman and Broad Homes), they do both, and so you see a duality between the horizontal side of the business and the vertical side of the business.
The horizontal side of the business must perennially be locking up sufficient inventory, such that as market conditions facilitate, the vertical side can readily convert that inventory into new housing tracts.
And it's a true duality, in the sense that there are real holding costs for all of this undeveloped land, and once the undeveloped land is built into actual homes, if the vertical side is unsuccessful at selling through its inventory, things can get ugly quick -- as the most recent housing bust underscores.
So what does this have to do with Google? For the longest time, Google has really been, from a synchronized horizontal-vertical development perspective, all about search. Grow the inventory, and simultaneously grow the ability monetize that inventory via AdWords/AdSense.
In the other areas of their business - Mobile, Maps, News, Video, Images, etc. - they have been content to be the horizontal developer; namely, creating tons of new inventory for future (theoretical) monetization, but no externally stated plan of how they were going to do so (i.e., monetize that inventory in a meaningful fashion).
The gambit has long been whether these other areas were just loss-leaders to surround and protect the main business, or serious vertical businesses in their own right.
Netting out today's Google Earnings Call, the company wants you to know that they are making $2.5B+ in Display, another $1B+ in Mobile (really mobile search), and are cracking the code to better monetize video content every day.
To be clear, Google isn't Apple in the sense that they build stuff that works together in a tightly-coupled 1+1=3 fashion.
But, today's earnings call should serve notice that they are moving beyond the "Sugar Daddy and a Bunch of Trust Babies" stage, and focused on vertically developing their (formerly) horizontal inventory with serious intention to capture multiple new multi-billion dollar opportunity segments.
It's the Google Path to Riches, and it's working, which is highly bullish...independent of the relativity to the Apple and/or Facebook narratives.
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