Why Did Google Pay $1.1 Billion for Waze

Recently Google acquired Waze, a community based traffic and navigation app, that provides real-time traffic information based on data collected by the drivers themselves. Google paid $1.1 Billion for Waze, when Waze had only 45 million users. This may sound like a lot, but for Google that probably has hundreds of millions, if not billions of users, it is a very small number. Also Waze's revenues are miniscule compared to Google's. So why did Google pay so much?

Some say that it is Google's way to penetrate into the mobile world. But Google doesn't really need Waze for that, it is already the default search engine on almost every smartphone. Others calim that the acquisition is because Google's turn by turn direction solution Is not good enough and Waze's is better. That may be true, but it is still no reason to pay so much for the company. With a much smaller investment Google can hire a number of software engineers that in a few months will come up with an excellent solution. So what is really the reason for paying so much for Waze?

The answer lies in Waze as a platform. Waze has been able to develop a two-sided platform, in which one side provides information and the other side benefits from it. In Waze's case, as in most of the two sided platforms, the providers of information and the benefactors of the information are the same people. A driver that sets a course uses the traffic information from other users to find the shortest route, but at the same time that driver also send data to Waze that allows it to identify traffic jams and calculate the best driving route for other drivers. While currently it is being used for reducing driving time, which is a very desirable solution for millions of drivers, this two sided platform can be put to use for other applications, and this is why it is so appealing to a company like Google.

There is another benefit of Waze's solution that makes it even more appealing. Waze's solution enjoys the Network Effect. In the Network Effect, the benefit the solution provides to its users increases as more and more users use the solution. In Waze's case, the more drivers use the application, Waze is able to determine in higher accuracy the traffic situation and suggest the best driving route to the drivers using it. The Network Effect creates an incentive for existing users of the application to convince other drivers to use it, since they know they themselves will also benefit from it.

Waze's strategy coincides perfectly with Google's strategy, since Google itself started its operations using a two-sided platform. Google's search algorithm relies heavily on information from the internet users ans searchers themselves. In Google's case the providers of information and the benefactors are the people performing searches on the Internet. Google bases its rankings on sites being searched and visited and this helps other users to find the best site when searching. Waze's two-sided platform can assist Google expand its operations in the mobile world, and its straegy will most likely be to add additional solution on Waze's application. Currently Waze produces minor revenues, but in time Google will use the platform to generate revenues from additional solutions.



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