Google App Engine tanks Google's (GOOG) stock price

When Google launched the much anticipated App Engine last week, I immediately sold all of my GOOG shares... uh, I mean, share (I'm diversified). Why you ask? Recently, I had a very interesting conversation with an old Red Hat colleague of mine, rPath founder Erik Troan. We were talking about EC2, Joyent, Mosso, and the like, and I asked him why Google hadn't yet come to the hosting party. Erik pulled out his UVA economics degree, and wisely pointed out that hosting would "kill their margins." A week later, enter Google App Engine.

If you think about Erik's comment, he's right. Google's operating margin is 30+%! I challenge you to find any hosting company who has operating margins outside of single digits, no matter how efficient they are. Hosting is a competitive, cut-throat business, and it's only going to get more competitive as anyone who has an under-utilized "cloud" will try to enter this space. Conversely, Amazon's operating margins are in the 5% range, so it's a fair bet that better utilization of their IT assets just might improve their margins. Unless Google figures out how to drop ads into every app in App Engine, you can bet that they will be giving away a lot of free hosting so that they don't materially affect their margins, so drink up.

And if that's not enough to make you short the googster, here's the kicker: App Engine doesn't support Rails apps. Python is sooooo 2005.

(Seriously, though - Larry or Sergey, call me if you want FiveRuns to help you with the whole Rails support thing. We don't want to see your stock price tank or anything.)

Comments

[Hone]

Python blows so much Google use it for all there in-house apps. How dumb are they?

Seriously though, Google has no interest in the hosting business. App Engine is far more strategic than that on multiple levels.

Also by bringing it out in Python, they're quickly able to qualify and attract all the most talented and intelligent programmers on the net.

[mark]

GOOG is trying to lock people into a proprietary stack that creates exactly the kind of integrated stack and lock-in that previous "platform" vendors have had...it's just that theirs is web-based.

GOOG's stack is much more integrated than EC2, but not nearly as open.

Regarding margins, wouldn't you have to know GOOG's utilization rates to know how much the marginal mips actually cost it? My guess is that unless the hosting becomes huge, that the marginal cost to them is next to zero. On top of that, they have the lowest capex and opex in the data center business by far.

My bet is that the lock-in is worth alot and that MSFT is trying to do the same thing for a reason.