In November 2020, Google Photos quietly announced a major change to its popular photo and video sharing platform. For any photos uploaded to its site after June 1, 2021, the file sizes would count towards the 15GB free storage that every Google account holder has — such as from using Gmail and Google Drive. If customers go over the limit, they will have to buy storage whose pricing starts at $1.99 a month.
This is a seismic change in the way Google does business. For 25 years, Google has trained its customers to enjoy its products and services for free, free at least in the sense that we don’t pay for anything in cash or as subscription fees. The free offerings have not resulted in a loss-prone, poorly growing company. On the contrary, Google’s revenues have been rising steadily, with Q3 revenues coming in at $46 billion. Profits average at $10 billion a quarter.
Balancing act
But charging a subscription for a service that it has always offered for free sent shock waves through the 500 million active users of Google Photos. Even if half of its subscriber base were to opt in for the lowest paid storage offering, Google would generate $6 billion in additional free cash flow each year, nearly all of which would go to its profit line.
Why? Because Google already pays for capital costs and operating expenses of managing the whopping storage servers and data centres infrastructure from revenue earned through its bread-and-butter product: search.
To be sure, Google’s costs for managing photo and video storage are not trivial. In November 2020, Google announced that more than four four trillion photos are stored in Google Photos, and every week 28 billion new photos and videos are uploaded.
The operating costs of Google Photos sit on top of costs for running YouTube which is a far bigger behemoth. 300 hours of video are uploaded to YouTube every minute and nearly 5 billion videos are watched every single day, touching more than 95 per cent of the global internet population. While YouTube doesn’t yet charge a subscription, it sells ads and offers a premium subscription service to recover some of the costs.
Understanding costs
Going back to 1995, when the internet first gained popularity through the Netscape browser, companies began to offer products for free in the hope that customers would adapt to this new medium. Many companies went bust after the dot com bubble burst, realising a basic lesson learned in business school: A commercial enterprise can only thrive the traditional way, with revenues paying for costs.
Newspapers and magazines had the hardest time to adjust. Confronted with a new way in which readers were consuming content, publishers had to operate full-service websites at an additional cost. Existing subscribers to their print editions gradually embraced the websites as a free and more convenient alternative. Ad revenue generated on the websites was insufficient to keep the internet business operational. Hit with a double whammy — lower traditional subscription revenue and increased costs of internet operations — many publishers closed shop.
Today, most publishers — The Wall Street Journal, The Economist, The New York Times — have instituted a pay wall system by which only a few articles each month are available for free. If readers want more, they need to buy a subscription.
The announcement by Google Photos seems like a play-by-play re-enactment of what happened in the publishing world. The service was initially offered for free. The user base grew exponentially. When costs became a concern, Google decided to charge for its service.
Follower currency
But Google’s decision is different in one dimension. It has a near-monopoly in Photos. By baiting users to get hooked to Google Photos all these years, Google worked hard to develop a loyal following. Now, abandoning Photos will become nearly impossible for users because the switching costs are too high. Downloading pictures and videos from the site and reorganising them for upload to another service takes inordinate amounts of time and effort. I have over 21,000 pictures on Google Photos. I am not even considering the idea of switching.
Besides, to which competing service will users switch? Apple’s iCloud has always been a paid offering. And other cloud providers, such as Amazon and Dropbox, have offered paid storage for years.
What does the future hold? Services which provide a public utility — such as search, YouTube, Twitter, or Facebook — will likely forever remain free.
But services which provide personal utility — such as email, text messaging, and cloud storage — are increasingly subject to being converted to paid offerings. Could Google begin charging for its Gmail service? Would Facebook start billing WhatsApp users a fee each month? These ideas sound ridiculous. But no one expected that Google Photos would one day become a paid service. With Big Tech, one can never tell.