As I write this, Google has a market cap of about $148 billion, compared to Verizon at $124 billion and AOL parent Time Warner at $82 billion. Google might rule the Web search market, but Verizon's $88 billion and Time Warner's $44 billion in revenue last year dwarf Google's $10 billion. Why would a smaller company that makes less money be worth more to investors than larger competitors? Are they just being irrational? Maybe so, but I think there is at least one good reason why Google has been so successful: it has focused on providing services, rather than content or infrastructure. Why is this important? Think about it this way: whenever you do anything on the Internet, chances are you can break it down into three layers: 1) Infrastructure - your connection to the Internet, whether it's Cable, DSL, dial-up, FIOS, etc. 2) Service - the application you use to get what you want done, for example the search engine you use to find things or the mail client you use to read you email. 3) Content - the stuff you read, watch, listen to, or create yourself for others to see. This is of course not a strict hierarchy, but it is a way to look at just about any medium to get some useful insights. Small companies and new startups usually have to compete within one of the layers, just because you can only do so much with limited resources. So a magazine might put up a web site to provide content, and a VOIP company won't build it's own DSL lines, it will just provide VOIP service. Many larger companies eventually find it tempting to cover two of the categories or even all three. This seems like a good idea, and you will hear a lot about "synergies" and things like that. In the best case maybe the company will have some cost savings and be able to provide more value to customers because they no longer have to pay other companies for the other layers. Quite often, though, this can lead to "walled gardens" where companies try to steer users through their systems at each level. AOL, for example, used to keep a lot of premium content off of the Web available to their ISP subscribers. Verizon sells Internet access on it's cell network, but you'd better believe they want you to buy ring tones and MP3s through them rather than some random retailer. In the worst case this leads to illegal monopolistic behavior. Now Look at Google. They seem to have very little interest in providing or controlling the Infrastructure. To Google an Internet connection is an Internet connection. In addition, they have very little interest in being the content provider - Google wants to organize the world's information, leaving the creation of information up to the world. This gets them in trouble with companies that wish to control the content and the service, and use their control of content to force users into their service. Google makes it's play at the service level, with the search engine, Gmail, Google News, etc. YouTube is a good example of how Google can grow and compete in new areas while still keeping within the service layer. Verizon might see YouTube as competition for their IPTV service, but note that YouTube isn't building fiber to every house. Time Warner produces TV shows (content), runs networks (service), and operates the cable running out to your house - meanwhile YouTube lets users produce video themselves. So why is this an advantage for Google? Think about it this way - Google could try to extend their dominance of search into content, but would Google really make better content than everyone else? Google could try to buy up or build out infrastructure, and judging by their data centers they might be able to do a really good job of it. But could they build infrastructure to reach the whole world? Would owning the connection give them an excuse to make the services less flexible, and ultimately less useful? In more general terms, for some services these separations are so obvious that you probably haven't even thought about the alternative. Email is a good example - although in the ancient past the service was tied down to the infrastructure, I would have a hard time imagining a service provider trying to generate the content themselves. Would you use an email service where you couldn't email your mom, your professor, your boss, etc., but could correspond with professional emailers hired by your ISP? In the past ten years, would you have used an ISP that provided email service but blocked access to Hotmail or your college email account? Competition can and should exist at every level. Just like any market there are different approaches - you can try to fit a particular niche, you can try to outperform the competition, you can try to lock users in. Successful practitioners of the latter approach might be tempted to extend into other levels, but in the long run it might not be a good idea. The best case scenario, for both consumers and competitors, is a natural separation with lots of competition within each level. This is more or less the present case with the Internet, despite many attempts at vertical integration and a paucity of competition in the infrastructure level in most areas. Lots of competition means lots of opportunity for capitalism to do it's magic, providing a wide range of options and generating a lot of wealth. Informal, natural separation means everyone has to stay flexible and we get the benefits of specialization. Adam Smith would totally be on board. This best case scenario is also what a lot of people mean when they talk about Net Neutrality. I think that Google understands all of this. Now what about their partnership with Earthlink to offer WiFi? It's possible they are just following the "throw it up and see if it sticks" approach they are known for. My guess is that they see moves to extend lock-in by infrastructure companies into services as a threat and are demonstrating that they can do the opposite if needed. But I bet they would be perfectly happy with a vibrant WiFi market with lots of players providing the infrastructure so they can provide their services.