Taking Stock / Why Google Buying Waze Won't Help Anybody

Israelis may look at the deal with a frisson of nationalistic pride, but it won't better anybody's lot

Guy Rolnik
Guy Rolnik
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Guy Rolnik
Guy Rolnik

"Noam Bardin is The Man."

There's nothing like success, but in the world of startups and Internet, there's also nothing more ephemeral.

Everybody involved with Waze, from its founders to its investors to its partners, had an explanation for the app developer's stunning success – as proven by the billion dollars Google paid for it. But the real story is something very different.

That opening quote, "Noam Bardin is The Man," was from an investor in a different startup in which Bardin had been involved.

Five years ago the word on Bardin was rather different; Waze hadn't been born yet and he had collected quite a few detractors. If anything it could be said that the seeds of Waze's success lie in Bardin's former failures.

The last startup he ran, Arootz, was sold at a loss (meaning for less money than had been invested in it), after much dispute within the company. And four years ago, when the Waze founders and backers decided to hire Bardin to run the company, they fielded phone calls telling them their choice was a "gamble." In English – they'd live to rue the day.

During his first few years, the Waze investors ate some bitter herbs from his hand – "He hares off in wrong directions, he doesn't keep us in the loop, we don't know exactly what he's doing," one investors groused a couple of years ago. "There's a lot of hype surrounding the company but we aren't sure where it's going."

So, Bardin's character has taken its arrows over the years, but last week proved its merit: the grit, the willingness to push the envelope, the ability to play poker with the great giants of Internet are the factors behind the stunning sale of the Israeli navigation app developer for a cool billion dollars, from Google no less, which has its own – much better – map service, $50 billion cash in hand and thousands of the smartest engineers in the world on its payroll.

The division of labor at Waze was pretty clear. The founders were responsible for the technology and Bardin was responsible for its business, and handling negotiations.

The founders, Ehud Shabtai and Amir Shinar had put together a terrific team – "They chose the best and refused to compromise," an investor said last week.

But even though this is a technology startup, make no mistake. It took nifty negotiating skill to pull off this deal.

For its billion, Google bought itself three things: 1. Waze's large base of users. 2. Waze's technological team. 3. It threw up a road-block to stymie existing and potential rivals in mapping, on Internet and mobile - namely Apple, Facebook, Samsung and Amazon, and that may be the most significant part of the deal.

This wasn't about Waze's earning potential. Like Google's purchase of Instagram, what Google was buying is a company it doesn't want its rivals to buy. It's buying users, technology and team, but mainly, it's buying insurance that this little Tel Aviv startup won't turn into a monster nurtured by the competition.

The fear factor

Actually, Israel has quite the knack for creating companies like that – never mind their present earning potential, it's all about not letting the other guy get it first. "They buy because they're under stress, because they're afraid of something, because competition is driving them crazy," explains a heavy investor in Internet.

Waze was the right company in the right place at the right time, and came gorgeously packaged – maps, mobile, social network and name investors too. Its board sported superstar analyst Mary Meeker as on observer on behalf of Kleiner Perkins, one of the best-connected venture capital funds in the United States. Its involvement usually has a heavy upside influence on a startup's value. Meeker meanwhile, an indefatigable marketer, included Waze in her famous presentations on Internet, which each garner hundreds of thousands of readers.

Bardin brought Waze's investors and workers a triple victory: a huge value, cash, and the assurance that the company would remain an independent, Israeli company. Google promised to maintain the Waze R&D center in Israel.

But Bardin and the Waze-ites are about to discover what other people at other startups that were sold already know: Preserving the company's independence, and Israeli location, are a day to day struggle that never ends.

Even before the deal closed last Tuesday, the Waze people began fighting with the Google people responsible for Google Maps, who inevitably feel threatened. One can imagine they didn't exactly adore the deal.

Benjamin Netanyahu sure did. The prime minister called the Waze people to congratulate them on the deal, which supports the narrative that Israel's leaders prefer – that we're a Startup Nation that has some problems with security, Arabs and Haredim. It's a great narrative that sells well, but hasn't much to do with the everyday reality of the Israeli man in the street.

Like the other technology companies that will be sold or floated, Waze exists detached from the rest of the country. We sell companies to the world but are behind in domestic communications and computer services. We sell cutting-edge companies but the computer systems of the income tax and social security systems can't talk to each other; if they could, Israel would save billions of shekels a year and reduce inequality.

Mirror, mirror, shudder

We're supposedly the Startup Nation but whole areas of the public sector and the business one too look like the third world. Dwelling on our wonderfulness as Startup Nation – and the security threat – is our way not to look in the mirror.

Billions collected in tax from the Waze sale, or Iscar's, pale to peanuts compared with the incompetent waiver of tax on trapped corporate profits, not to mention tax planning by the super-rich. The maybe 150,000 people who work in the competitive Startup Nation don't filter through to the rest of the economy. Money going to restaurants, lawyers, lease cars and so on doesn't change the equation – it's just money moving around, not structural change.

Israel's economic leaders talk about crises, deficits, Greece, Spain, Iran and other bugaboos but don't talk about the difficult road Israel needs to take in order to destroy the status quo of powerful interest groups and rebuild the economy for the greater good of all.

Stanley Fischer, the outgoing governor of the Bank of Israel, spoke last week for the first time about the real challenges Israel faces and about the pressure groups throwing up obstacles. He defined economic concentration as a key problem and added Israel's low productivity, high housing prices, the absence of competition in all too many areas and the giant defense budget.

The common denominator behind all the challenges Fischer named in his farewell speech is interest groups that like things the way they are.

The great power of pressure groups doesn't just stem from their economic clout (the tycoons, the banks and the privately owned monopolies), their impunity (public-sector monopolies and services) or the threat they represent (the defense establishment). Their power is that the public thinks what they do is legitimate.

This "legitimacy" can be achieved through informational asymmetry (the pressure groups hold the information), "buying" guard dogs and academics to argue their case, or – by creating scapegoats.

They can also buy legitimacy through traditional media outlets, which still influence the conversation on social networks and in the streets more than any other player.

Last week the Knesset Research and Information Center published a study on the role played by the pet newspapers of the tycoons. Economic concentration doesn't only distort the allocation of resources and depresscompetition, initiative and talent; it has also constrained the press to the point that it can't confront that real focal points of power in the economy (as opposed to the imaginary power centers the press sometimes creates in order to appear aggressive).

In much of the world, not just in the third world, the political and economic agenda reflects the power of pressure groups, the biggest of which is Wall Street.

Those who want to be a light unto the nations and to confront the deepest social, economic and political challenges can't settle for selling an app that helps people find their way to work. It lies in forging new economic models that benefit the people, not a handful of elites.

Waze CEO Noam Bardin: "Today people look at Waze as a success story, but there were hard times too."Credit: Itzik Ben-Malki