Google

What are the key factors behind Google’s early success? Google’s early success can be explained by four key factors. Since Google was a second-mover, it benefitted from Yahoo!’s and others’ experiences in order to improve its service and overall performance. 1. A well-conceived algorithm: technology advantage as a key factor (learning from Yahoo!’s mistakes) Google took advantage of the growing frustration towards Yahoo!’s failure to prevent or to control spam. Brin and Page studied the algorithms used by Yahoo! and others in order to improve them. They created Page Rank, an algorithm for online researches which shortlisted pages that were linked to by other pages. This algorithm enabled more relevant results and therefore increased user satisfaction. Later, when getting in the actual search business, they followed the same process: studied the market and improving the offer. Google first used a cost per impression but subsequently created its own cost-per-click model in 2002. It chose to weight the CPC bids by the actual CTR/expected CTR (click-through rate). This weighting enabled them to maximize revenue while making sure that their users were happy (and not bothered by irrelevant ads).

Google licensed its search technology and algorithm. This contained two advantages. First and foremost, it protected innovation and their monopoly over it. Moreover, Google generated revenue from selling their researches to Yahoo! and only focused on that at the beginning. In addition, Google was also able to discover the search business market due to their sales. These licenses enabled them to make a first step in the market it wanted to conquer, to understand it and to highlight the problems and/or the needs. Google started to build its brand. 3. A simpler and improved offer

Google offered a different type of search engine. It corrected problems arisen in the industry and succeeded in creating a simpler research engine. The white page with the Google logo is a good illustration of their key motto “simple & basic”. This page would be filled up with the research results, with very simple design, without the overload of information, content tools nor an editorial content that were not directly related to the search itself. Furthermore, it initially did not ‘spam’ users with advertisement. This was a relief for users. Later Google did allow and generate advertisement but the only links that were sponsored had to be related to the research. This type of advertisement was generally perceived as more useful and less intrusive by users. Philadelphe Knellwolf, Vincent Perraud, Maÿlis Chapellier, Alexandra Ivanova March, 19th 2014 4. A well-managed, efficient organisation

Finally, Google also succeeded due to its innovative management. Even though Brin and Page shaped their effective management only after the initial success, their distinctive methods and their expertise was a key success factor from the very beginning. Brin and Page brought engineering experience and innovative ideas together. Eric Schmidt complemented the team by bringing in the business experience at Sun Microsystems or Novell where he was PDG before entering the Google team. 2) Do you think the search business will become more concentrated? An industry is said to be concentrated when one or a small number of firms provide a large amount of the industry’s total production. As the U.S. Search Engine Market Share graph (Exhibit 2) highlights, Google owns almost 70% of the market.

The search business is therefore monopolistic or oligopolistic (with Yahoo!). In this context, the question whether it becomes more concentrated, will depend on whether Google will continue growing. First of all, the very nature of this industry seems to call for concentration. The more pages the search companies are able to index the more successful they are. This is due to network effects of a two-sided market such as paid listed advertising platforms such as Google. In other words, the value of Google’s ad service increases with the number of pages indexed, which increases the number of users. Thus, competitors’ pages with less links and less users are naturally less attractive for advertisers. Due to these important network effects, and due to the technical nature of the business, which is based on innovation and R&D, there are high entry costs. Consequently, the market will tend to be more concentrated in the future. Within the industry, Google currently faces only two main competitors. Yahoo! did not benefit from its first-mover-advantage, so far, every new product that it produces is matched with a better version by Google.

Microsoft just launched Bing. It seems to be a serious threat as they succeed to reach an agreement with Yahoo! to improve their service against Google. The competition within the industry is moderate due to Google’s dominance. For customers, switching costs are low but quality of the service is not yet identical. The threat of substitutes is fairly low since technological disruptions – even though challenging the way the search business operates – tend to increase the demand for information and for search engines. Smartphones for instance significantly increased the potential industry earnings for paid listed advertising providers such as Google. The threat of substitute being low, they will not prevent the concentration of the market. Overall, on the medium term, the industry will become more concentrated due to Google’s dominance, which will increase positive network externalities for the company.

On the long term, market concentration may depend on the shifting nature of the IT market itself. Philadelphe Knellwolf, Vincent Perraud, Maÿlis Chapellier, Alexandra Ivanova March, 19th 2014 3) In renewing its deal with AOL, could Google afford to pay more than 100% of the revenues generated by AOL searches? How would Microsoft’s highest affordable bid compare to Google’s? Based on the bid in 2005: Yes, Google could afford to pay more than the equivalent of the revenues generated by AOL searches, since revenue splits (i.e. the percentage of ad revenue that listing providers paid to network affiliates) is only one of the four factors affecting their overall paid listing revenues. Average cost per click paid by AOL would increase over time, since the size of Google’s advertiser base would increase, thus driving bidding prices up. This would compensate this initial expenditure. Microsoft’s maximum affordable bid was probably lower due to its smaller market share (in 2005 about 15% compared to Google’s 37%, as shown in Exhibit 2). Consequently, its coverage rate, i.e. the share of queries, and its paid-listing advertiser base were smaller than Google’s which meant that it would bid less because it would expect less revenues. In both cases, there is a virtuous (Google) or a vicious (Microsoft) circle due to network effects of the business.

This means that due to the strategic interests of Google it will invest and it will have a higher yield of its investment. Microsoft, has less strategic interest in expanding in the future due to the very high upfront cost and the low yield, thus it will invest less. In is unclear however, who’s pockets were deeper at this point in time, because
Microsoft may have had enough seniority to be able to suffer important losses due to this upfront investment in increasing the attractiveness of its advertiser base. Most probably, this might also have been the reason for a tight bidding war between Google and Microsoft. 4) Should Google diversify into new areas? For instance: building a portal like Yahoo, challenge Microsoft desktop software domination, becoming an e-commerce giant like eBay? Given that Google sees the online industry in an integrated way, it would not make sense for them to diversify and invest a significant amount of capital in any of the given branches already dominated by its competitors. As Google’s philosophy states, it is the best player in the business of making the world’s information accessible and useful. Therefore, Google is stronger than just a portal as Yahoo, because it includes professional users – something that Yahoo does less due to its leisure-like channels.

The acquisition of Youtube is enough to gain power in the media market and Google News is already providing the equivalent of Yahoo’s news channel. To challenge Microsoft in desktop software domination would probably make the least sense, because it requires high R&D and upfront capital investment. Google Chrome is enough in order to leverage more user search data for further use by Google. Moreover, it already challenged Microsoft on another level via web-based Google Docs: thus, as a substitute to the offline desktop software, Google Docs increases the threat to Microsoft’s main industry profitability. Closer cooperation with eBay would surely be of interest for Google, but probably profits are best sourced by keeping eBay a paid advertisement customer instead of developing an e-commerce website which would be alike.

Moreover, it would potentially bear a dilemma for Google: a conflict of interest between selling its own products and advertising competitors products would be a serious threat to Google’s profitability. It would also have to invest in Philadelphe Knellwolf, Vincent Perraud, Maÿlis Chapellier, Alexandra Ivanova March, 19th 2014 after-sales, a service which does not have much synergy with Google’s current business. At the stage of 2011, the market seems fast changing and Google seems to have the key and the means to face future disruptions and address them appropriately. Instead of diversifying to new areas too far from its main purpose, Google should thus exploit its competitive advantage more, this is benefit from the integrated approach to information it has with its already quite diversified sub-branches. It should focus on the most information-intensive sectors, such as GPS and Google Maps for instance, because it can outperform its competitors best in this sector. Moreover, one of its new businesses: Google Drive and Gmail, communication interfaces, are – themselves – disrupting the industry and should thus be improved and further developed in order to increase coverage and reach out to more users. Most probably, the communication part is the fastest growing business, with the arrival of social networks, so if Google is thirsty for innovation it could try to provide an integrative experience via a platform where further user information could by harvested and where it could also employ its already successful paid-listing advertisement strategy. 5) Do you think Google’s distinctive organization and governance is rather strength or a handicap? Google’s distinctive organization and governance seems, to us, rather a competitive strength than an obstacle.

Although it is different on a lot of different aspects, we will focus on the main and most influential aspect which is the company’s financial results. Google’s managers succeeded into creating a well-protected company. Their system of dual-class equity enables them to be a solid company. There cannot be any second-guessing as the main investors, that is to say themselves, know the company’s strategy and whereabouts. Moreover, it prevents investors from distorting the company’s larger goal and its ideals/key values. What’s more, when it comes to the information about their company, Google’s managers refuse to display anything that is not required by law. This concerns in particular, strengths, strategies and intentions. This is a clear advantage in the context of competition. In general, their unconventional management practices are found to be successful.

Horizontal approach

o the rule: physical proximity, teams strive to reach consensus o our conclusion: Google is good at creating human interactions within the work environment. It really differentiates itself from competitors in this regards, and will thus attract future talents.  Employees are asked to work on personal projects

o the rule: employees spend 20% of their time on individually chosen projects, while still being supervised o our conclusion: they excel at
innovating. Having a creative team is vital for companies in this innovative industry. What Google managed to do is an excellent trade-off between being big and leaving room and flexibility for creativity.  Small teams

o the rule: teams of three to five people
o our conclusion: the rigidity of large groups is indeed a problem. Here, Google is solving the free-riding problem of big and mostly less productive structures.