Published on December 2, 2008
Everything you always wanted to know about Google…But were afraid to ask Paris, December 2008
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Google key success factors : Web specific ? Scalability Network effects Data mining • Ability to easily grow at • The utility of a good or a • The web offers the marginal costs service varies with the opportunity to exploit and • Applied to infrastructures : number of users analyze a very large ability to adapt its size to • The reach of a critical amount of data high load & volumes mass of users constitutes • Users’ behavior can be • Applied to business a significant barrier to the analyzed to create models : ability to entry monetizing value monetize millions of users Openness Cocreation Business model • The traditional walled • Non-traditional actors • Advertising is not a market garden1 media strategy become part of the value but a business model becomes irrelevant chain • Any market that attract • Content and services must • Users, content creators advertising is a target for be open and interoperable and external developers Google to favor audience are given the tools to circulation create new markets and enrich services ..……. 1 Network or portal which offers only its own content or services to users December 2008 • Everything you always wanted to know about Google… • 3
1 Why won’t Google be affected by the crisis ? 2 Why is Google trying to change the mobile world ? 3 Why isn’t YouTube a content portal ? 4 Why does Microsoft fear Google ? 5 How Google wants to compete with Facebook ? 6 Why is Google buying satellites ? 7 How does Google buy traffic ? 8 Why did Google acquire DoubleClick ? 9 Why doesn’t Google monetize all its services ? 10 How does Google capitalize on Open Source developers work ? 11 How did Google capture the offline advertising market ? 12 Why is Google stealing our voices ? 13 Is PageRank a really competitive advantage ? 14 How does Google turn advertising into information and performance ? Annex: Network effect, two-sided market, glossary, financial , contact ..……. December 2008 • Everything you always wanted to know about Google… • 4
1 Why won’t Google be affected by the crisis ? 4 levers will allow Google to increase its revenues amidst the economic crisis Performance Bn$ 35 1 advertising Licenses and During a crisis, other performance revenues advertising gains market shares Internet Explosion of the Mobile non advertising + 3% 2007-2008 1 revenues On line Monetisation of +450% 2007-2008 video the Internet Mobile audience YouTube Bn$ 201 monetization 260 millions mobile subscribers increases worlwide oct 2008 1 Estimates 2008 : Revenues = 200 M $ 1 Revenues 2008 Revenues 2012 Google is in a situation in which it can resist the economic crisis and find new revenue sources, both advertising and non-advertising ..……. 1: faberNovel estimates December 2008 • Everything you always wanted to know about Google… • 5
2 Why is Google trying to change the mobile world ? (1/2) Mobile industry is based on a “ traditional” locked values chain. Operating Terminal Portal Operator Web Contents System Examples: Entry barriers stop Google from applying its models to the mobile industry: Access restricted to services/contents Limited Network Access and to their improvement • Terminals assigned to a unique operator • Operator portals favored over other portals • Difficulty of interconnecting networks • Services offered by terminal manufacturers favored over other services • Closed operating systems The mobile industry is not suited for the Google development model based on openness, interoperability and network effects. ..……. December 2008 • Everything you always wanted to know about Google… • 6
2 Why is Google trying to change the mobile world ? (1/2) In order to duplicate its open model, Google designed a three fold strategy : Android : Open Source Lobbying Telco partnerships O.S.1 • Android Developer Challenge: • Google candidacy for mobile • Pressure from Google to force Contest for developers to create license attribution aims to force the operators to offer its applications new applications for Android FCC2 to impose an openness as default options clause to the winner • Open Handset Alliance: Common initiative of 34 mobile • Sharing of advertising phone industry players • A success : clause partially revenues between Google and (manufacturers, suppliers and imposed on the winning bidder, operators distributors) aiming at spreading Verizon. Android In addition, Google developed and acquired mobile devices applications : Location-based Social Collaborative Games services Networks Tools ShareYour Grand central 3 Cab4me FreeFamilywatch Golfplay JOYit Wertago Jaiku 3 Board Google breaks open the mobile industry value chain to create an environment that will be fit to the distribution of its products and monetization model. ..……. 1 Operating System 2 Federal Communications Commission 3 Acquisitions December 2008 • Everything you always wanted to know about Google… • 7
3 Why isn’t YouTube a content portal ? (1/2) YouTube acquisition is part of a strategy to monitor key content and audience hubs. Monetise contents Give access to Organise information through various information sources of audience •A new information silo: video • YouTube bandwidth • Broadcasting of contents search spending estimated to reach through Google websites as 1M$/day1 well as other sites •Next : Speech to text technology : information • Revenue sharing logic searches within video contents YouTube has already won the audience battle … 75% … 60% May 2008 16% 9% 4%8% 2% 3% 1% 1% May 2007 Market shares of 5 leading video websites, United States (may 2008 vs.may 2007) [%]2 1 NewYork Times ..……. 2 Hitwise 2008 December 2008 • Everything you always wanted to know about Google… • 8
3 Why isn’t YouTube a content portal ? (2/2) Unlike its competition, YouTube follows an open logic and focuses primarily on developing content distribution tools : Encourage content Attract as many viewers as Monetize through relevant providers to use the service possible advertising tools • YouTube Program Partner : • Broadcasting videos on • Traditional advertising: Payed providers of semi- YouTube website and other AdSense and banners professional content Google sites (ex : Google.com, GoogleNews) • In-video advertising : Pre-roll, post-roll, overlay2 • Broadcasting contracts • Exporting videos (blogs, with major content providers social networks) and • Brand advertising: developing API1 for broadcasting video ads advanced broadcasting on within an environment third party websites coherent with the brand’s image • Broadcasting on all video devices : television, mobiles, • E-Commerce: Affiliation of multimedia players, video partner websites (Amazon, consoles Itunes, video games) YouTube acts as the platform of a two sided3 market composed of content providers and video seeking users. 1 Application Programming Interface. Standardized programming protocol allowing applications to communicate 2 Clickable text advertising displayed on a video 3 See Annex ..……. December 2008 • Everything you always wanted to know about Google… • 9
4 Why does Microsoft fear Google ? Google’s ambition isn’t limited to “in browser” Web services, but extends to any online or offline application market. Google sets out to enter the online application market, MSFT’s cash cow : Disruption of offline application Consolidation of the online market segments environment • Launching of the Office Google • Launching of Google Gears: software pack: a word-processor, Open Source project allowing an a spreadsheet program, a offline use of online applications presentation tool and a calendar • Free alternative to Microsoft Office pack • Claimed ambition of becoming a standard and encouraging online languages as opposed to offline programming languages • Acquisition of SketchUp, a 3D modeling software with a free version made available Google partly « destroys » Microsoft’s market when shifting value from offline to online ..……. December 2008 • Everything you always wanted to know about Google… • 10
5 How Google wants to compete with Facebook ? In 2007, Google launched Opensocial : a series of multi platform API allowing developers to create compatible applications with partnering social networks, Ex : Slideshare application available on Linkedin and hi5 OpenSocial is not a Facebook competitor but a «meta-social network ». Network Network effects effects Network effects Google wants to become the « social data search engine » and to monetize this data, leveraging network effects. Facebook’s platform is limited, Google’s is the whole Web ..……. December 2008 • Everything you always wanted to know about Google… • 11
6 Why is Google buying satellites ? (1/2) Since 2005, Google has been multiplying investments in all kinds of infrastructures: • Free Wifi in Mountain View • Investment in Fon: shared Wifi access Wifi Gratuit Satellite Wimax • 60 M$ Investment • Partnership • Internet access in • A mobile high-speed developing countries internet access technology • A 100 M users Baloon market by the end of Backbone1 Wifi 2008 • Partnership • 100 M$ investment announcement • Expansion of high- • Internet access speed networks technology superior to satellites for isolated areas ..……. 1 Long distance high-speed networks, core of the Internet network December 2008 • Everything you always wanted to know about Google… • 12
6 Why is Google buying satellites ? (2/2) Internet infrastructures is actually Google’s business infrastructure: Traffic on Google websites depends on internet infrastructure development and availability (Backbone, Wifi, Satellite,…) Google has three objectives when investing in the upstream part of its value chain: Strengthen and secure existing • Strengthening and securing existing infrastructure infrastructure lightens Google’s dependancy on its providers • Favouring high-speed Internet access means more Favor high-speed Internet access time spent and usage volumes, thus increases Google services usage Prioritize Internet access for • Future web users are Google services’ next unconnected countries or populations users Through infrastructures investments, Google reinforces its traffic providers and increases access to its services. ..……. December 2008 • Everything you always wanted to know about Google… • 13
7 How does Google buy traffic ? Google asserts its ability to attract users on the sole basis of its services quality and without turning to advertising… Truth is Google largely buys traffic from providers Browsers Manufacturers Toolbar Portals •Firefox: 60 million daily • In 2006, partnership users in 2008 deal with Dell to have the • The Google Toolbar is part of the web navigator, •Google finances 85% of Google search engine which makes Google the • In 2005, Google bought Firefox in exchange for appear by default on Dell a 5% stake in AOL for 1 computers default search engine having its search engine billion$ (20 million embedded in the browser • In 2008, partnership • Adobe installs it as part subscribers at time of deal) of a package with deal with Apple to have the • Google became AOL’s Google search engine Shockwave(2006) white label search engine appear by default on • Sun has been installing • Google expands its Iphones (13 million devices it as part of a package with advertising network reach sold by october 2008) Java since 2005 (20 million • Partnerships with uploads/month) manufacturers allow the search engine to be guaranteed to in a prime position. Google has the financial power to buy traffic from partners, accessing to massive audiences. ..……. December 2008 • Everything you always wanted to know about Google… • 14
8 Why did Google acquire DoubleClick ? • In 2007, Google acquired DoubleClick, one of the world leaders in display advertising : To position itself on the banner To reach for highly popular market websites Google « moves up » the long tail Market shares of main online of advertisers advertisers in relation to website traffic 1 Ad budget per advertiser Advertising < 100k 100k- >1Mon houses UV2 1M UV2 UV2 Banner Market Adbrite 4,1% 4,9% 0,5% Text ad market AOL 1,9% 6,5% 5,7% DoubleClick 9,1% 29,9% 48,0% Google 71,4% 41,6% 15,8% advertising Traditional MSN 6,6% 6,3% 12,8% market Yahoo 4,7% 7,3% 16,5% Number of advertisers Google acquired DoubleClick to gain an expertise (display) and global market shares (highly popular websites) 1 www.attributor.com/blog/2008/03/ 2 Unique Visitors ..……. December 2008 • Everything you always wanted to know about Google… • 15
Why doesn’t Google monetize all of its 9 services? Some Google services are free of charge and monetized through advertising : Blogger: blog creating tool Google Health: service for managing and storing personal medical information GoogleNews: personalized mash-up of news articles and summary Picasa: photo sharing service Google SketchUp: 3D model creating tool Goog-411: phone information service … These services are actually indirectly monetized : Tools designed to Products specifically Attract new customers generate audience are developed to improve through loss leaders made available other Google products Monetization of blogs created on Google 411 created to better the Picasa devised as a loss leader Blogger through AdSense or video indexing on YouTube towards other Google products FeedBurner Google global strategy allows strong indirect monetization of its products ..……. December 2008 • Everything you always wanted to know about Google… • 16
10 How does Google capitalize on Open Source developers work ? Google encourages development of open source applications: • Google code: platform designed for Open Source developers Supplied with guides, tutorials, code extracts of Google products • Google Search Code: code search engine Automatic referencing of all code sections that can be found on the Internet • Events created for the Open Source community: Google Summer of Code: grants awarded to Open Source student projects Google Developer Days: seminars dedicated to Google products Through support of Open Source community, Google pursues 4 objectives: Development of Open Increase of total Promotion of a more Assembling a free Source langages used Internet traffic « open » Web public relations team by Google •New applications •Increasing the •Developers’ chats are •The number of create new uses, interoperability a very effective public available Open Source leading to increased multiplies network relation tool codes encourages the total traffic effects1 emerging of new •Opensource is products becoming an •Feedback of Open advantage to attack Source developers proprietary code helps creating new strategies products Google supports the Open Source community in a spirit of collaborative creation, one of Google’s strategic pillars ..……. 1 See Annex December 2008 • Everything you always wanted to know about Google… • 17
11 How did Google capture the offline advertising market ? Online advertising market accounts for only 8% of the US market1: 3% 7% 8% Billboards Radio Most offline media (television, 44% 17% Internet Daily Press radio, press,…) begin to be IP- News Press Television ready with online versions 21% Google is exploring the offline ad market! • Ad transfer from online to offline (YouTube on television) • Entry on traditional offline markets (radio, billboards,…) • Integration of offline techniques (traditional fixed pricing) • Partial adaptation of AdWords onto radio and television Google’s entry on this market anticipates new uses and broadens its offer. Not specifically successful for now… ..……. 1 TNS Media Intelligence, US advertising market December 2008 • Everything you always wanted to know about Google… • 18
12 Why is Google stealing our voices? In 2007, Google launched Google Voice Local Search in the United States, a free and automated phone directory service : What is the business model of this free and ad-free service ? Google is creating a database of phonemes, recorded during calls in order to better its speech to text1 technologies: Creation of a Development Indexing of Indexing of all of « speech to phoneme text » YouTube audio/voice database audio tracks sources technologies 2 Bla bla bla Externalizing tasks onto users (« crowdsourcing 3») is a commonly used process by Google to improve its products. 1 Converting oral information into text 2 First experiments with political videos posted during the presidential campaign of 2008. 3 Neologism created in 2006 by Jeff Howe and Mark Robinson, Wired magazine editors ..……. December 2008 • Everything you always wanted to know about Google… • 19
13 Is PageRank a really competitive advantage ? (1/2) PageRank is Google’s link analysis algorithm that measures the probability that a page will be relevant to user’s query : Based on the correlation between the amount of links towards a page and their relevance It accounts for the notoriety of the sites that link to the page in question PageRank’s simplified formula is : (A page’s (u) PR is the sum of all PRs of pages linking to u (v), divided by the respective number of outbound links contained in pages v) Google1 claims that PageRank is one of its search engine’s main competitive advantage : A « champion of The search engine’s A tool unlikely to be democracy » « cornerstone » tampered with 1 http://www.google.fr/why_use.html ..……. December 2008 • Everything you always wanted to know about Google… • 20
13 Is PageRank a really competitive advantage ? (2/2) A tool that can’t be tampered with? An outdated technology? Sale or exchange of famous website links Launch of search engines that (webringing) don’t use tools such as Search Engine Optimization1 techniques PageRank (Cuil, Powerset) Google’s search engine success relies on other factors : Relevance guaranteed Scalable architecture Quick/simple queries by 200 other criteria • Capacity of increasing/ • Clear query interface • The search engine’s growing according to the • Simple and quick algorithm was subjected to volume of indexed pages presentation of results 450 modifications in 2007 and number of queries • 2 millions servers by 2008 PageRank is only one of many Google’s search competitive advantages. It is certainly not the main entry barrier to competitors on the search market. 1 Set of techniques aiming at improving a site’s referencing on a search engine. ..……. December 2008 • Everything you always wanted to know about Google… • 21
14 How does Google turn advertising into information and performance?(1/2) « Advertising income often provides an incentive to deliver poor quality search results» Sergey Brin & Larry Page Most advertising models present strong weaknesses Undefined Strong intrusion Weak relevance performance • Large size adverts • Influence results by • Impossible to reward • Slows down results making paid for clients efficient advertising display from a search appear first • Example : television ads engine query • Example: Opentext/Kelkoo • No direct measure of real • Little or non-existent performance targeting • Example : invoicing according to the number of displays (CPM) ..……. December 2008 • Everything you always wanted to know about Google… • 22
14 How does Google turn advertising into information and performance?(2/2) Displays advertising defines Relevance Quality Score Performance For the user Direct impact on advertising value For the advertiser Most relevant ad Qualityscore measures the relevance of the ad and is determined by the click throug rate on the ad. It impacts the display rank and Cost per Click: • Rank: relevant ads are pushed up, non relevant ads do not appear • Cost per click of the ad : performant Total cost of the advertising ads are charged less campaign is determined by the number of clicks on the ads and Less relevant ad not by the number of displays. Google’s advertising model benefits the user (improved relevance) as well as the publisher (performance based billing & rebates) ..……. December 2008 • Everything you always wanted to know about Google… • 23
Google : the network circulation value creation model Traditional value creation Network value creation Eg : Microsoft Eg : Google $ Gmail $ Apps Server Products $ Apps $ $ $ Search $ Customer engine Business products Products $ $ $ $ $ $ Partners Entertain Youtube ment $ The global value of the company relies The global value of the company relies on independent lines of on traffic between network parts products/business units (proprietary or partners) ..……. December 2008 • Everything you always wanted to know about Google… • 24
Going further : are Google’s key success factors limited to Google • Our conviction : Every company innovating in the digital industry must address and capitalize on the 6 identified key success factors to perform on digital markets. • Our proposition : faberNovel proposes to align companies strategy, development projects and existing products with these factors to ensure success optimization and market performance. Download our comprehensive White Paper « Google’s key success factors » http://www.fabernovel.com ..……. December 2008 • Everything you always wanted to know about Google… • 25
Annex • Definition : network effects • Definition : two-sided market • Pricing of a two-sided market • Glossary • Financial datas • Acknowledgement • Contacts ..……. December 2008 • Everything you always wanted to know about Google… • 26
What is a network effect? • A network effect describes how a service becomes more valuable to its users as more people use that same service Phone’s utility is limited if The utility for a user According to Metcalfe’s the network is composed raises if the network law, the utility(U) of a of 2 users broadens network is proportional to the square of the number (n) of its users U ≈ k*n2 Network effects creates critical masses of users. They represent significant barriers to entry for competitors. ..……. December 2008 • Everything you always wanted to know about Google… • 27
What is a two-sided market? • A two sided market consists of a platform allowing 2 groups of clients/providers to interact and which optimizes the revenue distribution among these groups with the objective of maximizing market sizes. Exemple of the video game market Crossed network effects Internal Price A Price B network Side A Side B effects Developers Consumers Network effects in action Internal effects Crossed effects • A potential market for a • Utility to a new developer developer gets bigger as more increases as the community of consumers enter the said market developers grows (shared knowledge) • The number of games available to the consumer increases with • Utility to a new consumer the number of developers increases as the community of working on the platform consumers grows (secondhand market) ..……. December 2008 • Everything you always wanted to know about Google… • 28
Pricing of a two-sided market Price A > 0 Price A < 0 Side A Platform1 Face A Platform1 • The platform may charge a side • … or subsidize a side • Example 1 : Apple Appstore charges • Example 3 : Google Android finances developers by taking a revenue share developers through a contest on sold applications • Example 4 : Youtube finances video • Example 2 : Microsoft makes content providers consumers pay for video games Who should you be charging? Who should be subsidized? The platform must subsidize the groupe that is most price-sensitive and charge the group that is most sensitive to the other group’s size. 1 Provided the sum of price A + price B is a fixed figure, a platform financing a group automatically charges the other group and vice versa ..……. December 2008 • Everything you always wanted to know about Google… • 29
Financial data (1/2) Revenues and Net margin (M$) Revenue distribution/activity (B$) 439 1466 3189 6139 10604 16594 Total 16,6 Revenues 0,2 1% CAGR Revenues 02-07 : 107% Net CAGR Net margin 02-07 : 112% Licences and other 5,8 34% margin revenus Partner websites (AdSense) 10,6 4203 3077 Google web sites 1465 65% 100 106 399 CA 2007 2002 2003 2004 2005 2006 2007 Net margin’s growth outperform Most of Google’s revenues still revenues’ growth come from its own websites 78% 79% 85% 2005 2006 2007 Advertising revenue share to partner web sites is increasing2 and is the highest of the market ..……. Source: Google financial tables 2007 2 : calculated as Traffic Acquisition Cost/Google Network web sites revenues December 2008 • Everything you always wanted to know about Google… • 30
Financial data (2/2) Advertising revenues Turnover Traffic acquisition costs R&D investments 6139 10604 16594 16,4 10,5 30,1% 599 1229 2120 34,9% 6,1 31,5% 9,0% 11,0% 12,0% 2,1 3,3 4,9 2005 2006 2007 2005 2006 2007 Controlled traffic acquisition costs High R&D investments 34,9% of advertising revenus in 2005 vs 30,1% in 2007 +88%/year between 2005 and 2007 + 26% 1,9 2,4 2005 2006 Data center costs are under control In Billion $ : +26% 2006/2007 (vs +72% revenues) ..……. Source: rapport annuel Google 2007 December 2008 • Everything you always wanted to know about Google… • 31
Glossary • API : application programming interface. Standardized programming protocol allowing applications to communicate • Internet Backbone : main trunk connections of the Internet, made up of a large collection of interconnected high-capacity data routes and core routers that carry data across the countries and continents • Crowd sourcing : act of outsourcing a task to users • Data center : facility used to house computer systems and associated components • O.S. : operating system • Overlay ad : clickable text advertising displayed on a video • Scalability: property of a process, which indicates its ability to handle growing amounts of work easily • Search Engine Optimization : process of improving the volume and quality of traffic to a web site from search engines via natural search results (as opposed to paid search results) • Speech To Text : technology converting spoken words to machine-readable input such as text • Walled Garden : closed or exclusive set of information services provided for users by a network or portal ..……. December 2008 • Everything you always wanted to know about Google… • 32
Acknowledgements To faberNovel contributors : • Amaury de Buchet, VP Consulting • Cyril Vart, VP Strategy & Development • Alexis Arquié, Junior Project Analyst • Mounir Fassouane, Junior Project Analyst To the bloggers : • Olivier Ertzscheid from affordance.typepad.com/ • Google Operating System : googlesystem.blogspot.com/ • Richard MacManus from readwriteweb.com/ • Techcrunch.com & Mobilecrunch.com/ • Frédéric Cavazza from fredcavazza.net/ ..……. December 2008 • Everything you always wanted to know about Google… • 33
Stéphane Distinguin Founder and CEO email@example.com Cyril Vart VP Strategy & Development firstname.lastname@example.org Pierre Fremaux Project Analyst email@example.com Matthieu Lecomte Junior Project Analyst firstname.lastname@example.org Tél. : +33142722004 ..……. December 2008 • Everything you always wanted to know about Google… • 34
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