Google is not only a big company, but also a central player on the internet arena. It has become so effective at what it does that it has become a synonym of Search. This aren't, of course, big news. Yet, with the advances in technology and the constant fight for dominance online- both, on the PC and on mobile-, one cannot ignore Google.
The Company
How was the internet before
Google? That’s a question we rarely ask ourselves since we take the search
Engine giant as a given. In any case, the closest things to be had compared to
search engines today were directory-like sites. The first two were WWW Virtual
Library and Yahoo! There were a ton of advances toward a smoother experience,
but it wasn't until Altavista and Ask Jeeves that we got a search engine. But
relevant results were still elusive. Then came Google, with the deadly PageRank algorithm.
What is PageRank? Basically, it
is an equation that measures the relevance of a site given not only relevant
words, but also the number of references that link to a site. To put it in
simple words, it measures the popularity of a site by how many referrals it has.
This, of course, is just part of the equation, but the effectiveness of
PageRank (named after Google’s Larry Page) made Google the Search Engine of
choice.
Yet, why does Google seem to be
so important to advertisers? As Ben Popper from The Verge puts it,
“Early on in its history, Google learned a valuable lesson. It wasn't just the index of all the documents on the web which was interesting. It was also the logs detailing how people searched that were valuable. The millions of people typing billions of words into Google’s search bar provided the raw material which fueled the machine learning behind Google Translate, a service which quickly outstripped its competitors.”- Source: The Verge
This enabled Google to have very
effective, targeted ads.
This, of course, is very valuable for advertisers, since it means that ads
would be displayed to the people who are most likely to buy their products
and/or services and avoid the people who wouldn't be interested.
Google’s Search (and most of the
rest of its products) seem to be free, but they actually have a hidden cost for
users: data. We use Google products for “free” in exchange of information that Google uses to perfect their business model.
In a sense, that explains why the search results vary from person to person,
especially when you are logged into G+ (just try it with a friend; sometimes
the results would vary mildly, but sometimes they are quite noticeable). Yet,
this means that our Search results would be helpful to us- it’s a matter of
give and take with privacy.
Nonetheless, there are many other
options to Search stuff online, being Microsoft’s Bing, Yahoo!, and Ask.com
some of the most widely known. How do they measure up? ComScore, an internet
company that measures what people do online,
released the Search Engine rankings for May 2013, which points to how strong
Google is in Search.
As you can see, Google dominates the ranking with 66.7%, followed by Microsoft
and Yahoo! with 17.4% and 11.9% respectively. It’s no wonder that Google became
a verb.
Google Products
Google makes almost all of its
revenue with its sales of ads. And by almost, I mean it: 95% of Google’s
Revenue for 2012 came from advertising (page 12, Google 10-k 2012).
Not surprising given that advertising is Google’s core business through the
likes of AdSense and AdWords. Nevertheless, Google has a lot of different
products not related to search, like Google Play or Google Docs. None of them
makes a dent on the huge percentage of what ads mean in revenue to Google.
The rule in Mountain View has
been, as far as 2004’s 10K Annual Report, to follow a 70-20-10 rule. 70% of Google’s efforts go towards optimizing
Search and developing their advertising network- their core business. 20% is
dedicated towards “adjacent areas”, such as Gmail, for example. The remaining
10%, nonetheless, is entirely focused on innovation.
What may really come as a
surprise is that the percentage of revenue coming from ads is very big despite
the recent acquisition of Motorola Mobility. Yet, Motorola is actually bleeding out which makes the acquisition seem like a big mistake. Yet, Tim Worstall from
Forbes makes a compelling case that the price was actually much lower since the Search giant can use tax deductions accumulated by Motorola to its advantage. Nonetheless, this helps us to put Google’s size in perspective.
Google, then, supports its
expansion through products and acquisitions with the cash generated by ads. The
company has the most valuable property online. KPCB’s famous Mary Meeker’s
Internet Trends released on May 2013 showcases on slide 6 how Google rules the
internet in terms of visitors. As for the percentage of the digital advertising market,
Google has 31.5% (Google’s dominance on mobile is more steep, reaching 52.4%). The question is: “What’s the purpose of Google products?”
That is certainly a valid
question since many of Google products are completely unrelated to Search, from
Picasa to Google driverless car (for the complete set of Google products, see
this lengthy list on Wikipedia). Even Cracked.com makes fun of the fact through the following image:
Jokes aside, it certainly seems
that the company has a distinct personality of its own that keeps it making new
things that tilt towards the futuristic like the driverless car,
but often in a way that sometimes even comes as somewhat cartoonish sounding,
like Project Loon. The company embodies Silicon Valley’s spirit.
Currently, the company is divided
into 7 distinct categories (The Verge).
These are: Search, Chrome & Apps, Mobile, YouTube, Ads, GeoCommerce, and
Social. These categories were, according to The Verge, created after Larry Page
took over as CEO on 2011. The chart on that article is pretty nifty, since it
lets us see how Google managed acquisitions throughout the years.
Still, what’s the point behind
such a broad range of products that doesn't seem closely related to Search?
What’s this about driverless cars? As an investor, current or potential, you
must worry about how revenue is being spent.
Nonetheless, there are reasons
behind all this different endeavors. Steve Faktor, from IdeaFaktory, has made,
quite certainly, the best analysis I've read on how the different Google products work together.
Basically, Faktor divides Google
products into four distinct categories: Earn, Entice & Defend, Expand the
Pie, and Experiment (Google’s 4 E’s). The first E groups what brings Google
most of its revenue. The second group is formed by products that not only give
more space to place ads, but also keep users devoting their time to Google.
Here we can find the likes of G+ and YouTube. This mirrors what I said about Facebook wanting to keep eyeballs on their site on my last article.
Publicity fights for time and
views. The more viewers, the more expensive the ad. Take for instance how the
price of a 30-second ad on the Super Bowl reached $4 Million this year. And the more time a person spends on a given activity, say a TV show, the
more likely advertisers would fight to place an ad there- hence the importance
of ratings, as I discussed before.
Add that up to what Sergey Brin
said on the 2004’s investor newsletter,
“[…] incremental resources have diminishing returns in almost any undertaking, so it is not desirable to put all your resources on the core product.”This idea translates perfectly into to Faktor’s third E: Expand the Pie. As you spend more time on the Google network, the more valuable Google becomes. Suddenly, the openness of Android makes sense.
The last E, Experiment, groups
endeavors that seek innovation. There’s little I can add here beside the fact
that it makes sense for Google to devote time this kind of things (besides
being incredibly cool).
Up next... Why competitors must fear Google?
