Key factors behind Google’s early success
Many key factors contributed to Google’s early success making Google a market leader in an unattractive industry.
- Technology: Technology played a major role in Google’s growth. They implemented cutting edge innovative systems that catered to the needs of all parties involved. The creators at Google had always focused on the importance of scalable architecture to provide a cheaper and more efficient service “Google is designed to scale well to extremely large data sets.” Google’s focus on innovation and developing better technology based on their R&D capabilities allowed them to overcome the first mover advantages of its competitors and attracted more network users (both advertisers and consumers), thereby positively contributing to their success. In addition, their Page Rank Algorithm delivered more reliable search results than their competitors therefore attracting more users and further contributing to their positive network effects.
- Business Model Innovation. Google’s model was to attract consumers or users by providing them with free service, made sustainable through revenue generated from advertising.
Paid Listing increased and became the backbone of Google’s business model. Google attracted advertisers by adapting their original model from a cost per click model to a click through rate model, which allowed for more effective services. By perfecting the nature of contextual paid listings, Google not only created a highly effective revenue generator, but it also produced a better experience for its users. One goal was to ensure that their contextual paid listing was at least as relevant and useful to users as the search results themselves.
- Product - Focus on The User Experience. Product decisions at Google were driven by the optimization of first the user experience, then generating revenue. The people at Google firmly believed that the better the user experience, the more easily revenues would follow. They offered innovative and effective products that served a growing demand. As more and more users began using their services, more revenue was generated through advertising and as a result of a positive network effect, contributed to Google’s success.
Google capitalized on positive network effects to form an easy to use and simple line of products where its users could search anything and everything and the advertiser could place their ads in effective locations relative to search consumers. The model was mutually beneficial both the sides of Google’s network.
- Capitalization on Industry Growth & Size: Google targeted a growing market and as a result had 500 million users by the end of 2003 as noted by Exhibit 5 which highlights the industry growth of 120% (Appendix A). The web search was the evolution of search growing large enough to overpower the traditional search demand and capabilities.
- Strategic Partnerships: Google formed Strategic partnerships (AOL, YAHOO already partnered with Overture) and as a result Google overtook Overture and other web search models in the market.
Overall, Google developed a sound business model, through customer-focused innovation and technology geared towards creating optimal conditions to satisfy a two-sided market. Their business model allowed revenue to grow and success to follow.
Search a winner-take-all business?
Certain industry dynamics can lead to a winner-take-all scenario. This occurs when a network market situation can be served by a single platform provide and one market leader emerges as the dominant player. Search traditionally involves the dynamics of two-sided networks, where advertisers and searchers (or consumers) interact with one another through the search platform provider or intermediary. For search to be a winner-take-all business the following three conditions must hold true:
- Multi-Homing Costs higher for at least one user side then a winner-take-all dynamic is optimal.
Upon examination of the two parties involved in search, a winner-take-all situation could occur as multi-homing costs are high for at least one user side, namely advertisers.
Advertiser In Search: One platform would be an optimal situation for advertisers and they would benefit from a winner-take-all scenario. When an advertiser uses multiple platforms to reach consumers additional costs or homing costs are incurred. For example, homing costs for advertisers include the time to manage various platforms, or the time to design different ad requirements for multiple search engines, and even the extra diligence involved in ensuring that all the channels portray one cohesive message. Therefore, advertisers incur unnecessarily high multi-homing costs, and ideally the advertiser would be benefit if there was only one platform to reach end consumers. However, since multiple search engines have a wide variety of users with multiple platforms available at no cost per use advertisers must still advertise on a variety of platforms to be effective.
Consumers In Search: As evident in the case, a search consumer uses a search engine that best fulfils his/her needs. In search, there are low homing costs for individual consumers. They can use multiple search engines as most platforms are free, easy to use and involve little learning curve or costs to use multiple search engine. As shown in Exhibit 8 from the Case (Appendix B) in the case about 23% of the users use multiple search engines between Yahoo, Google and MSN, which suggests that from the consumer perspective there are low homing costs.
As the winner-take-all conditions stipulates only one user must have high multi-homing costs, therefore search would qualify and condition one would be satisfied.
- Network effects are positive and strong for at least one party or user side.
Advertiser In Search: For an advertiser that utilizes a search platform they would benefit from a winner-take-all dynamic as number of users viewing the search engine increases the more attractive it becomes for the advertiser. Advertisers also face positive cross network effects, whereby the value to them as users is positively correlated with the number of consumers using the search platform. On the other hand Advertisers have negative same side effects, as the more the advertisers that use a certain platform may decrease the value to the advertiser as there will be more competition
Consumers In Search: For searchers it doesn’t really matter how many people are using the search engine in this industry, nor does it matter for the user the number of advertisers who promote through search. Consumers in search do not have similar same side or cross side network benefits.
As is the case in the previous condition, the strong and positive network effects for the advertisers combined with high multi homing costs stipulate an optimal winner-take-all scenario.
- Demand for differentiated features is limited for at least one party or user side.This is not necessarily the case within the search industry and as both parties will be segmented based on features that best fit their needs. Furthermore, in search features may be more attractive to different niche users and therefore negate the losses associated with not having a single platform. Advertiser In Search: Advertisers want to reach as many searchers in their target market as possible. As long as they are doing that they may or may not care about the high tech functionality that a search engine provides them. Consumers In Search: If we look at the needs of the searchers, a majority of them use search engines as a primarily search tool but there is a number of users who prefer other features. Looking at Exhibit 8 in the case we can see that Google users prefer speed and relevance, whereas Yahoo and MSN are more into the portal features. Thus preference for features does exist in Search and the winner-take-all scenario does not hold true in this case.
To conclude not all three conditions are satisfied, therefore search is not an optimal winner-take all business.
In addition to enhancing its core search businesses, should Google also branch out into new arenas, such as 1) building a full-fledged portal like Yahoo!’s; 2) targeting Microsoft’s desktop software hegemony; and/or 3) becoming an ecommerce intermediate like eBay?
Using Strategic Positioning Analysis methods, it is possible to approximate which product will offer the best strategy for Google in the future. The products are 1) Portal – the option to build a Yahoo/AOL/MSN-like portal. 2) Online Software/Document (OS) – the option to offer a Windows-like OS, online with office document support. 3) E-Commerce – to build an online marketplace like that of E-Bay.
Our team has identified four parameters for attractiveness of a product and three parameters for competitive positioning as key determinants to determine the best strategy.
Segment Attractiveness
- Market Size: Google would benefit from determining the market size for each product offering. Yahoo’s market size is 345 Million whereas eBay is 80 million. A portal can attract more customers than an online market place. This is also apparent since a portal also has shopping as a product offering. But without OS, no user can use any product or features. Hence the OS users could be considered as the entire user base. An OS with document editing capability is a basic functionality for most internet users.
- Intensity of Competitors: Another parameter is the intensity of competitors. In the portal business, there are many players. In the online marketplace, though eBay is the major player, portals have also started offering “shopping” as a product. This reduces the number of buyers and sellers in a particular marketplace. In OS, there is only one big player, Microsoft windows.
- Innovation: The next parameter is innovation in product business models. This parameter evaluates the attractiveness for Google in terms of the business model to determine which option will create the most innovative and new opportunities for revenues. The portal and online marketplace industry model would be very similar to the business model of Yahoo or any other portal.
- Number of Platforms: The last parameter that we used for attractiveness is the number of platforms that exist and their weight. This parameter evaluates the possibility of other players entering Google’s platform and the risk of envelopment.
Competitive Positioning
- Market Share: The first competitive positioning parameter is the market share with respect to search query rates. Since Google’s main technology is search, it can better use the technology in Portal and online marketplace businesses but not necessarily as much as in the online OS.
- Innovation Level: The second parameter is the innovation level. This parameter identifies the technology positions of the new product launch. We identify the importance of the advancement of technology and see how Google can position itself with each of these products. The portal and online market place is like a me-too product. But online OS is a new technology and Google can maintain a better competitive position
- Risk: The last parameter is the risk involved in replicating the product by other companies. We qualitatively measure the possibility of other companies developing a similar product.
Based on our overall Strategic Positioning analysis (see Appendix C) as well as the pros and cons of each option (see Appendix D), the OS product is the most attractive avenue for Google moving forward. As the market conditions change and competitive threat grows, it would be wise for Google to adopt additional strategic positioning that will allow them to sustain their position.
Google should differentiate with additional service and/or increasing product quality. Based on the attractiveness of the Online OS, Google should branch out into this area. The OS product is an entirely new area and business model for them that can be seen as offering more value to Google in future. Google could charge an initial low cost fee or recurring fee from the users as well, who at present are using Google products for free. Moreover, Google could use their existing base and challenge Microsoft by bundling software and offering it at a discount price.
Appendix
Appendix A – Search Industry: Overall Analysis
GROWTH/SIZE
- Growing Market, Number of Users 500 Million and growing
- International Growth Rate
- See Exhibit 5 – 120% Growth
- Web grew too large for traditional search demand and capabilities (i.e. Human editors)
RIVALRY
- Large Companies with media budgets > than 1 Million = 12% paid listing accounts & 20% paid listing revenues
- One Clear Market Leader – Overture with 55% of the global paid-listings revenue in 2003 compared to Google’s 35%
- Clear market leaders & Increasing competition
- Inktomi, Overture, Yahoo,
- Yahoo, AOL, MSN, Alta Vista, all housed and dominated by Overture – major search portal
BUYER POWER:
- Low switching Costs
- Two Sided Markets – Both with High Buyer Power – can go to any company at any time…
- Consumers – have high buyer power – they can go to multiple search engines
MANY ENTRY BARRIERS – HIGH
- First- Mover Advantages of other key players (i.e. Overture):
- R& D Capabilities –
- Exclusive Partnerships (AOL, YAHOO already partnered with Overture)
- Lack of initial Networks Effects
SUBSITITUTES
- N/A
Appendix C – Strategic Position Analysis
Appendix E – Branching Out
| PORTAL | |
| PROS | CONS |
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| WINDOWS ONLINE OS | |
| PROS | CONS |
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| BONDS (HONG KONG MARKET) | |
| PROS | CONS |
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| E-COMMERCE | |
| PROS | CONS |
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