Google's Business Model and Growth Strategies

Google's Business Model and Growth Strategies

Google

Google, which that has become synonymous with the verb “search”, is an internet technology and advertising company. The company says that it is the only website in the world that wants its users to leave its homepage as soon as they visit it. It specializes in internet searches and related advertising services. It maintains a large index of websites and other online content, which are accessible through its search engine. The company generates revenue primarily through online advertising.

Google’s business model

Google dominates the search marketplace and commanded a 67.5% search share in July 2009. Its core competence is represented by its spider "bots", which constantly crawl over millions of websites for pieces of text, and use a secret and constantly changing algorithm to rank the most relevant, descriptive, and popular pages.

Google generates the majority of its revenue through ads. In a short span of just over 11 years, the firm has emerged as a threat to other advertising media such as newspapers, magazines, and TV. Google has two advertising programs, AdWords and AdSense.

AdWords

• AdWords is a cost per click (CPC) program that enables bidding for keywords that list in paid search listings. Advertisers design an advertising message and bid for a key word that best relates to their ad, but the same key words are typically submitted by several bidders, so it is the highest bid that gets an associated ad priority placement when customers search using the key word. Ads are separately labelled as "sponsored links" or "Ads by Google" to distinguish them from search results. Google earns most of its revenues from these tiny ads. The marketer willing to pay the most for a particular word has their ad appear as the top sponsored link.
• Most of Google’s AdWords customers pay the company on a CPC basis, which means that an advertiser pays only when a user clicks on one of its ads. It also offers AdWords on a cost per mille (CPM) basis that enables advertisers to pay based on the number of times their ads appear on the company’s websites and its network members’ websites as specified by the advertiser.
• Whenever a user clicks on the sponsored link, the marketer pays Google the bid amount. While each click may cost only a few pennies, millions of such clicks every day make this a multi-billion dollar business for Google and other competitors such as Yahoo and Microsoft.

AdSense

• Google partners with several hundreds of thousands of partners, from bloggers to major online publishers, on its Google AdSense program. This program inserts display adverts in Google’s affiliate network (Google Network) that generate advertising revenues by paying affiliates on a CPC basis. It delivers ads from its AdWords advertisers that are relevant to the content or search results on partner sites.
• AdSense offers both a CPC and CPM program. Advertisers either pay Google a fee each time a user clicks on one of its ads displayed on Google Network members’ websites, or pay CPM pricing for their displayed ads. A portion of the advertiser fee is paid to the network members as traffic acquisition costs.

In addition, Google also offers various advertising formats on YouTube, Google TV Ads, and online ad serving and management services through DoubleClick. Finally, to help advertisers measure the effectiveness and efficiency of their ads, Google provides free tools such as Google Analytics, a website optimizer, and insights for search and ad planners. From these services it receives licensing fees as revenues.

Google’s advertising revenues

Google’s advertising revenues have steadily increased over the period 2007–09 from $16,413m to $22,889m, reflecting an ever-increasing demand for its services. However, the importance of advertising to its business is illustrated by the fact that almost its entire revenue came from ad spends. In 2009, for instance, 96.8% of its revenues came from ads, a marginal decline over 2007–08.

Table 8: Google advertising revenues ($m), 2007–09
	2007	2008	2009
Total revenues	16,594	21,796	23,651
Ad revenues	16,413	21,129	22,889
Ad revenues (% of total)	98.9%	96.9%	96.8%
Fiscal year end December, 2009

Source: Company information

Google’s strategies

Google is adopting an aggressive acquisition strategy, having bought YouTube for $1.65bn in 2006 and DoubleClick for $3.1bn in 2008. DoubleClick is an online ad serving and management technology company, which is primarily involved in display advertising. In August 2009, Google purchased On2 Technologies, which develops video compression technology.

Other acquisitions include Episodic, which carries out live video streaming to complement YouTube, and online ad vendor Teracent. However, the company’s recent pullout from China is expected to benefit Chinese search engine Baidu, while adversely impacting Google's online ad revenues.

The company extended its web search partnership with AOL for five years in 2010, and expanded the cooperation to mobile search and online video, two areas where growth expectations are high as the media business is shifting to digital communications. These deals help Google defend its dominant share of the web search business against smaller rivals such as Microsoft and IAC/Interactive.

Partnering with social networking sites to attract advertising dollars

After a string of failed attempts to enter the lucrative social networking business through projects such as MySpace, Orkut, Jaiku, and finally Google Buzz, the company is exploring other alternatives. Google, Yahoo, and Microsoft have signed agreements with Facebook, MySpace, and Twitter to integrate real-time results into their search listings, underscoring the importance of real-time as the future of search. Under this strategy, a brand that is listed with at least two of the three will appear prominently within any results.

Twitter has already earned $25m ($15m from Google and $10m from Microsoft) by displaying its microblogging content in search results. Google is also launching a new service called Google Realtime Search, which can be used separately from the company's main search engine to help people find the latest web conversations on regional and global hot topics on Facebook and Twitter.

Facebook, on the other hand, had earlier rejected both Google's and Microsoft’s takeover offers, so Microsoft took a different approach and invested $240m in the company in exchange for a minority stake. The relationship continues to be leveraged as a strategic force against Google. Facebook is now challenging Google’s Gmail with its own Titan service. It also struck a new deal with Microsoft that will give it back its display ad sales in exchange for giving Microsoft's Bing a bigger search presence on its site.

Furthermore, Facebook is entering social semantic search. Bing will power Facebook’s search engine, Open Graph. For advertisers, this implies that they can send across a more targeted message based on the interests that the consumers themselves selected or “liked” and “shared” on their graph. Google is concerned about this development, since it could adversely impact its search advertising business.

Strategic initiatives to boost display advertising

Google’s core competency is search advertising as a result of its search market leadership, which implies that more users visit its site than those of its rivals. However, it has not had so much success in its display ad business. Google's attempts at contextual targeting have not produced satisfactory results, while it has only slowly involved itself in behavioral targeting, recently adding re-marketing capabilities.

To foray into the lucrative display advertising business and to counter rival Yahoo, which has gained strong traction in this segment, Google acquired YouTube in 2006. This will help the company to host display ads. YouTube has already sold 90.2% of its US homepages to display advertising this year. YouTube has tripled the number of "monetized views" and earns ad revenue on more than a billion of the online videos watched weekly. More importantly, behind Google, its parent company, YouTube has become the second-largest search engine. This has increased the demand advertising space on YouTube.

Google also said that ad-targeting technology from DoubleClick, which it bought in 2007, is at the core of its online display advertising strategy. DoubleClick acts as a display advertising "stock exchange" for which Google provides a simple tool for businesses to create online marketing campaigns. In addition to DoubleClick, Google recently added dynamic ad generator Teracent to scale up its display ad business.

However, Google has had to deal with the mounting losses at YouTube. The company generated about $375–400m in revenue and $425–450m in costs in 2009. The business has since turned around and is now expected to contribute $550–600m in revenue and $500m–525m in costs in 2010, which means that it will generate a profit in the range of $50–75m.

In what is being called a major milestone by Google, the company is also partnering with Omnicom in display advertising, where Omnicom will buy display ads for its clients through Google over the next two years. In return, Google will work with Omnicom to build a global "trading desk" that allows the company to buy display ads more easily on Google's ad exchange using an auction-like system that matches ad buyers and sellers in the advertising space of large groups of websites.

However, the trend is raising conflict-of-interest concerns in industry circles. Industry experts are worried that marketers may not be in a position to know whether ad dollars are being used effectively. Additionally, Omnicom may not be able to seek out the best deals for its clients, and entering into such a definite agreement with one company could potentially discourage rivals from associating with it.

New features are targeted at increasing users and ads

Bing is steadily gaining search market share, having only had 2.9% compared to Google’s 67.5% in July 2009, although this figure was 10.8% if Bing-powered Yahoo searches are taken into account. This could potentially threaten Google’s long-term profits. .

To counter this challenge, Google launched Google Instant in September 2010, a new feature on its search engine that guesses what a user is searching for as soon as they start typing in its main search page. The feature fills in the search box with shaded words as they type, attempting to complete the user’s thoughts before he types them. It then instantly shows search results based on what is typed in the box.

Search marketers are going to have to rethink their strategies to push their sites higher into Google's results. The crux of the issue will now be getting a company, brand, product or service to appear as people start typing.

Google has also introduced the “priority inbox” enhancement in Gmail, which prioritizes email messages for consumers. Priority inbox filters incoming email messages into three sections: “important and unread”, “starred”, and “everything else”. Marketing mailers welcomed the feature, saying that it would help them to better target consumers.

Google is also reaching out to small businesses through a blog that includes a series of posts and information about Google's products, features, and projects. For a flat fee of $25 a month, Google will make an advertiser’s listings on its webpage stand out. Whenever a paying user’s key word comes up in a search page or on a Google map, it is highlighted with a bright yellow tag.