Hypothesis: Google as a System
AdvertisersGoogle
Websites Web Users
Websites continue to provide value to customers (i.e. relevant
search)
Targeting Technology
Access to huge
audience
$CPC$CPI(CPA)
Web users provide traffic to websites
Useful?
Audience?
Hypothesis: Google making money
AdvertisersGoogle
Websites Web Users
Websites continue to provide value to customers (i.e. relevant
search)
Access to huge
audience
Web users provide traffic to websites
Targeting Technology
Money Side
$CPC$CPI(CPA)
Hypothesis: Google making money
AdvertisersGoogle
Websites Web Users
Websites continue to provide value to customers (i.e. relevant
search)
Access to huge
audience
Google Network Members
Web users provide traffic to websites
Targeting Technology
$CPC$CPI(CPA)
Money Side
Goog
le
Netw
ork
Google AdWords through Google sites
Google AdWords through AdSense
http://www.nationalpost.com/
AdvertisersGoogle
Websites Web Users
Websites continue to provide value to customers (i.e. relevant
search)
Access to huge
audience
Google Network Members
Targeting Technology
$CPC$CPI(CPA)
Subsidy Side
Web users provide traffic to websites
Goog
le
Netw
ork
Hypothesis: Google making money
AdvertisersGoogle
Websites Web Users
Websites continue to provide value to customers (i.e. relevant
search)
Access to huge
audience
Google Network Members
Web users provide traffic to websites
Targeting Technology
$CPC$CPI(CPA)
Money Side
Subsidy Side
Goog
le
Netw
ork
Hypothesis: Google as a two-sided System
Strategy
•Objective ▫Goal: To have people leave their
homepage as quickly as possible Implicit objective: To remain the dominant
search engine of choice and continue to grow
Source: As found in the Corporate section of the Google website: http://www.google.com/intl/en/corporate/
Scope•Offerings
▫Search ▫Advertising – 97% of Revenues
Google Website Google Network
▫Operating Systems & Platforms Android, Chrome O/S & Browser
▫Enterprise – 3% of Revenues familiar, easy-to-use Google technology for
business settings
Source: Google 2009 Annual Report
Scope •Geographic Location
▫United States 47%▫United Kingdom 13%▫Rest of the World 40%
•Market▫Advertising - Two Sided Market
Businesses wanting to advertise Web searchers
▫Enterprise Businesses
Source: Google 2009 Annual Report
Core Activities
•Operating search engine•Research and Development•Sales and Support – incl. Google Network
•Brand Marketing
Value Proposition Map – Advertiser
0
5
10
Amount of Users on Platform
Conversion from users
Cost Partners associated with Platform
Value Prop Map - Advertisers
Microsoft
Yahoo
High
Low
Value Proposition Map– Web Searcher
0
5
10
Value Prop Map - Web Searchers
Microsoft
Yahoo
High
Low
Strategy Statement
Advertisers• To remain the prominent web searcher of choice by
offering a large platform of targeted web searchers and the Google Network of partner sites to advertisers through extensive research and design and partnership initiatives.
Web Searcher• To remain the prominent web searcher of choice by
building tools that simplify the search process, having a wide reach of relevant websites, and maintaining a “cool”, trusted brand image for web searchers through extensive brand marketing, research and design initiatives, and the operation of search engine.
PEST AnalysisPEST Forces Macro Trends
Impact on market (demand/competition/supply)
Opportunities & risks for Google
Political -Market Regulation
Anti-trust concerns regarding monopoliesSecurity and Privacy Laws gaining increased importance
Competition: existing competition is subject to anti-trust laws inhibiting growth.Supply: data information gathering used for advertising purposes is limited through laws
Risk: Could inhibit growth of Google. Risk: Could affect the Google brand image, and the way they operate.
Technological Rapid advancements in technology
Competition: innovative technology reduces barriers to entry
Risk: Google could be forced out of the market from lagging technological advancements.
Business Model
Target Customer
•Online search engine users▫Users looking for information easily and
conveniently
•Businesses looking to advertise▫Offers cost effective advertising
Job
•Users – to easily and conveniently locate vast amounts of information to meet their needs
•Advertisers – to obtain a means of getting affordable advertising directed at the ‘right audience’
Customer Value Proposition
Users
Feature BenefitVast Reach of Searches
Variety/Relevance
Prioritized and Relevant Results
Saves Time/Relevance
Everyone uses it Fun and ImagePrice - Free
Customer Value PropositionAdvertisers
Feature BenefitLarge and diverse audience
Relevance
AdSense & Google Network
Reach/Relevance
AdWords delivers ads alongside relevant searches
Customization
Price –Cost per click, impression, or acquisition
Key Resources• Google engineers
▫ Build the apps and IT infrastructure• Brand
▫ Critical to expanding user and advertiser base• Patents and IP
▫ Protection of intellectual property• Servers and data centers
▫ Over one million• Partnerships
▫ Google Network Members▫ Sun Microsystems
Profit ModelRevenue• Usage Model
▫ Web searchers can use service for free as it is subsidized
• Advertising Model▫ Cost-per Click (CPC) – based on auction▫ Cost-per-Impression – pay per appearance▫ Cost-per-Acquisition – advertiser only pays if someone buys or signs up
Costs – largely fixed costs• Costs of Revenue
▫ Traffic acquisition costs, data center operations costs
• R&D Costs▫ Personnel compensation
• Sales and Marketing Costs▫ Customer services, sales and support functions, advertising and promotion
• General and Admin Costs▫ Personnel and facilities, finance, HR, IT, legal, professional services fees
Profit Model Cont’dMargin Model•High Margins
▫ Operating margin reasonably high at 35.2%
Resource Velocity• Needed high capital investment initially when
establishing itself, but now resource velocity is high (Rev/IC = 3.04)
Key Processes• Operating search engine
▫ Indexes millions of pages and returns searches for users queries
• Research and Development▫ R&D centers all over world▫ Aim to launch innovative products early and often
• Sales and Support▫ Sales teams foster relationships with advertisers and internet
companies
• Marketing▫ Targets small businesses
• Advertising▫ Various methods – search, web, YouTube
Target Customer Job Value Proposition
Key Processes
Profit ModelKey Resources
Easily locate different forms of information
Obtain affordable advertising
directed at the right audience
Prioritized/Relevant Results -
> Saves time/Relevance
Price – Cost per click, impression,
acquisition
AdWords delivers ads alongside relevant
searches -> Customization
Vast reach of searches ->
Variety/Relevance
Everyone uses it -> Fun &
Image
Adsense & Google Network
-> Reach/Relevanc
e
Large/Diverse Audience -> Relevance
Google Engineers
Brand
Patents & IP
Server/Data Centers
Usage Revenue
Advertising Revenue
High Margins
High Velocity
R&D CostsTraffic Acquisition
Costs
Sales and Mktg CostsData Center
Op’n Costs
Sales & Support Advertising
R&D New Products
Marketing & Promotion
Operating Search Engine
Google Business Model
Online search engine users
Businesses looking to advertise
Partnerships & Network Members
Price - Free
Users Advertisers
Value Network
Google Brand
Marketing
Google R&D
Google Sales & Support
Google Websites (i.e
YouTube. Gmail, etc)
Google Search Engine
Operation
Regulators
Web Searchers
/Users
Advertisers
Sun Microsyste
ms
Google Network Members (incl.Fox Interactive Media)
New Products/ Services
Google Toolbar with downloadsCPC /CPI
Revenue
Use
AdSense Ads
% of CPC Revenue
Back End Infrastructure
AdWords Ads
Use
Use
KnowledgeServices, RevenueIntangible Benefits
AdWords Ads
Value Network
Google Brand
Marketing
Google R&D
Google Sales & Support
Google Websites (i.e
YouTube. Gmail, etc)
Google Search Engine
Operation
Regulators
Web Searchers
/Users
Advertisers
Sun Microsyste
ms
Google Network Members (incl.Fox Interactive Media)
Anti-Trust Laws & Privacy/Security Laws
Data
KnowledgeServices, RevenueIntangible Benefits
Data
Data
Value Network
Google Brand
Marketing
Google R&D
Google Sales & Support
Google Websites (i.e
YouTube. Gmail, etc)
Google Search Engine
Operation
Regulators
Web Searchers
/Users
Advertisers
Sun Microsyste
ms
Google Network Members (incl.Fox Interactive Media)
Loyalty
Brand recognition
Sense of Community
KnowledgeServices, RevenueIntangible Benefits
Value Network
Google Brand
Marketing
Google R&D
Google Sales & Support
Google Websites (i.e
YouTube. Gmail, etc)
Google Search Engine
Operations
Regulators
Web Searchers
/Users
Advertisers
Sun Microsyste
ms
Google Network Members (incl.Fox Interactive Media)
Anti-Trust Laws & Privacy/Security Laws
Loyalty
Brand recognition
New Products/ Services
Google Toolbar with downloads
Sense of Community
CPC /CPI Revenue
Use
Data
AdSense Ads
% of CPC Revenue
Back End Infrastructure
AdWords Ads
Use
Use
KnowledgeServices, RevenueIntangible Benefits
DataDataAdWords Ads
Google Created Value!
Net Share Gain
Market Loss
8.6% -0.1%108.50%
100%
Adjacent Market
New Business
2009 Revenue
Sources of Revenue
2008 Revenue
Source: Google 2009 Annual Report
Source of Revenue Statements
Google US UK Rest
Market Growth -0.1% -3.4% 4.2% 2.3%
Net Share Gain/(Loss) 8.6% 8.7% -5.9% 14.3%
Total Revenue Growth 8.5% 5.3% -1.7% 16.6%
Source: Comscore and MagnaGlobal
Revenue Decomposition (by Geography)
2009: 9%Revenue Growth
2008: 31%
2009: 5%United States
2008: 22%
2009: (2%)United Kingdom
2008: 20%
2009: 17%Rest of the world
2008: 51%47%
13%
40%
Market Focus
United States
United Kingdom
Rest of the world
Source: Google 2009 Annual Report
Revenue Decomposition (by channel)
2009: 9%Revenue Growth
2008: 31%
2009: 9%Google Websites
2008: 36%
2009: 15%Aggregate Paid
Clicks2008: 18%
2009: (7%)Average Cost Per
Click2008: 7%
2009: 7%Google Network
Websites2008: 16%
Source: Google 2009 Annual Report
Key Factors to Value Creation• Key characters: web users, advertisers and competitors
• Increased customer base through search (Google directs 70% of resources to this)▫ Google is ranked as the top search property worldwide
with the number of searches increased by 58%from 55k to 88k in 2009.
Source: Comscore
• Increased aggregate paid clicks through maintenance of Adsense activities which are tailored to value proposition of relevance ▫ “66% of Internet users would click on more online ads if
they were better targeted to them.”Source: Internet Advertising Bureau
Gaining Global Market Share
• Competition:▫ Gaining global
search engine market share 2009 Google:
82.01% 2009 Yahoo!:
7.19%2007 2008 2009
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
Google - Global Yahoo - Global
Source: NetMarketShare data for 2007-2009
NOPAT
NOPAT
Excluded from calculation:•Impairment of equity investments•Interest income and other, net
Invested Capital
Invested Capital
Excluded from calculation:•Non-working cash and marketable
securities•Deferred Income taxes•Non-marketable securities•Goodwill
ROIC Decomposition2009: 78%
ROIC Growth2008: 65%
2009: 100%Pre-tax ROIC2008: 91%
2009: 35%Operating Margin
2008: 30%
2009: 2.84Capital Turn2008: 2.95
2009: 22%Tax Rate
2008: 28%
ROIC Decomposition (Operating Margin)
2009: 35%Operating Margin
2008: 30%
2009: 37%Cost of Revenue
2008: 40%
2009: 12%R&D
2008: 13%
2009: 8%Sales and Marketing
2008: 9%
2009: 7%General Admin
2008: 8%
ROIC Decomposition (Capital turns)
2009: 2.85Capital Turn2008: 2.95
2009: 12Working Capital
2008: 13
2009: 4.7PP&E
2008: 4.7
2009: 27Intangible2008: 30
2009: 56Prepaid
2008: 72
WACC
WACC Vs. ROIC
Google is capturing value!
•ROIC far exceeds WACC•Invested capital decreased from prior
year but NOPAT grew•Increase in revenue and cost control
(both variable and fixed)
Test: How value was capturedKey Characters
Google Network Members
Content Distributors
Advertisers
Motivation
Appropriate Profit
2007 2008 20090%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Margins of Google Network Member Websites vs. Google Websites
% Margin on Google Network Member Websites% Margin on Google Websites
Google is Doing Well!C
reat
e V
alu
e
Capture ValueYesNo
Ye
sN
o
Sensitivity Analysis
Why is Google doing well?
Why? Buyer Utility Map – Web Users
Web Users Purchase Delivery Use Supplements
Maintenance
Disposal
Customer Productivity
Relevant & useful information (e.g. search)
Access to broad range of Google products
Continuous improvements to relevance and usefulness
Simplicity Easy to use interface
Consistent experience across platforms
Convenience Free! Fast search results
Easy access to complimentary products
Risk Sites are available when they need to be
Page ranking system to ensure useful websites
Integration of sites reduce compatibility problems
Fun and Image
Environmental Friendliness
Google continues to create unique value for web users!
Why? Buyer Utility Map – Advertisers
Advertisers (AdWord Users)
Purchase Delivery Use Supplements
Maintenance
Disposal
Customer Productivity
Access to huge Google Network – provides huge audience
Targeted/relevant ads
AdWords show up on wide range of other Google products
Growth in Google products
Simplicity
Convenience Availability of AdWords consultants
Risk Pay-per-click and pay-per-impression
Control over campaigns
Fun and Image
Environmental Friendliness
Google continues to create unique value for advertisers!
Why? Economic Formula
Advertising Revenues:
$22,888,804,000Cost-per-click +
Cost-per-impression
# of Web Users
x% of users who click
=CPC Ad Revenue
xCPC(Quality, # of Advertisers, WTP)
# of Impressions
xCPI (Quality, # of Advertisers, WTP)
=CPI Ad
Revenue
Resources: Technology, Brand, Search algorithm,
Partnerships, Infrastructure
Processes: Research and Development
Resources: Technology (Targeting/ Relevance)
Advertiser dependent and environmental
factors
Why? Economic Formula
Google Network Members and other
partners
Operating data centers 11.7%
R&D 12.4%
Sales and Marketing 8.7%
General and Admin. 7.3%
Revenue 33%
23% AdSense
3.9% Distribution arrangements
Advertising Revenues:
$22,888,804,000Cost-per-click
Cost-per-impression
• Cost-per-click and cost-per-impression models for AdWords with auction-style prices.
• Very dependent on volume of users of Google Websites and Google Network Members through AdSense.
Source: Google 2009 Annual Report
Why is Google doing well?
Customer Value Proposition
Users: Relevant and useful information, increasing breadth of web servicesAdvertisers: Increasing the audience through Google websites
Economic Formula
Revenues driven by high volume of users who click or view ads, with high margins on each click or impression.
Key Resources and Processes
Resources: IT infrastructure + skills to build and host web services, search algorithm and technology to deliver targeted ads.Processes: Research and development to create and improve services, and sales & support activities to build and maintain relationships.
So what?
•What happens if one side of this two-sided market disappears?
Questions?
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NetMarketShare. "Search engine market share news." Market share for browsers, operating systems and search engines | News. N.p., n.d. Web. 3 Mar. 2011. <http://marketshare.hitslink.com/search-engine-market-share.aspx?qprid=4&qptimeframe=Y&qpsp=2007#>.
Prince, Brian. "Microsoft Bing Security Covers Familiar Ground - Security - News & Reviews - EWeek.com." Technology News, Tech Product Reviews, Research and Enterprise Analysis - News & Reviews - EWeek.com . 3 June 2009. Web. 01 Mar. 2011. <http://www.eweek.com/c/a/Security/Microsoft-Bing-Security-Covers-Familiar-Ground-211293/>.