hypothesis: google as a system advertisers google websites web users websites continue to provide...

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


search)

Access to huge

audience



Money Side

$CPC$CPI(CPA)


AdvertisersGoogle

Websites Web Users


search)

Access to huge

audience

Google Network Members



$CPC$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


search)

Access to huge

audience



$CPC$CPI(CPA)

Subsidy Side


Goog

le

Netw

ork


AdvertisersGoogle

Websites Web Users


search)

Access to huge

audience




$CPC$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


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

Facebook

Microsoft

Yahoo

Google

High

Low

Value Proposition Map– Web Searcher

0

5

10

Value Prop Map - Web Searchers

Google

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





Operation

Regulators

Web Searchers

/Users

Advertisers

Sun Microsyste

ms


Anti-Trust Laws & Privacy/Security Laws

Data


Data

Data

Value Network

Google Brand

Marketing

Google R&D





Operation

Regulators

Web Searchers

/Users

Advertisers

Sun Microsyste

ms


Loyalty

Brand recognition

Sense of Community


Value Network

Google Brand

Marketing

Google R&D





Operations

Regulators

Web Searchers

/Users

Advertisers

Sun Microsyste

ms


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


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 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


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%


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

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 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


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.


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?

BibliographyComScore. " comScore Reports Global Search Market Growth of 46 Percent in 2009." ComScore, Inc. 22 Jan. 2010. Web.

<http://www.comscore.com/Press_Events/Press_Releases/2010/1/comScore_Releases_December_2009_U.S._Search_Engine_Rankings>.

Google. 2009 Annual Report. Rep. Google. 2010 Google 10K. Rep.Google. "Corporate Information." Google. 2011. Web. 08 Mar. 2011. <http://www.google.com/corporate/>.Gralla, Preston. "Obama Anti-trust Chief: Google Is a Monopoly Threat, Not Microsoft - Computerworld Blogs." Featured Blogs -

Computerworld Blogs. 18 Feb. 2009. Web. 1 Mar. 2011. <http://blogs.computerworld.com/obama_anti_trust_chief_google_is_a_monopoly_threat_not_microsoft>.

Hitwise. "Experian Hitwise :: Experian Hitwise Reports Bing Searches Increase 5 Percent in December 2010." Experian Hitwise | the Leading Online Competitive Intelligence Service. 12 Jan. 2011. Web. 1 Mar. 2011. <http://www.hitwise.com/us/press-center/press-releases/experian-hitwise-reports-bing-searches-increase>.

Internet Advertising Bureau. “IAB Internet Advertising Revenue Report”. PriceWaterhouseCoopers, April 2010. Web. <http://www.iab.net/media/file/IAB-Ad-Revenue-Full-Year-2009.pdf>.

Internet Advertising Bureau. “Interactive Avertising Outlook 2009.” 26 Jan2009. Web. <http://www.iab.net/media/file/IAB_Interactive_Advertising_Outlook_2009.pdf>.

Internet Advertising Bureau. ”UK internet advertising expenditure grows 4.2% to £3.5 billion in 2009”. April 2010. Web. <http://www.iabuk.net/en/1/advertisingexpenditure2009.html>.

MagnaGlobal. "Magnaglobal Core Media Advertising Forecast.“16 June 2010. Web. <http://www.magnaglobal.com/wp-content/uploads/downloads/2010/09/MAGNAGLOBAL-Core-Media-Advertising-Forecast-June-2010-Global.pdf>.

Microsoft Advertising. "SearchIgnite Report Shows Conversion Rates Up, Bing Average Order Value Highest - AdCenter Blog - Microsoft Advertising Community." Welcome to the Community - Microsoft Advertising Community. 2 Dec. 2009. Web. 1 Mar. 2011. <http://community.microsoftadvertising.com/blogs/advertiser/archive/2009/12/02/report-shows-conversion-rates-up-bing-average-order-value-highest.aspx>.

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/>.

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