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December 2008 Everything you always wanted to know about Google

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Google key success factors : Web specific ?

Scalability

Ability to easily grow atmarginal costs

Applied to infrastructures :ability to adapt its size tohigh load & volumes

Applied to businessmodels : ability to

monetize millions of users

Network effects Data mining

Openness Cocreation Business model

The traditional walledgarden1 media strategybecomes irrelevant

Content and services mustbe open and interoperableto favor audiencecirculation

The utility of a good or aservice varies with thenumber of users

The reach of a criticalmass of users constitutesa significant barrier to theentry

The web offers theopportunity to exploit andanalyze a very largeamount of data

Users behavior can beanalyzed to createmonetizing value

Non-traditional actorsbecome part of the valuechain

Users, content creatorsand external developersare given the tools tocreate new markets andenrich services

Advertising is not a marketbut a business model

Any market that attractadvertising is a target forGoogle

1 Network or portal which offers only its own content or services to users


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Why wont Google be affected by the crisis ?

Why is Google trying to change the mobile world ?

Why isnt YouTube a content portal ?

Why does Microsoft fear Google ?

How Google wants to compete with Facebook ?

Why is Google buying satellites ?

How does Google buy traffic ?Why did Google acquire DoubleClick ?

Why doesnt Google monetize all its services ?

How does Google capitalize on Open Source developers work ?

How did Google capture the offline advertising market ?

Why is Google stealing our voices ?

Is PageRank a really competitive advantage ?

How does Google turn advertising into information and performance ?

Annex: Network effect, two-sided market, glossary, financial , contact

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3

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5

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11

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Why wont Google be affected by the crisis ?

During a crisis,performanceadvertising gainsmarket shares

+ 3% 2007-2008 1

YouTubemonetizationincreases

Estimates 2008 :Revenues = 200 M $1

Monetisation ofthe InternetMobile audience

260 millions mobilesubscribersworlwide oct 2008 1

Explosion of thenon advertising

revenues

+450% 2007-2008

Performanceadvertising

On linevideo

InternetMobile

Licenses andother

revenues

Google is in a situation in which it can resist the economic crisis and find

new revenue sources, both advertising and non-advertising1 : faberNovelestimates

4 levers will allow Google to increase its revenues amidst the economic crisis

Revenues 2008 Revenues 2012

Bn$ 201

Bn$ 351

1


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Why is Google trying to change themobile world ? (1/2)

Mobile industry is based on a traditional locked values chain.

Entry barriers stop Google from applying its models to the mobile industry:

TerminalOperatingSystem

Portal Operator Web Contents

Examples:

Limited Network AccessAccess restricted to services/contents

and to their improvement

Terminals assigned to a unique operator

Difficulty of interconnecting networks

Operator portals favored over other portals

Services offered by terminal manufacturersfavored over other services

Closed operating systems

2

The mobile industry is not suited for the Google development modelbased on openness, interoperability and network effects.


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Why is Google trying to change themobile world ? (1/2)

In order to duplicate its open model, Google designed a three fold strategy :

1 Operating System

Location-based

services

Cab4me FreeFamilywatch

Games

Golfplay JOYit

Social

Networks

Jaiku 3Wertago

Collaborative

Tools

ShareYourBoard

Grand central3

2 Federal Communications Commission

Google breaks open the mobile industry value chain to create an environmentthat will be fit to the distribution of its products and monetization model.

3 Acquisitions

Android : Open SourceO.S.1

Lobbying Telco partnerships

Android Developer Challenge:Contest for developers to createnew applications for Android

Open Handset Alliance:

Common initiative of 34 mobilephone industry players(manufacturers, suppliers anddistributors) aiming at spreadingAndroid

Google candidacy for mobilelicense attribution aims to force theFCC2 to impose an opennessclause to the winner

A success : clause partiallyimposed on the winning bidder,Verizon.

Pressure from Google to forceoperators to offer its applicationsas default options

Sharing of advertisingrevenues between Google andoperators

2

In addition, Google developed and acquired mobile devices applications :



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Why isnt YouTube a content portal ? (1/2)

YouTube acquisition is part of a strategy to monitor key content and audience hubs.

YouTube has already won the audience battle

1 NewYork Times2 Hitwise 2008

75%60%

9%16% 4%8% 2% 3% 1%1%

May 2008

May 2007

Organise informationGive access to

information

Monetise contentsthrough various

sources of audience

A new information silo: videosearch

Next : Speech to texttechnology : informationsearches within videocontents

YouTube bandwidthspending estimated to reach1M$/day1

Broadcasting of contentsthrough Google websites aswell as other sites

Revenue sharing logic

Market shares of 5 leading video websites,United States (may 2008 vs.may 2007)[%]2

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YouTube Program Partner :Payed providers of semi-professional content

Broadcasting contractswith major content providers

Encourage contentproviders to use the service

Attract as many viewers aspossible

Monetize through relevantadvertising tools

Unlike its competition, YouTube follows an open logic and focuses primarily ondeveloping content distribution tools :

YouTube acts as the platform of a two sided3 market composed of contentproviders and video seeking users.

Why isnt YouTube a content portal ? (2/2)

2 Clickable text advertising displayed on a video 3 See Annex

Broadcasting videos onYouTube website and otherGoogle sites (ex :Google.com, GoogleNews)

Exporting videos (blogs,social networks) anddeveloping API1 foradvanced broadcasting onthird party websites

Broadcasting on all videodevices : television, mobiles,multimedia players, video

consoles

Traditional advertising:AdSense and banners

In-video advertising :Pre-roll, post-roll, overlay2

Brand advertising:broadcasting video adswithin an environmentcoherent with the brands

image

E-Commerce: Affiliation of

partner websites (Amazon,Itunes, video games)

1 Application Programming Interface. Standardized programming protocol allowing applications to communicate

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Why does Microsoft fear Google ?

Googles ambition isnt limited to in browser Web services, but extends to

any online or offline application market.

Google sets out to enter the online application market, MSFTs cash cow :

Google partly destroys Microsofts market when shifting value

from offline to online

Launching of the Office Googlesoftware pack: a word-processor,a spreadsheet program, apresentation tool and a calendar

Free alternative to MicrosoftOffice pack

Acquisition of SketchUp, a 3Dmodeling software with a freeversion made available

Disruption of offline applicationmarket segments

Launching of Google Gears:Open Source project allowing anoffline use of online applications

Claimed ambition of becominga standard and encouragingonline languages as opposed to

offline programming languages

Consolidation of the onlineenvironment

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In 2007, Google launched Opensocial : a series of multi platform API allowing

developers to create compatible applications with partnering social networks,Ex : Slideshare application available on Linkedin and hi5

OpenSocial is not a Facebook competitor but a meta-social network .

Google wants to become the social data search engine and to monetizethis data, leveraging network effects.

Network effects

How Google wants to compete with Facebook ?

Facebooks platform is limited, Googles is the whole Web

5

Networkeffects

Networkeffects



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Why is Google buying satellites ? (1/2)

Since 2005, Google has been multiplying investments in all kinds ofinfrastructures:

WifiGratuit

Wimax

Backbone1Baloon

Wifi

Satellite

60 M$ Investment

Internet access indeveloping countries

Partnership

A mobile high-speedinternet accesstechnology

A 100 M usersmarket by the end of

2008

100 M$ investment

Expansion of high-speed networks

Partnershipannouncement

Internet accesstechnology superior tosatellites for isolated

areas

Free Wifi in Mountain View Investment in Fon: shared Wifiaccess

1 Long distance high-speed networks, core of the Internet network

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Internet infrastructures is actually Googles business

infrastructure:Traffic on Google websites depends on internet infrastructure development andavailability (Backbone, Wifi, Satellite,)

Google has three objectives when investing in the upstream part of its valuechain:

Strengthen and secure existinginfrastructure

Favor high-speed Internet access

Prioritize Internet access forunconnected countries or populations

Strengthening and securing existing infrastructurelightens Googles dependancy on its providers

Favouring high-speed Internet access means moretime spent and usage volumes, thus increasesGoogle services usage

Future web users are Google services nextusers

Why is Google buying satellites ? (2/2)

Through infrastructures investments, Google reinforces its traffic providersand increases access to its services.

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How does Google buy traffic ?Google asserts its ability to attract users on the sole basis of its services quality and without

turning to advertising Truth is Google largely buys traffic from providers

Firefox: 60 million dailyusers in 2008

Google finances 85% ofFirefox in exchange forhaving its search engineembedded in the browser

Browsers

In 2006, partnershipdeal with Dell to have theGoogle search engineappear by default on Dellcomputers

In 2008, partnershipdeal with Apple to have theGoogle search engineappear by default onIphones (13 million devices

sold by october 2008) Partnerships withmanufacturers allow thesearch engine to beguaranteed to in a primeposition.

Manufacturers

Google has the financial power to buy traffic from partners, accessing to

massive audiences.

The Google Toolbar ispart of the web navigator,which makes Google thedefault search engine

Adobe installs it as partof a package withShockwave(2006)

Sun has been installingit as part of a package with

Java since 2005 (20 millionuploads/month)

Toolbar

In 2005, Google boughta 5% stake in AOL for 1billion$ (20 millionsubscribers at time of deal)

Google became AOLswhite label search engine

Google expands itsadvertising network reach

Portals

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Why did Google acquire DoubleClick ?

In 2007, Google acquired DoubleClick, one of the world leaders in displayadvertising :

1 www.attributor.com/blog/2008/03/

Advertisinghouses

< 100kUV2

100k-1M UV2

>1MonUV2

Adbrite 4,1% 4,9% 0,5%

AOL 1,9% 6,5% 5,7%

DoubleClick 9,1% 29,9% 48,0%

Google 71,4% 41,6% 15,8%

MSN 6,6% 6,3% 12,8%

Yahoo 4,7% 7,3% 16,5%

Market shares of main onlineadvertisers in relation to websitetraffic 1

Number of advertisers

Tradition

al

advertising

market

Banner Market

Text ad market

Ad budget peradvertiser

Google acquired DoubleClick to gain an expertise (display) and global marketshares (highly popular websites)

2 Unique Visitors

Google moves up the long tailof advertisers

8

To position itself on the bannermarket

To reach for highly popularwebsites


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How does Google capitalize on OpenSource developers work ?

Google encourages development of open source applications:

Through support of Open Source community, Google pursues 4 objectives:

Increase of totalInternet traffic

New applicationscreate new uses,leading to increasedtotal traffic

Promotion of a more open Web

Increasing theinteroperabilitymultiplies networkeffects1

Opensource isbecoming anadvantage to attackproprietary codestrategies

Assembling a freepublic relations team

Developers chats area very effective publicrelation tool

Development of OpenSource langages used

by Google

The number ofavailable Open Sourcecodes encourages theemerging of newproducts

Feedback of OpenSource developershelps creating newproducts

Google supports the Open Source community in a spirit of collaborativecreation, one of Googles strategic pillars

Google code: platform designed for Open Source developersSupplied with guides, tutorials, code extracts of Google products

Google Search Code: code search engineAutomatic referencing of all code sections that can be found on the Internet

Events created for the Open Source community:Google Summer of Code: grants awarded to Open Source student projects

Google Developer Days: seminars dedicated to Google products

1 See Annex

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How did Google capture the offlineadvertising market ?

Online advertising market accounts for only 8% of the US market1:

Google is exploring the offline ad market!

1 TNS Media Intelligence, US advertising market

Most offline media (television,radio, press,) begin to be IP-ready with online versions

Ad transfer from online to offline(YouTube on television)

Entry on traditional offline markets(radio, billboards,)

Integration of offline techniques(traditional fixed pricing)

Partial adaptation of AdWords ontoradio and television

Googles entry on this market anticipates new uses and broadens its offer.

Not specifically successful for now

11

3% 7%8%

17%

21%

44%

Billboards Radio

Internet Daily Press

News Press Television



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Why is Google stealing our voices?In 2007, Google launched Google Voice Local Search in the United States, afree and automated phone directory service :

Google is creating a database of phonemes, recorded during calls in order tobetter its speech to text1 technologies:

What is the business model of thisfree and ad-free service ?

Creation of aphonemedatabase

Developmentof speech to

text technologies

Indexing ofYouTube

audio tracks

Indexing of allaudio/voice

sources

Externalizing tasks onto users ( crowdsourcing 3) is a commonly usedprocess by Google to improve its products.

1 Converting oral information into text2 First experiments with political videos posted during the presidential campaign of 2008.3 Neologism created in 2006 by Jeff Howe and Mark Robinson, Wired magazine editors

2

Bla bla

bla

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Is PageRank a really competitiveadvantage ? (1/2)

PageRank is Googles link analysis algorithm that measures the probability

that a page will be relevant to users query :

Based on the correlation between the amount of links towards a page and theirrelevance

It accounts for the notoriety of the sites that link to the page in question

PageRanks simplified formula is :

(A pages (u) PR is the sum of all PRs of pages linking to u (v), divided by the respective number of

outbound links contained in pages v)

Google1 claims that PageRank is one of its search engines main competitiveadvantage :

1 http://www.google.fr/why_use.html

A champion ofdemocracy

The search engines

cornerstone A tool unlikely to be

tampered with

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Is PageRank a really competitive advantage ?(2/2)

A tool that cant be tampered with?

Sale or exchange of famous website links(webringing)

Search Engine Optimization1 techniques

PageRank is only one of many Googles search competitive advantages. It

is certainly not the main entry barrier to competitors on the search market.

1 Set of techniques aiming at improving a sites referencing on a search engine.

Scalable architecture Quick/simple queriesRelevance guaranteedby 200 other criteria

Capacity of increasing/growing according to thevolume of indexed pages

and number of queries 2 millions servers by 2008

Clear query interface

Simple and quickpresentation of results

The search enginesalgorithm was subjected to450 modifications in 2007

An outdated technology?

Launch of search engines thatdont use tools such as

PageRank (Cuil, Powerset)

Googles search engine success relies on other factors :

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How does Google turn advertising intoinformation and performance?(1/2)

Advertising income often provides an incentive to deliver poor quality search resultsSergey Brin & Larry Page

Influence results bymaking paid for clientsappear first

Example: Opentext/Kelkoo

Little or non-existenttargeting

Large size adverts Slows down resultsdisplay from a searchengine query

Weak relevance

Impossible to rewardefficient advertising

Example : television ads

No direct measure of realperformance

Example : invoicingaccording to the number of

displays (CPM)

Most advertising models present strong weaknesses

Strong intrusionUndefined

performance

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14How does Google turn advertising intoinformation and performance?(2/2)

Displays advertising

Most relevant ad

defines

Quality ScoreDirect impact on advertising value

Qualityscore measures the relevance of the ad andis determined by the click throug rate on the ad. Itimpacts the display rank and Cost per Click:

Rank: relevant ads are pushed up,non relevant ads do not appear

Cost per click of the ad : performant

ads are charged less

RelevanceFor the user

Total cost of the advertisingcampaign is determined by thenumber of clicks on the ads andnot by the number of displays.

Googles advertising model benefits the user (improved relevance) as well as

the publisher (performance based billing & rebates)

Less relevant ad

PerformanceFor the advertiser



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Google : the network circulation valuecreation model

Traditional value creation

Eg : Microsoft

Network value creation

Eg : Google

Customerproducts

$

ServerProducts

$

The global value of the company relieson independent lines ofproducts/business units

Gmail

Youtube

Partners

The global value of the company relieson traffic between network parts(proprietary or partners)

BusinessProducts

$

Entertain

ment$

Searchengine

Apps

Apps

$

$

$

$

$

$

$$

$

$



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Going further : are Googles key success

factors limited to Google

Our conviction : Every company innovating in the digital industry mustaddress and capitalize on the 6 identified key success factors to performon digital markets.

Our proposition : faberNovel proposes to align companies strategy,development projects and existing products with these factors to ensure

success optimization and market performance.

Download our comprehensive White Paper

Googles key success factors

http://www.fabernovel.com


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Annex

Definition : network effects Definition : two-sided market

Pricing of a two-sided market

Glossary

Financial datas

Acknowledgement

Contacts


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What is a network effect?

A network effect describes how a service becomes more valuable to its

users as more people use that same service

Phones utility is limited if

the network is composedof 2 users

The utility for a user

raises if the networkbroadens

According to Metcalfes

law, the utility(U) of anetwork is proportional tothe square of the number(n) of its users

U k*n2

Network effects creates critical masses of users.They represent significant barriers to entry for competitors.


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What is a two-sided market? A two sided market consists of a platform allowing 2 groups of

clients/providers to interact and which optimizes the revenue distribution

among these groups with the objective of maximizing market sizes.Exemple of the video game market

Network effects in action

Side ADevelopers

Side BConsumers

Price A Price B

Utility to a new developerincreases as the community ofdevelopers grows (sharedknowledge)

Utility to a new consumerincreases as the community ofconsumers grows

(secondhand market)

A potential market for adeveloper gets bigger as moreconsumers enter the said market

The number of games availableto the consumer increases withthe number of developersworking on the platform

Internal effects Crossed effects

Internalnetworkeffects

Crossed network effects


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Pricing of a two-sided market

Side A

Price A > 0

Platform1

The platform may charge a side

Example 1 : Apple Appstore chargesdevelopers by taking a revenue shareon sold applications

Example 2 : Microsoft makesconsumers pay for video games

or subsidize a side

Example 3 : Google Android financesdevelopers through a contest

Example 4 : Youtube finances video

content providers

Face A

Price A < 0

Platform1

1 Provided the sum of price A + price B is a fixed figure, a platform financing a group automatically charges the other group

and vice versa

Who should you be charging?Who should be subsidized?

The platform must subsidize the groupe that is most price-sensitive and charge thegroup that is most sensitive to the other groups size.


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Financial data (1/2)

Revenues and Net margin (M$)

2002 2003 2004 2005 2006 2007

100 106 3991465

30774203

439 1466 3189 6139 10604 16594

Revenues

Netmargin

CAGR Net margin 02-07 : 112%

Revenue distribution/activity (B$)

CA 2007

65%

34%

1%

10,6

5,8

0,2

Licences and otherrevenus

Partner websites(AdSense)

Google web sites

16,6Total

Source: Google financial tables 2007 2 : calculated as Traffic Acquisition Cost/Google Network web sites revenues

CAGR Revenues 02-07 : 107%

Net margins growth outperform

revenues growth

Most of Googles revenues still

come from its own websites

Advertising revenue share to partnerweb sites is increasing2

and is the highest of the market

78%2005 2006 2007

79% 85%


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Financial data (2/2)

2005 2006 2007

6,1

10,5

16,4

Traffic acquisition costs

Advertising revenues

2,1 3,3 4,9

34,9% 31,5%30,1%

2005 2006

2005 2006 2007

6139

5999,0%

10604

122911,0%

16594

212012,0%

Turnover

R&Dinvestments

High R&D investments+88%/year between 2005 and 2007

Data center costs are under controlIn Billion $ : +26% 2006/2007 (vs +72% revenues)

Controlled traffic acquisition costs34,9% of advertising revenus in 2005 vs 30,1% in 2007

Source: rapport annuel Google 2007

+ 26%

1,9 2,4


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Glossary

API: application programming interface. Standardized programming protocolallowing applications to communicate

Internet Backbone: main trunk connections of the Internet, made up of a largecollection of interconnected high-capacity data routes and core routers that carrydata across the countries and continents

Crowd sourcing: act of outsourcing a task to users

Data center: facility used to house computer systems and associated components

O.S. : operating system

Overlay ad: clickable text advertising displayed on a video

Scalability: property of a process, which indicates its ability to handle growingamounts of work easily

Search Engine Optimization: process of improving the volume and quality of

traffic to a web site from search engines via natural search results (as opposed topaid search results)

Speech To Text: technology converting spoken words to machine-readable inputsuch as text

Walled Garden: closed or exclusive set of information services provided for usersby a network or portal


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Acknowledgements

To faberNovel contributors : Amaury de Buchet, VP Consulting

Cyril Vart, VP Strategy & Development

Alexis Arqui, Junior Project Analyst

Mounir Fassouane, Junior Project Analyst

To the bloggers :

Olivier Ertzscheid from affordance.typepad.com/

Google Operating System : googlesystem.blogspot.com/

Richard MacManus from readwriteweb.com/

Techcrunch.com & Mobilecrunch.com/ Frdric Cavazza from fredcavazza.net/


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Stphane DistinguinFounder and CEO

[email protected]

Cyril Vart

VP Strategy & [email protected]

Pierre FremauxProject Analyst

[email protected]

Matthieu Lecomte

Junior Project [email protected]

Tl. : +33142722004

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