Everything you wanted to know about Google

Everything you always wanted to know about Google‌But were afraid to ask Paris, December 2008

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December 2008 • Everything you always wanted to know about Google…

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Google key success factors : Web specific ?

Network effects

Scalability

• • •

•

Ability to easily grow at marginal costs Applied to infrastructures : ability to adapt its size to high load & volumes Applied to business models : ability to monetize millions of users

•

•

The traditional walled garden1 media strategy becomes irrelevant Content and services must be open and interoperable to favor audience circulation

•

The utility of a good or a service varies with the number of users The reach of a critical mass of users constitutes a significant barrier to the entry

•

Cocreation

Openness

•

Data mining

• •

Non-traditional actors become part of the value chain Users, content creators and external developers are given the tools to create new markets and enrich services

The web offers the opportunity to exploit and analyze a very large amount of data Users’ behavior can be analyzed to create monetizing value

Business model

• •

Advertising is not a market but a business model Any market that attract advertising is a target for Google

1 Network or portal which offers only its own content or services to users December 2008 • Everything you always wanted to know about Google…

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1 2 3 4 5 6 7 8 9 10 11 12 13 14

Why won’t Google be affected by the crisis ?

Why is Google trying to change the mobile world ?

Why isn’t 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 doesn’t 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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1

Why won’t Google be affected by the crisis ?

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

Licenses and other revenues Internet Mobile On line video YouTube monetization increases

Bn$ 201

Monetisation of the Internet Mobile audience

Explosion of the non advertising revenues

Bn$ 35 1

During a crisis, performance advertising gains market shares + 3% 2007-2008 1

+450% 2007-2008

260 millions mobile subscribers worlwide oct 2008 1

Estimates 2008 : Revenues = 200 M $ 1

Revenues 2008

Revenues 2012

Google is in a situation in which it can resist the economic crisis and find new revenue sources, both advertising and non-advertising : faberNovel estimates

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Why is Google trying to change the mobile world ? (1/2) Mobile industry is based on a “ traditional” locked values chain.

Terminal

Operating System

Portal

Operator

Web Contents

Examples:

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

Limited Network Access • •

Terminals assigned to a unique operator Difficulty of interconnecting networks

Access restricted to services/contents and to their improvement • • •

Operator portals favored over other portals Services offered by terminal manufacturers favored over other services Closed operating systems

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

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2

Why is Google trying to change the mobile world ? (1/2) In order to duplicate its open model, Google designed a three fold strategy : Android : Open Source O.S.1

Lobbying

Telco partnerships

• Android Developer Challenge:

• Google candidacy for mobile

• Pressure from Google to force

Contest for developers to create new applications for Android

license attribution aims to force the FCC2 to impose an openness clause to the winner

operators to offer its applications as default options

• Open

Handset Alliance: Common initiative of 34 mobile phone industry players (manufacturers, suppliers and distributors) aiming at spreading Android

• A success : clause partially imposed on the winning bidder, Verizon.

• Sharing

of advertising revenues between Google and operators

In addition, Google developed and acquired mobile devices applications : Location-based services

Cab4me FreeFamilywatch

Social Networks

Games

Golfplay

JOYit

Wertago

Jaiku 3

Collaborative Tools

ShareYour Grand central 3 Board

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

1 Operating System

2 Federal Communications Commission

3 Acquisitions

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Why isn’t YouTube a content portal ? (1/2) YouTube acquisition is part of a strategy to monitor key content and audience hubs.

Monetise contents through various sources of audience

Give access to information

Organise information •A new information silo: video

• YouTube bandwidth

• Broadcasting of contents

search

spending estimated to reach 1M$/day1

through Google websites as well as other sites

•Next : Speech to text

• Revenue sharing logic

technology : information searches within video contents

YouTube has already won the audience battle … …

75% 60%

May 2008 May 2007

16% 9% 4%8%

2% 3% 1% 1%

Market shares of 5 leading video websites, United States (may 2008 vs.may 2007) [%]2 1 NewYork Times 2 Hitwise 2008

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Why isn’t YouTube a content portal ? (2/2) Unlike its competition, YouTube follows an open logic and focuses primarily on developing content distribution tools : Encourage content providers to use the service

•

•

YouTube Program Partner : Payed providers of semiprofessional content

Broadcasting contracts with major content providers

Attract as many viewers as possible

•

•

•

Broadcasting videos on YouTube website and other Google sites (ex : Google.com, GoogleNews) Exporting videos (blogs, social networks) and developing API1 for advanced broadcasting on third party websites Broadcasting on all video devices : television, mobiles, multimedia players, video consoles

Monetize through relevant advertising tools

•

Traditional advertising: AdSense and banners

•

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

•

Brand advertising: broadcasting video ads within an environment coherent with the brand’s image

•

E-Commerce: Affiliation of partner websites (Amazon, Itunes, video games)

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

1 Application Programming Interface. Standardized programming protocol allowing applications to communicate 2 Clickable text advertising displayed on a video

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3 See Annex

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Why does Microsoft fear Google ?

Google’s ambition isn’t limited to “in browser” Web services, but extends to any online or offline application market.

Google sets out to enter the online application market, MSFT’s cash cow : Disruption of offline application market segments

Consolidation of the online environment

• Launching of the Office Google

• Launching of Google Gears:

software pack: a word-processor, a spreadsheet program, a presentation tool and a calendar • Free alternative to Microsoft Office pack

Open Source project allowing an offline use of online applications

• Claimed ambition of becoming a standard and encouraging online languages as opposed to offline programming languages

• Acquisition of SketchUp, a 3D modeling software with a free version made available

Google partly « destroys » Microsoft’s market when shifting value from offline to online December 2008 • Everything you always wanted to know about Google…

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5

How Google wants to compete with Facebook ?

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 ».

Network effects

Network effects

Network effects

Google wants to become the « social data search engine » and to monetize this data, leveraging network effects.

Facebook’s platform is limited, Google’s is the whole Web December 2008 • Everything you always wanted to know about Google…

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Why is Google buying satellites ? (1/2) Since 2005, Google has been multiplying investments in all kinds of infrastructures: • •

Free Wifi in Mountain View Investment in Fon: shared Wifi access Wifi Gratuit

Satellite

• •

Wimax

• •

60 M$ Investment Internet access in developing countries

• Baloon Wifi

• •

Partnership announcement Internet access technology superior to satellites for isolated areas

Backbone1

• •

Partnership A mobile high-speed internet access technology A 100 M users market by the end of 2008

100 M$ investment Expansion of highspeed networks

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

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Why is Google buying satellites ? (2/2) Internet infrastructures is actually Google’s business infrastructure: Traffic on Google websites depends on internet infrastructure development and availability (Backbone, Wifi, Satellite,…)

Google has three objectives when investing in the upstream part of its value chain: Strengthen and secure existing infrastructure

Favor high-speed Internet access

Prioritize Internet access for unconnected countries or populations

•

Strengthening and securing existing infrastructure lightens Google’s dependancy on its providers

•

Favouring high-speed Internet access means more time spent and usage volumes, thus increases Google services usage

•

Future web users are Google services’ next users

Through infrastructures investments, Google reinforces its traffic providers and 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

Browsers

Manufacturers

•Firefox: 60 million daily users in 2008 •Google finances 85% of Firefox in exchange for having its search engine embedded in the browser

•

In 2006, partnership deal with Dell to have the Google search engine appear by default on Dell computers • In 2008, partnership deal with Apple to have the Google search engine appear by default on Iphones (13 million devices sold by october 2008) • Partnerships with manufacturers allow the search engine to be guaranteed to in a prime position.

Toolbar

Portals

•

The Google Toolbar is part of the web navigator, which makes Google the default search engine • Adobe installs it as part of a package with Shockwave(2006) • Sun has been installing it as part of a package with Java since 2005 (20 million uploads/month)

•

In 2005, Google bought a 5% stake in AOL for 1 billion$ (20 million subscribers at time of deal) • Google became AOL’s white label search engine • Google expands its advertising network reach

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

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Why did Google acquire DoubleClick ?

• In 2007, Google acquired DoubleClick, one of the world leaders in display advertising : To position itself on the banner market Google « moves up » the long tail of advertisers Ad budget per advertiser Banner Market

Traditional advertising market

Text ad market

To reach for highly popular websites Market shares of main online advertisers in relation to website traffic 1 Advertising houses

< 100k UV2

100k1M UV2

>1Mon UV2

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%

Number of advertisers

Google acquired DoubleClick to gain an expertise (display) and global market shares (highly popular websites) 1 www.attributor.com/blog/2008/03/

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2 Unique Visitors

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Why doesn’t Google monetize all of its services?

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Some Google services are free of charge and monetized through advertising : Blogger: blog creating tool Google Health: service for managing and storing personal medical information GoogleNews: personalized mash-up of news articles and summary Picasa: photo sharing service Google SketchUp: 3D model creating tool Goog-411: phone information service …

These services are actually indirectly monetized : Tools designed to generate audience are made available Monetization of blogs created on Blogger through AdSense or FeedBurner

Products specifically developed to improve other Google products

Attract new customers through loss leaders

Google 411 created to better the video indexing on YouTube

Picasa devised as a loss leader towards other Google products

Google global strategy allows strong indirect monetization of its products ..…….

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How does Google capitalize on Open Source developers work ?

Google encourages development of open source applications:

• Google code: platform designed for Open Source developers Supplied with guides, tutorials, code extracts of Google products

• Google Search Code: code search engine Automatic 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

Through support of Open Source community, Google pursues 4 objectives: Increase of total Internet traffic •New applications create new uses, leading to increased total traffic

Promotion of a more « open » Web •Increasing the interoperability multiplies network effects1 •Opensource is becoming an advantage to attack proprietary code strategies

Assembling a free public relations team •Developers’ chats are a very effective public relation tool

Development of Open Source langages used

by Google •The number of available Open Source codes encourages the emerging of new products •Feedback of Open Source developers helps creating new products

Google supports the Open Source community in a spirit of collaborative creation, one of Google’s strategic pillars ..…….

1 See Annex

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How did Google capture the offline advertising market ?

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Online advertising market accounts for only 8% of the US market1: 3%

7% 8%

44%

17%

Billboards

Radio

Internet

Daily Press

News Press

Television

Most offline media (television, radio, press,…) begin to be IPready with online versions

21%

Google is exploring the offline ad market!

• 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 onto radio and television

Google’s entry on this market anticipates new uses and broadens its offer.

Not specifically successful for now… ..…….

1 TNS Media Intelligence, US advertising market

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Why is Google stealing our voices?

In 2007, Google launched Google Voice Local Search in the United States, a free and automated phone directory service : What is the business model of this free and ad-free service ?

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

Development of « speech to text » technologies

Indexing of YouTube audio tracks

Indexing of all audio/voice sources 2

Bla bla bla

Externalizing tasks onto users (« crowdsourcing 3») is a commonly used process by Google to improve its products.

1 Converting oral information into text 2 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

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Is PageRank a really competitive advantage ? (1/2) PageRank is Google’s link analysis algorithm that measures the probability that a page will be relevant to user’s query : Based on the correlation between the amount of links towards a page and their relevance It accounts for the notoriety of the sites that link to the page in question PageRank’s simplified formula is : (A page’s (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 engine’s main competitive advantage :

A « champion of democracy »

The search engine’s « cornerstone »

A tool unlikely to be tampered with

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

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Is PageRank a really competitive advantage ?

(2/2) A tool that can’t be tampered with?

An outdated technology?

Sale or exchange of famous website links (webringing) Search Engine Optimization1 techniques

Launch of search engines that don’t use tools such as PageRank (Cuil, Powerset)

Google’s search engine success relies on other factors : Scalable architecture

•

•

Capacity of increasing/ growing according to the volume of indexed pages and number of queries 2 millions servers by 2008

Relevance guaranteed by 200 other criteria

Quick/simple queries

• •

Clear query interface Simple and quick presentation of results

•

The search engine’s algorithm was subjected to 450 modifications in 2007

PageRank is only one of many Google’s 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 site’s referencing on a search engine.

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How does Google turn advertising into information and performance?(1/2) « Advertising income often provides an incentive to deliver poor quality search results» Sergey Brin & Larry Page Most advertising models present strong weaknesses Strong intrusion

• Large size adverts • Slows down results display from a search engine query

Undefined performance

Weak relevance

• Influence results by • •

making paid for clients appear first Example: Opentext/Kelkoo Little or non-existent targeting

• Impossible to reward • • •

efficient advertising Example : television ads No direct measure of real performance Example : invoicing according to the number of displays (CPM)

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How does Google turn advertising into information and performance?(2/2) Displays advertising defines

Relevance

Quality Score

Performance

For the user

Direct impact on advertising value

For the advertiser

Most relevant ad Qualityscore measures the relevance of the ad and is determined by the click throug rate on the ad. It impacts 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 Less relevant ad

Total cost of the advertising campaign is determined by the number of clicks on the ads and not by the number of displays.

Google’s advertising model benefits the user (improved relevance) as well as the publisher (performance based billing & rebates) December 2008 • Everything you always wanted to know about Google…

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Google : the network circulation value creation model Network value creation Eg : Google

Traditional value creation Eg : Microsoft

$ $

Server Products $

Gmail

Apps

$

Apps

$

$ Customer products $

Business Products $

Search engine

$

$ $

$

$ Entertain ment $

Partners

Youtube

The global value of the company relies on independent lines of products/business units

The global value of the company relies on traffic between network parts (proprietary or partners) ..…….

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Going further : are Google’s key success factors limited to Google • Our conviction : Every company innovating in the digital industry must address and capitalize on the 6 identified key success factors to perform on 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

« Google’s 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

Phone’s utility is limited if the network is composed of 2 users

The utility for a user raises if the network broadens

According to Metcalfe’s law, the utility(U) of a network is proportional to the 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 Crossed network effects

Price A

Internal network effects

Price B

Side A Developers

Side B Consumers

Network effects in action Internal effects •

•

Utility to a new developer increases as the community of developers grows (shared knowledge) Utility to a new consumer increases as the community of consumers grows (secondhand market)

Crossed effects •

A potential market for a developer gets bigger as more consumers enter the said market

•

The number of games available to the consumer increases with the number of developers working on the platform

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Pricing of a two-sided market Price A > 0

Side A

Price A < 0

Platform1

• The platform may charge a side • Example 1 : Apple Appstore charges •

developers by taking a revenue share on sold applications Example 2 : Microsoft makes consumers pay for video games

Face A

Platform1

• … or subsidize a side • Example 3 : Google Android finances •

developers through a contest Example 4 : Youtube finances video content providers

Who should you be charging?

Who should be subsidized?

The platform must subsidize the groupe that is most price-sensitive and charge the group that is most sensitive to the other group’s size.

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

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Financial data (1/2) Revenues and Net margin (M$) 439

1466

3189

6139

Revenue distribution/activity (B$)

10604

16,6

Total

16594

0,2

Revenues

1%

CAGR Revenues 02-07 : 107% CAGR Net margin 02-07 : 112%

Net margin

Licences and other revenus

5,8

Partner websites (AdSense)

34%

10,6

4203

100 2002

399

106 2003

2004

1465 2005

3077

2006

Google web sites

CA 2007

2007

Most of Google’s revenues still come from its own websites

Net margin’s growth outperform revenues’ growth

78% 79% 2005

65%

2006

85% 2007

Advertising revenue share to partner web sites is increasing2 and is the highest of the market Source: Google financial tables 2007

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2 : calculated as Traffic Acquisition Cost/Google Network web sites revenues

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Financial data (2/2) Advertising revenues

Turnover

Traffic acquisition costs

R&D investments

6139

10604

16594

16,4 10,5

34,9%

6,1

2,1

2005

31,5% 3,3

2006

30,1%

599 9,0%

4,9

2005

2120 12,0%

1229 11,0%

2006

2007

2007

Controlled traffic acquisition costs

High R&D investments

34,9% of advertising revenus in 2005 vs 30,1% in 2007

+88%/year between 2005 and 2007

+ 26%

1,9

2,4

2005

2006

Data center costs are under control In Billion $ : +26% 2006/2007 (vs +72% revenues) ..…….

Source: rapport annuel Google 2007

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Glossary • API : application programming interface. Standardized programming protocol •

• • • • • •

• •

allowing applications to communicate Internet Backbone : main trunk connections of the Internet, made up of a large collection of interconnected high-capacity data routes and core routers that carry data 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 growing amounts 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 to paid search results) Speech To Text : technology converting spoken words to machine-readable input such as text Walled Garden : closed or exclusive set of information services provided for users by a network or portal ..…….

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Acknowledgements To faberNovel contributors :

• • • •

Amaury de Buchet, VP Consulting Cyril Vart, VP Strategy & Development Alexis Arquié, 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/ Frédéric Cavazza from fredcavazza.net/

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Stéphane Distinguin Founder and CEO stephane.distinguin@fabernovel.com Cyril Vart VP Strategy & Development cyril.vart@fabernovel.com Pierre Fremaux Project Analyst pierre.fremaux@fabernovel.com Matthieu Lecomte Junior Project Analyst matthieu.lecomte@fabernovel.com Tél. : +33142722004

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