Google key success factors by Pierre

Google’s key success factors November 2008

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Preliminary note – This study does not aim to give an exhaustive description of Google’s strategy. We mostly attempt to identify the company and industry’s specificities and to give a wide vision of Google’s key success factors, part of these factors applying to the digital ecosystem. However, the teachings of this analysis may as well apply to any industry facing the need to evolve and innovate in a competitive environment. The Internet revolution is neither technical nor organizational, but a conjunction of both. Hence, the innovation paradigm of Google is considered as widely a replicable. Google web culture Throughout this paper, we identified major reasons on which is based Google’s success. A common denominator applies to the firm’s management model, to its innovation machine, and to its industrial strategy: Google is the first major company to fully understand and implement the recently born web culture. As an illustration, we can spot a few characteristics that are idiosyncratic of the Internet and hence of the Google model. -Scalability: what works on a small scale has to work on a large scale. This applies to infrastructures - a system must be ready for high loads – as well as to business models – a product must be adapted for a very important number of customers. -Network effects: the benefit of a product or service increases with the number of users. The reach of a critical mass of users constitutes a significant barrier to the entry of competitors. -Data: whether it be for internal management or for customer knowledge, the web offers the opportunity to collect, exploit and analyze a very large amount of data. This metric environment helps optimizing uncertainty management. -Openness: the traditional walled garden media strategy exploded; content and services must be open to all, and be interoperable. -Co-creation: Non-traditional actors become part of the value chain. In particular, users, content creators and external developers are given the tools to create new markets. -Business Model: advertising is not a market but a business model. Google is able to extend its domination by creating new markets or changing the model of existing industries.

KSF

Scalability

Network

Data

Openness

Cocreation

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Business Model

Google’s key success factors .................................................................................................................. 1 I

Google as a Platform .......................................................................................................................... 4 1 The Google business model ......................................................................................................... 4 1.1 Google’s multi-sided market: making profit out of network effects ....................................... 4 1.2 Setting up a pricing system: who is paying for the service ................................................... 5 1.3 A scalable architecture: being prepared to get bigger .......................................................... 6 1.4 A disruptive business model ................................................................................................. 7 1.5 Google’s long tail of advertisers ............................................................................................ 8 1.6 The perfect ad ....................................................................................................................... 9 2 Google’s search for new ad supports ......................................................................................... 10 2.1 Monetizing the Web: AdSense ........................................................................................... 10 2.2 Moving up the long tail of publisher: acquisition of DoubleClick ........................................ 11 2.3 From search to content and services.................................................................................. 12 2.4 Offline Google ..................................................................................................................... 13 3 Google’s video strategy............................................................................................................... 16 3.1 Content and diffusion .......................................................................................................... 17 3.2 Attracting advertisers .......................................................................................................... 20 4 Google’s Mobile Strategy ............................................................................................................ 22 4.1 Moving the mobile industry to the web ............................................................................... 23 4.2 New mobile products and services ..................................................................................... 24 Google in its ecosystem .................................................................................................................. 27 Google and the crowds ............................................................................................................... 28 1.1 PageRank: from neutral hyperlinks to a ranking algorithm ................................................ 28 1.2 Google Image Labeler: when players index images .......................................................... 29 1.3 Google 411: a phonemes database to empower speech recognition ................................ 30 1.4 Google My Location: GPS users create cell phone databases .......................................... 30 2 Google and the acquisition of traffic ........................................................................................... 31 2.1 Acquisition of traffic from browsers and toolbars ................................................................ 31 2.2 Acquisition of traffic from hardware manufacturers ............................................................ 32 2.3 Acquisition of traffic from web portals ................................................................................. 32 3 Investing in Internet Access infrastructures ................................................................................ 33 3.1 Strengthening existing infrastructure in mature markets .................................................... 33 3.2 Democratizing access for billions of users ......................................................................... 34 4 Google and the developers ......................................................................................................... 36 4.1 Google Code ....................................................................................................................... 36 4.2 Financing Firefox................................................................................................................. 37 4.3 Entering the offline software market ................................................................................... 37 4.4 Promoting open source applications on mobile platforms .................................................. 37 5 The promotion of a more open Web and Mobile environment ................................................... 38 5.1 Opensocial: network effects on an open Web .................................................................... 38 5.2 Gears: interoperable standards for offline capabilities ....................................................... 39 6 Creative destruction .................................................................................................................... 39 6.1 Google’s destructive effect on other industries’ value ........................................................ 40 6.2 Creative destruction in specific industries .......................................................................... 41 1

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I Google as a Platform 1

The Google business model

Google applied all of its success factors in its business model by focusing on the users to create network effects, implementing a performance-based model to seduce advertisers, creating a scalable architecture for a worldwide market and by definitely changing the rules of the market. KSF

Scalability

Network

Data

Openness

Cocreation

Importance

High

Normal

Low

1.1

Business Model High

Google’s multi-sided market: making profit out of network effects

Like many Internet companies, Google had a large pool of users before it knew how to make money. Unlike many of those companies, Google found an effective business model and achieved considerable success. One of Google’s mantra, “focus on the user” comes from that time when Google could record 60 million searches a day and only made a few dollars out of it. In fact Google only had to deal with the user, because he was its one and only customer. Google understood that money was not to be made from the individual user and quickly gave up the hypothesis of licensing its technology in a B2B model. By deciding to let everybody use their search engine for free, Google had to introduce a new type of player that would pay for the users: advertisers. By this simple fact, Google entered what is called a “two-sided market”.

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Typically, a two-sided market is made up of a platform and two user groups. If the platform wants to be successful, it needs to appeal to both groups that are necessary to its economic activity. For instance, to be successful, a credit card company needs consumers to own its credit cards and businesses to run its system. This type of market has been unveiled and studied by Parker and Van Alstyne1 as well as Rochet and Tirole2. One of the main characteristics of these markets is their “network effects”3. It means that a service becomes more valuable as more people are using it. For instance, the value of the telephone depends on the number of people who own one. For a single user, the value of Google search engine partly increases with the total amount of people logging into Google since Google exploits and analyzes customer data to better its system. The same cannot be said for advertisers: any single one of them would rather appear alone on a page and have no competitors. On the other hand, indirect network effects played a major part in Google’s success. Indirect network effects are a phenomenon increasing the value of a service with the number of members of the other group. In Google’s case, advertisers benefit from any increase in the amount of people using Google search Engine. That explains Google’s “focus on the user”, users come first and advertisers will follow.

1.2

Setting up a pricing system: who is paying for the service

In order to maximize its profit, a company has to choose the right price for each group4. Setting a lower price and giving up some value on one side may lead to more “clients” on this side, which in turn would attract more “clients” on the other side and more than make up for the difference of profit. The company usually has to figure out 1

Information Complements, Substitutes, and Strategic Product Design, Parker and Van Alstyne Platform competition in two-sided market, Rochet and Tirole 3 References: Metcalfe's law, Reed's law 4 The price theory for two-sided markets: E. Glen Weyl 2

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which side is more price sensitive and accept to lower its price for this group in order to increase demand. Money is earned on the other side of the market.

In other words, the platform wants the rectangle area to be as big as possible. It wants to maximize the sum of the two rectangles and it can mean that the platform deliberately gives up value on one side. To figure out from which side will come most of the money, the platform must take into account a couple of factors. First, it has to understand which side is the most price sensitive. This side will be subsidized to some extent. On this figure the consumer demand is the most price sensitive side. Any decrease in the price will lead to a significant growth in the demand. This figure is a good illustration of what Google is facing. Second, the platform has to subsidize the side that gives platform value. For instance, on the operating system market, developers add value to the platform. An operating system only has the value of the programs that can run on it. In Google’s market, users make for platform value. A search engine is not more valuable when it gets more advertisers but when it gets more users. To sum up, in this model, Google is the platform, Internet users account for one group and advertisers for the second one. Google decided to subsidize the group that made up of individual Internet users. Advertisers represent the money side. However, if Google’s “focus on the user” is at the core of its culture and its success, the mantra only covers part of Google activity.

1.3

A scalable architecture: being prepared to get bigger

However significant may have been the creation of the Pagerank algorithm in the quality of Google’s search engine, it does not constitute a high barrier to entry for other competitors. On the other hand, Google creators have always been focused on the importance of a scalable architecture to provide a cheaper and more efficient service: “Google is designed to scale well to extremely large data sets”5.

The Anatomy of a Large-Scale Hypertextual Web Search Engine, Sergey Brin and Lawrence Page, Stanford 1998 - http://infolab.stanford.edu/~backrub/google.html

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As an example, let us examine the difference between Google’s and Altavista’s search engine cost structures. Whereas Google used numerous cheap Linux machines, adapting smoothly to demand variations, Altavista operated expensive and powerful supercomputers (Alpha servers). In that context, the cost structure evolves as described below, following the demand growth.

Google cost-optimization in a scalable architecture

1.4

A disruptive business model

Incentives for individuals to use Google search engine are well known and explain Google’s position in search: a very simple and well-designed homepage, quick response to any query, accurate results, etc. It was only after the battle for users had been won that Google started to monetize its search engine. Ironically, the system which made Google rich was pioneered by Overture, a company later bought by Yahoo, and its implementation in Google search engine lead Overture to sue Google for patent infringement. The system consists in linking text-ads to user queries and displaying them on the result page. This ad system, named Google AdWord was launched in 2000 and provides numerous benefits for businesses: Cheap. The cost-per-click pricing and bidding systems make advertising cheaper: companies only pay for the traffic that really occurs on their website, and can set a fixed price for any keyword they buy as well as setting a daily budget for any campaign

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Tracking. Companies can easily follow the results of their campaign: Google provides free tracking software (Google Analytics) which allows them to calculate their return on investment for every campaign, and even for any individual keyword Targeting. Advertisers can choose at what time of the day their ads will appear by setting up precise activation periods. They can also use tools such as “negative keywords” (the ads will not show up on the page should such a keyword be part of a query), “phrase match” (keywords are to appear in a particular order in the query for the ad to be displayed) or “exact match” (the query has to match exactly the keywords for the ad to show up) It is the first advertising business model that was created specifically for the Internet and that has no equivalent in the offline world. Display ads recreate the TV model of visual ads and the CPM (cost per thousand) pricing system.

1.5

Google’s long tail of advertisers

The ad system’s success is based on its ability to broaden significantly the market of potential advertisers. In the beginning, the “advertiser” side of Google’s two-sided market was mainly made up of businesses that usually did not advertise on traditional media. The tracking possibilities linked to those ads suited perfectly e-retail websites that could display one ad by product and precisely follow its performance. Small businesses find the most appeal in these ads. They usually cannot afford any other kind of advertisement and every feature of AdWords seems to fit their need perfectly: focus on any geographical area, pricing system etc.

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1.6

The perfect ad

Interestingly, Google doesn’t forget that its roots lie in “the focus on the user”, and aims at making its ad system but also the ads themselves efficient and relevant for the advertisers. An efficient ad system for the advertiser Google ads are based on a Vickrey auction6 model in which the winner is the person who makes the highest bid. However the winner only has to pay the amount bid by the second highest bidder. Among various reasons, this ad system was implemented so as to stop advertisers from adjusting their bids constantly, as it would have been necessary in an open outcry auction. Relevant information for the user However, the position of the ads on the page is not only decided through the bidding price; it also depends on Google’s “quality score”. This metric is calculating how relevant a keyword is to a user's search query. The higher a keyword's Quality Score, the lower its minimum bid and the better its ad position, thus giving a true positioning advantage to ads considered relevant for the user. With this system, Google is able to claim that their ads are in fact a way for them to provide additional information to the user. This focus on the relevance of the displayed ads leads Larry Page to claim that the ultimate goal would be to show only one ad, the perfect ad. In this respect, Google’s position as a platform of a two-sided market is totally clear: advertisers need the largest possible pool of users to make their campaign as effective as possible. According to Google, users “need” advertisers because they provide valuable additional information. Once Google managed to make money out of its search engine and benefit from its first position in market share, it looked for other areas where it could implement its advertising expertise.

Hal R. Varian: "Position Auctions". International Journal of Industrial Organization, 2006 faberNovel 42, boulevard de Sébastopol • 75003 Paris • Tél. +33 1 42 72 20 04/ Fax +33 1 42 72 20 03

Google’s search for new ad supports

Despite the success of its search engine, Google’s monetization was limited to a unique entry point. Its winning ad system coupled with a wide range of advertisers gave Google the opportunity to look for new advertising supports. KSF

Scalability

Network

Data

Openness

Cocreation

Importance

High

Normal

Low

2.1

Business Model High

Monetizing the Web: AdSense

Through the implementation of ads, Google managed, with great success, to benefit from its large pool of users and make money. Following the logic that says that any website page drawing some traffic is a potential support for ads, Google launched the Google AdSense program in 2003 which allows website administrators to easily display ads run by Google. When a user clicks on an ad displayed on a website which is enrolled in the AdSense program, the advertiser will pay Google and Google will, in turn, give a percentage of that amount to the website displaying the ad. Once again, Google is a platform in a two-sided market where advertisers still make up for one side, but where websites make up for the other site.

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As a platform, Google’s role is here to connect advertisers and websites. Each side needs the other to be able to function efficiently and make money. Google created a system that is attractive to both sides: Relevance. Thanks to the acquisition of Applied Semantics in 2001, Google is able to analyze the content of any page of a website which enrolled in the AdSense program. Google performs latent semantic indexing of these pages to extract high value keywords. This analysis allows them to display only relevant ads on the page, which benefit to both the advertiser and the website. The advertiser places its ads in a favorable context, while the website can keep the essence of its pages intact Scalability. For the website: Google administrates the advertisements and can run the ads regardless of the traffic of the page or the number of pages enrolled in the program. For the advertiser: each page of every website enrolled in the program is a support for ad displaying. The sheer number of those pages makes even the largest campaign easy to run, especially since Google automatically matches the ads to the websites. Furthermore, the system is easy to use for both sides. Advertisers do not have to enroll in a specific program – they can simply use the Google AdWords platform to display their ads on Google AdSense websites. Webmasters only have to insert a JavaScript code on their pages to display Google ads. AdSense is not only a way for Google to expand the area where it can put ads. Indeed, if Google only allows text-based ads on its search engine, AdSense is a way of embedding images or even videos on a website and allows Google to make its first step in the market of banner advertising.

2.2

Moving up the DoubleClick

long

tail

publisher: acquisition

The second step was the $3.1 billion acquisition of the ad serving company DoubleClick, which is specialized in banner or display advertising. Indeed, DoubleClick is the second company in terms of market share when it comes to monetizing content:

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Furthermore, Google acquired DoubleClik as a means to get a new typology of customers. Indeed, Google AdSense is essentially used by small and medium-sized websites. Google’s market share on websites with less than 100,000 monthly unique visitors is 71.38%. On the other end, Google has a meager 15.85% share for websites with more than a million monthly unique visitors whereas DoubleClick has a 48% market share. DoubleClick can then provide its expertise on major websites, as well as its customer base to Google.

2.3

From search to content and services

As a way of increasing its advertising support, Google has also launched a few services that show a shift in Google’s position in the Web. Google has not only monetized its search engine and external websites, it was also bent on monetizing the free service it offers to the users. These services are meant primarily to draw a huge amount of traffic. Google is confident in its ability to later find a business model for every one of these services, whether it is by using some of its “traditional” advertising systems or by inventing new ad types. Some of the most well known features of the Web are the result of that logic: drawing huge amount of traffic before trying to monetize them. Some services are paradigmatic of this strategic move towards new audiences by Google: Blogger, Gmail and Google Maps. We can identify a double goal in Google’s acquisitions and service providing: 1- Direct monetization of these services through advertising 2- Indirect effects a. Google needs to acquire data to better its search engine b. Google wants to build an ecosystem of services to guide users towards monetized services Blogger: a new audience for direct monetization Google offers people two main ways to monetize the content of their blogs. First, they can enroll in the AdSense program and display ads on the pages of the blog. The second way consists in displaying ads in RSS feeds, which are used for content 8

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delivery in a standardized format. In 2007 Google acquired FeedBurner for a reported $100 million. Thanks to this acquisition, Google is able to effectively display ads in RSS feeds, which constitute a major part of a blog. Gmail: reinforcing Google’s ecosystem and exploiting data First, Gmail provides Google with a new audience targeted according to the mail exchanges. Google runs a semantic analysis of the incoming and outgoing mails to determine relevant ads, which are displayed on the right of the pages. Second, Gmail encourages users to stay within Google’s set of services. Third, Google hosts billions of written conversations they can exploit statistically to improve their search engine. Google Maps: a new search engine Rather than Google indexing external websites and simply gathering information from other places, Google Maps offers a free database hosted by Google and accessible by users, webmasters and programmers alike through an API. Indeed, Google acquired a number of mapping companies (Where2, Keyhole, etc.) so as to own the maps needed to run this service. Google Maps is used both to display traditional textads and customized sponsored icons on the map as part of the Local Business Ads program. Furthermore, Google Maps makes sense as a leading service for mobile users.

2.4

Offline Google

US advertising spending measured by media (2007-2008)9 As exposed here above, despite a permanent growth the Internet, as a media, still accounts for a small 8% in the US advertising market. On the other hand, the 9

Source: TNS Media Intelligence, US advertising market. faberNovel 42, boulevard de Sébastopol • 75003 Paris • Tél. +33 1 42 72 20 04/ Fax +33 1 42 72 20 03

Internet as a communication protocol is extending to all kinds of devices and supports such as television, radio, billboards and video games. Consequently, Google is aiming to expand its growth according to two models: -Transferring online onto an offline advertising market. E.g. Youtube on TV -Going fully offline. E.g. Adwords platform for newspapers

Google has not tried to duplicate its online advertising programs Some of the main features are not compatible with the offline media: cost-per-click pricing would not mean much when related to TV or radio ads. More surprisingly, Google has not even tried to adapt its bidding system to its radio, TV or print ads. In fact, everything from the pricing system to the ad format remains as it has been for decades and Google is only entering a new industry, as would any competitor. The presence of Google in these industries is still limited, but gives an indication as to their business model ambitions. However, Google does bring its AdWords platform to the table. As for online ads, it is the only system of reservation Google offers. Google believes that the simplicity and flexibility of the platform is sufficient incentive for the advertisers to use Google as a multi-media advertising center. Right now, through the AdWords platform, advertisers can put ads: On the Internet On TV: networks such as ESPN, MTV, CNBC, ABC family On the radio with more than 1600 radio stations In magazines and news paper: 800 newspapers representing 70% of US paid circulation Google always looks to expand its area of expertise in advertising, and has filed patent or bought companies to develop its activity in new advertising system.

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Videogames: entering a new advertising market Digital advertising in games is limited to IP-connected games where ads can be changed or updated through the Internet connection such as persistent worlds, massively multiplayer online games and casual online games. Still, the market of ingame advertising should represent $732 million by 2010 10 . By buying Adscape, specialized in in-game advertising for $23 million and by launching Google Adsense for Games in September 2008, Google expanded its advertising presence in other digital worlds. Furthermore, Google proved its interest in virtual universes with the release of Google Lively, a 3D virtual environment, able to embed Youtube videos.

Street advertising: a patent to connect billboards to the Internet. Although for now, Google has not launched a product that translates its online advertising system into a real-life product, they filed a patent that would connect billboards to the Internet and to the AdWords platform. Such a billboard would display ads for local businesses, especially for products available in stock. Once a product is no longer available, the billboard would display another ad. Such a patent could extend the whole street advertising market by connecting kiosktype billboards, ATM machines and all other digital displays in malls and hotel lobbies.

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Google’s video strategy

Google is largely dominating the online video market. They focused on creating a wide network of contributors and on opening their content to all possible sources of audience. They are now facing the difficulty of attracting advertisers and promoting an efficient revenue model on a new market KSF

Scalability

Network

Data

Openness

Cocreation

Importance

Low

High

Normal

High

Business Model Low

Google’s $1.6 billion take-over of YouTube in 2006 is still criticized for its lack of efficient revenue model. However, this buy-out makes sense as part of a larger strategy of content control and audience domination. New medium, new media. Google’s decision to acquire YouTube is part of an overall strategy of running for the audience. In the “winner takes all” context of the web industry, Google has to control the eyeballs and monetize leading entry points. However, the ambitions of the video-sharing leader exceed that of being a mere portal: Google fosters third parties to capitalize on YouTube content and to monetize it in partnership. Organizing the world’s information. On the other hand, controlling video is a competitive advantage in Google’s original mission of information organization. Google confirms its leading position as a search engine by enriching it with a new silo of information: searching for videos in the short term and searching for information within videos in the medium term, thanks to speech-to-text technology. Accessibility: according to recent reports11, Google may be spending $1 million a day to pay for YouTube bandwidth.

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Market Share of top 5 US Video websites: March 2007 vs. March 200812

3.1

Content and diffusion

Google and YouTube have won the battle for “eyeballs” in the online video industry. As Google did as a search engine, YouTube managed to draw a huge amount of traffic and outgrow the market’s development. Youtube exploited the multi-sided network effects of video diffusion: 1. Ensuring a maximum number of content providers enriches the service 2. Attracting a large audience 3. Providing advertisers with efficient tools Content: from amateur to professional providers Youtube gathers its videos, relying primarily on UGC – User Generated Content. In this model of content sourcing, YouTube is but a platform which purpose is to connect content providers – in the case of UGC, individual uploaders – to content seekers. Once again, Google plays the part of a platform in a two-sided market. Should UGC provide an absurd amount of content to the website, it reflects on YouTube. The website has been criticized, especially by potential advertisers, about its amateurish and oftentimes low quality clips. YouTube has tackled this problem by: Launching the YouTube partner program geared towards semiprofessional uploaders who receive a compensation for their work Striking deals with major content providers such as television networks, cinema studios and sports organizations: Warner, Sony BMG, BBC, CBS, etc.

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Diffusion: from the Internet to all IP-devices To win the battle for eyeballs, YouTube not only managed to draw traffic on its website, but it also allowed its technology to be very accessible for anyone who wished to use it. As a matter of fact, one of the most popular features of YouTube is the capacity to “embed” a YouTube video on one’s blog or website, for free. Furthermore, YouTube has developed an API that lets webmasters tap into YouTube features and video database and exploit them in an external website. Once again, Google managed to benefit from traffic from external websites. A third way of broadcasting YouTube videos is through Google websites, by using an existing Google audience. YouTube videos are indeed displayed in Google News, Google’s automated news aggregator. Furthermore, Google made a deal with the creator of “Family Guy” to broadcast his new comic series consisting of several short clips through the AdSense network. This differs strongly from how competitors work. For example, Dailymotion insists strongly on the website and doesn’t offer such powerful tools to broadcast videos on external or partner websites, thus cannot benefit from a network as strong as Google websites. These three sources of traffic – the YouTube website, the videos embedded in blogs and external websites and the use of Google websites as a support for diffusion – has made YouTube the number one player in the online video industry. However, with the launching of AdSense, Google acknowledged the fact that drawing traffic to one’s website is only part of the equation. For a website to be successful and achieve profitability, one must be able to monetize it, to make money out of the thousands –or millions- of people who visit it each month. Furthermore, YouTube has implemented several aggressive changes to make its platform even more accessible and valuable.

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For every one of its services and features, Google decided that money would be earned through advertising and the user would receive full use free of charge. YouTube is no exception, and neither users watching videos nor video uploaders have to pay a fee to use YouTube. Advertising is Google’s business model and Google naturally intends to monetize YouTube with advertisements. However, many analysts have described Google’s attempts to make money out of YouTube as a failure.

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3.2

Attracting advertisers

Usual ads do not mix up well with YouTube. The traditional way of putting ads in a video consists in what is called a “pre-roll ad”. Before watching a video on a website, users have to watch a short clip (usually 30 seconds) that cannot be speeded up or skipped: a video ad. When the ad has been played, the real video can begin. However, this system of advertising is not well suited for YouTube for a couple of reasons. YouTube content. YouTube videos mainly come from users themselves. User Generated Content (UGC) is not easily accepted by advertisers, who are reluctant to display one of their ads and link their brand name to an amateur video whose quality or topic may be seen as not appropriate for them. Google’s focus on the user. Users usually don’t appreciate pre-roll ads, for they are seen as obtrusive and of little relevance. Since YouTube videos are mainly very short clips, the perception of the obtrusiveness of these ads would only increase and be a nuisance for the user. These two characteristics – obtrusiveness and lack of usefulness – are exactly what Google has always claimed to avoid – they pride themselves in providing additional and useful information which happens to take the form of advertisements. The quest for new types of ads

Traditional Ads

In-video ads

Brand engagement

While YouTube cannot be monetized through classic ads, Google has still tried to implement different kinds of advertising in order to make money out of the online video website. Traditional ads. Google implemented traditional video within YouTube pages. These ads may have different formats reproducing a usual monetization model: text ads, display ads and video ads.

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In-video ads. Since August 2007, as a way to display ads that would at least be a lesser nuisance, Google has been experimenting overlay ads. These ads are displayed for a dozen of seconds after the beginning of the video at the bottom of the player, in the form of a text-ad that opens a new window and pauses the video, if clicked on. Also, Google introduced pre-roll and post-roll formats, enabling advertisers to be present before or after the diffusion of the video. Brand engagement. One way to make money while making the user happy is to offer a new type of content. Companies can pay Google money to open up a channel and upload whatever videos they want. As described by Google, “advertisers can participate in the community, engaging users with contests, promotions, and sponsorships”. With this format, Google found a way to make money from businesses and please the user by offering him useful and unobtrusive sponsored content. However, it has not resulted in significant YouTube revenues for Google.

Furthermore, Google took the first experimental steps forward transforming Youtube into a digital retailer in 2008. “Click to buy” buttons linked to the videos will redirect users to Amazon or iTunes to purchase video games from Electronic Arts or music from EMI Music and Universal Music Group.

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Google’s Mobile Strategy

The search engine mobile strategy is confronted to the existence of a value-chain structured around strong players, from manufacturers to mobile carriers. Google’s energy is focused on recreating an open ecosystem in which they could reproduce their web model. Still, they are investing on the hypothesis of a significant mobile advertising market. KSF

Scalability

Network

Data

Openness

Cocreation

Importance

Low

Normal

High

Business Model Low

Promising advertising revenues The mobile phone universe is promising when considering Google’s advertising model. By 2012, mobile Internet users are expected to exceed traditional Internet users 13 in numbers. In addition, personalized and localized mobile uses provide significant market targeting opportunities that may ensure consequent advertising revenues in the mid term.

Expected worldwide mobile advertising spending 2006-2011 in millions $14

13 14

Source: International Data Group - 2008 Source: Emarketers 2007 faberNovel 42, boulevard de Sébastopol • 75003 Paris • Tél. +33 1 42 72 20 04/ Fax +33 1 42 72 20 03

4.1

Moving the mobile industry to the web

i. A locked mobile universe Google was born inside the Internet ecosystem and took benefit from its industrial and economic mechanisms: openness, interoperability, decentralization and accessibility favored important network effects. Nevertheless, reproducing the same success within the mobile universe requires changing the rules of the game. Indeed, the mobile industry is structured on a locked value chain with controls access and distribution.

Several barriers prevent Google from reproducing its Internet model: - Barriers on network access: o Handsets are locked on a unique carrier o Bandwidth trading by third party is limited -

Barriers on services/contents access and creation o Carriers favor their own walled-gardens and portals o Handsets manufacturers favour their own services o Mobile OS are rarely open and interoperable

ii. Changing the rules of the game Google must create a favorable environment to distribute its services and open access to all web contents. Its opening efforts are on a triple scale: An “open source” operating system: Android Google developed a partially open source mobile operating system. Even though, Google still retains a partial control on the OS, its expected goal is the diffusion of services and applications developed by Google or by third parties. To ensure the success of this initiative, Google drags all mobile actors along with him: -Application developers: they benefit from Google development tools and incentive contests such as the Android Developer Challenge -Market actors: they are the carriers, manufacturers and distributors, 34 of whom are joining Google within the Open Handset Alliance initiative. An active and powerful lobbying toward regulating entities

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In parallel, the rise of a free-constraint market cannot be done without the regulating agencies. In 2007, Google was involved in a 700 MHz mobile frequencies auction for integrating a quadruple opening clause to its offer. This clause has been partly imposed by the FCC to Verizon, the highest bidder.

Partnership on products with operators Eventually, Google’s fame and high quality products put them in a comfortable position to negotiate directly with operators to distribute its application. The firm imposed the installation of its services as Original Equipment Manufacturer, thus generating advertising revenue share.

4.2

New mobile products and services

Google has been trying to impose the rules of the web on a mobile world. On the other hand, they intensely focus on the new trends lead by mobile uses. Not only do they want to transfer their existing products and services on handheld devices, but also to create new markets and to be present on all use cases. This strategy is

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illustrated by external growth through acquisitions of existing solutions as well as internal development of mobile products. i. A large range of acquisitions Acquiring innovative technology and audience on mobile services. Since May 2005, Google has begun an integration strategy towards mobile service. The forthcoming acquisitions show a certain interest in two specific fields/categories: Products and services Dodgeball: a location-based social networking service for mobile that provides text alert to a circle of friends; a dating service given the location of the user Zingku: a mobile social network service helping people to manage their inner circle of friends. Zingku was bought for an estimated amount of 1 million dollars Jaiku: a micro blogging service available via the phone and the web purchased for an estimated 1,5 million dollars Technologies Grand Central: a voice over Internet protocol service that provides a simple interface to manage one’s phone numbers. Grand central gathers all phone calls on a single call and organizes one’s private and business phone numbers. Grand central was acquired for an estimated amount of 45 million dollars Reqwireless: a mobile browser for J2ME/MIDP devices and other rich content AllPay Gmbh: payment services for mobile OS Android: before developing the actual OS for mobile, Android was known as a software company for mobile phones Yet, fitting the actual trends is only part of Google’s vision. Google is not afraid to upset the status quo and is actively seeking to create new trends. To that purpose, it had to find a way to encourage innovation. ii. Developing new solutions Shaping new trends through innovation. On the first quarters of 2008, Google organized a contest for Android with total offered prizes of 10 million dollars. The goal of the contest was to design the most innovative application for Google mobile OS. Developers were encouraged to explore wide fields from media consumption and gaming to mash up (combined) functionalities and humanitarian benefits15. Judging criteria were set to leverage Android features through original and intuitive application. Thus, developers were asked to specially focus on: 15

“Social networking, Media consumption, management, editing, or sharing, e.g., photo, Productivity and collaboration such as email, IM, calendar, etc., Gaming, News and information, Rethinking of traditional user interface, Use of mash-up functionality, Use of location-based services, Humanitarian benefits, Applications in service of global economic development, Whatever you're excited about!” Source: http://code.google.com/android/adc.html

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-Originality of the application through novel and value added services. -Effective use of the Android Platform with location-based services that would encourage networking with a speedy and designed application. -Polish and Appeal through easy and intuitive application. -Indispensability with a compelling application for a given segment of the population Part of Android’s main future applications can be considered through the following scheme. Gaming, location-based services, productivity and collaboration, but also media consumption seem to be the new promising emerging services. Some applications such as Gocart which allows an instant comparison of best prices nearby through the scan of a product barcode or ShareyourBoard that simplifies the capture and sharing of whiteboard data were particularly rewarded by Google for their high degree of innovation16. They are an example of what future applications on Android could be.

Receiving respectively $250 000 and $100 000 prizes from Google.

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II Google in its ecosystem Traditional visions of industrial strategies tend to identify a unique market and a clear typology of actors. The roles of these agents are easily analyzed with longestablished logics: customers buy services or products, providers supply service or commodity, competitive threats may come from new entrants or substitution products and business models episodically evolve. In the IT world and particularly in the web industry, these models have evolved to such an extent that former analysis proved incomplete or false. A developer can either be a customer or a provider according to the business model implemented. A customer may pay zero and still be a key value-creation asset. The definition of the market itself is put into question since network externalities can destroy the value of unrelated industries, by financing them through advertising. In that context, Google has been able to evaluate the weight and limits of its ecosystem: -users are key data providers, thus wide pools of users account for great barriers to competitors -developers and webmasters are necessary to create content on the internet and have to be considered as indirect providers -network infrastructures are compulsory to provide users with persistent and highspeed internet -the advertising mechanisms financing the search engine can be scaled to other existing markets monetized as services -the Internet is a marketplace for eyeballs and traffic has to be brought at the entry points through browsers or manufacturers We shall give a wide overview of how Google managed to coexist with a wide range of partners and to recreate its own ecosystem. The aim is to identify how the search engine totally redefined the perimeter of the advertising market and the potential roles of all key players.

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Google and the crowds

As a sheer Internet player, Google has always understood the major part people play in the Web. Designed for users, Google’s search engines have always included user data into their technology. Analysis of the users’ behaviors as a measure of quality, having the users be part of the creation of databases and thus pillars of search technology. This exploitation has been expanded to other products. KSF

Scalability

Network

Data

Openness

Cocreation

Importance

Low

High

Business Model Normal

Crowdsourcing, defined by Jeff Howe in Wired Magazine 17 as the process of outsourcing a task to the crowds or users is at the heart of Google’s philosophy and strategy. The following table describes examples of information crowd sourced by Google and exploited for product creation or enhancement.

1.1

PageRank: from neutral hyperlinks to a ranking algorithm

Google’s approach to search was completely different from its competitors’. At that time, Search engines used statistical techniques to rank pages. Indexed pages were

The Rise of Crowdsourcing: Jeff Howe, Wired Magazine faberNovel 42, boulevard de Sébastopol • 75003 Paris • Tél. +33 1 42 72 20 04/ Fax +33 1 42 72 20 03

analyzed and compared to the actual query. The page with the most occurrence of the keyword appeared first in the search engine. Rather that insisting on the actual analysis of the pages’ contents, Sergey Brin and Larry Page focused on the analysis of hyperlink – one of the papers they published while in Stanford was titled “The anatomy of a Large-Scale Hypertextual Web Search Engine”18. By taking into account the “popularity” of a page, measured through the use of the PageRank, Google made the statement that users and webmasters were best suited to say which pages were relevant and which were not. The most emblematic technology of Google is then based on the analysis and use of the work of “the crowds”. This idea of involving users, whether they know it or not in the making of Google search algorithms has been used several times to improve Google technology.

1.2

Google Image Labeler: when players index images

Searching for images is more difficult than searching for text. Since we use text to make a query, Google analyses the text on the page to find and rank images. Since most images on the Internet are not next to an accurate description of their content, Google has tried to improve its image search engine. Image Labeler is the tool used to manually add a description to images. Since it’s a huge and daunting task, Google decided to get help from its millions of users. Google Image Labeler is a game in which participants have to “label” images – they’re shown an image and they have to enter words related to it – and win points if their “partner” has entered the same words. This game is sheer crowdsourcing: Google tries to bypass a technical difficulty by getting free help from individual users. Unlike some other features, the purpose of this game is clearly explained to the users. “Want to help improve Google Image Search? Try Google Image Labeler”19

18 19

Source: http://infolab.stanford.edu/~backrub/google.html http://images.google.com/imagelabeler/ faberNovel 42, boulevard de Sébastopol • 75003 Paris • Tél. +33 1 42 72 20 04/ Fax +33 1 42 72 20 03

1.3

Google 411: a phonemes database to empower speech recognition

Launched in September 2007, Google 411 is a free service that lets users call a tollfree number to make a business search. The service uses a speech recognition software to answer users’ questions and is thus, entirely automatic. As stated, this service is completely free for users and is furthermore fully ad-free. Since the service has no business model, Google acknowledged that it was designed to gather a very large database of phonemes, prerequisite to building efficient speech recognition software 20 . However, the true purpose of this enhancement is not to improve the Google 411 service but to improve audio and video search. In July 2008, Google launched such an application with Google Elections Video Search. Says Google: “videos from YouTube's Politicians channels are automatically transcribed from speech to text and indexed”21. This feature allows users to enter a text query such as “Iraq” or “health” and search into the spoken content of videos.

1.4

Google My Location: GPS users create cell phone databases

In a near future, mobile advertising revenues will be dependent on contextual targeting, optimized by users’ locations. In that situation, the market share of devices having access to a location system (Wifi, GPS, AGPS, eGPS…) is quite limited. The alternative is to exploit the location coming from the mobile carrier’s antennas (cell-ID location), accessible to all handsets with no waiting time. However, mobile carriers own the databases necessary to translate the cell identity into a location. A timeconsuming substitute would be to scan all possible signals of cell-IDs with a GPS to translate them into locations. Therefore, Google implemented a quite successful strategy of location crowdsourcing. All mobile devices using Google Maps with a GPS are exploited by Google to identify the location of mobile operators cells: for each cell, these mobiles upload the cell-ID (the “name” of the cell) and the GPS geographic coordinate. With such crowd-sourced database, Google can now run its own proprietary location system, for all mobile phones, and without the need of mobile carrier partnerships.

« If you want us to build a really robust speech model, we need a lot of phonemes, which is a syllable as spoken by a particular voice with a particular intonation. So we need a lot of people talking, saying things so that we can ultimately train off of that », Marissa Mayer, Google vice president of Search Products & User Experience, interview By Juan Carlos Perez, IDG News Service, October 2007 21 Source: The Official Google Blog faberNovel 42, boulevard de Sébastopol • 75003 Paris • Tél. +33 1 42 72 20 04/ Fax +33 1 42 72 20 03

Google and the acquisition of traffic

Google often claims its ability to attract users thanks to the sole quality of its products, thus neglecting traditional marketing investment. Still, Google’s important financial resources and ability to monetize eyeballs lead the company to buy huge amounts of traffic from traditional partners (Adsense network, Doubleclick network), nontraditional partners (Web browsers, device providers) and even from competitors. KSF

Scalability

Network

Data

Openness

Cocreation

Importance

Low

High

Low

2.1

Business Model High

Acquisition of traffic from browsers and toolbars

Google has been mainly following two strategies to draw traffic to its search engine from the browser. Deals with browser makers. Google has a deal with Mozilla to put it search engine by default in the top right search bow, as well as a Google search bow in the default Firefox homepage. Same can be said of Safari or Opera. By 2008, Firefox accounted for 60 million daily users. Google Toolbar. To bypass Internet explorer’s emphasis on the Microsoft search engine, the one browser Google cannot strike a deal with, Google launched the Google Toolbar, which basically embeds a Google Search box into the browser. Google Toolbar is mainly installed through popular free software such as Java 22, Adobe’s Shockwave 23 and Flash. As a default, the option to install the toolbar is selected, which shows Google’s willingness to be aggressive in its pursuit of partners allowing its presence in their browsers.

22 23

Java accounts for 20 millions downloads monthly (source : faberNovel) Shockwave is used by 390 million users in 2008 (source : Adobe)

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2.2

Acquisition of traffic from hardware manufacturers

Microsoft proved that linking software to operating system and hardware was a very efficient way of doing business. Since Windows and Internet Explorer are installed by default on most PCs, if Google wants to be present by default on a brand new machine, it had to make a deal directly with PC makers. For instance, Google signed a deal with Dell to include the Google toolbar and Google Desktop on all consumer PCs. Thanks to this deal, Google can be present by default on all these PCs. According to the deal, advertising revenues will be split between the two parties. This type of deal is especially critical for the mobile market. If Firefox has managed to gain a significant share of the market, mobile users traditionally keep the original browser installed on their phone. Part of Google’s effort to acquire mobile traffic is the development of Android. Even then, Google is still trying to strike deals with phone makers to implement its search engine as the default option. One of those deals was made with Apple for its iPhone. Sure enough, the result was that Google has recorded 50 times more visits from the iPhone than from any other device. By the end of 2008, iPhones sales had reached 13 million units24. Google also made a deal with Nokia to be the preferred search engine on Nokia mobile phones.

2.3

Acquisition of traffic from web portals

Although web portals and walled-garden strategies is contrary to Google opened strategy, the search engine does not neglect the huge pools of traffic generated by these players. In 2005, Google invested $1 billion for a 5% stake in AOL. Google and AOL wanted to make more AOL content available to Google users. However, this was mainly justified by the need to monetize new eyeballs25 through white labeling of Google’s advertising technology and to expand display advertising throughout the Google network.

AOL declined from 20 million subscribers in 2005 to 8 million subscribers in 2008 faberNovel 42, boulevard de Sébastopol • 75003 Paris • Tél. +33 1 42 72 20 04/ Fax +33 1 42 72 20 03

Investing in Internet Access infrastructures

Internet infrastructures are a free provider for Google: the search engine indirectly benefits from Wifi providers, cable and satellite operators or backbone manufacturers who all subsidy the access of users to the Internet. On a macroeconomic scale, Google is becoming dependent on this value chain and must secure its providers. KSF

Scalability

Network

Data

Openness

Cocreation

Importance

High

Low

High

Low

Business Model Normal

Google is consequently driving towards infrastructure investing. This trend is aiming at a multiple goal: -Ensuring long-lasting existing infrastructures -Giving access to the Internet for non-connected populations and countries -Offering high-speed and permanent access to the World Wide Web

3.1

Strengthening existing infrastructure in mature markets

Google WiFi? Since August 2006, Mountain View inhabitants can freely connect to the Internet after having created a Google account. So far, the network covers 25 000 homes to serve 15 000 unique users. For people to access the web, Google has already committed to provide free Wifi for the city of San Francisco. This ad-financed service will not be expanded to other cities in the short-run. In order to extend its free wireless network, Google is more than willing to invest in hybrid shared wireless networks, a technology that allows Internet users to voluntarily share a portion of their broadband connections. For the city of San Francisco, Google invested with Sequoia capital on Meraki, a network equipment manufacturer that provides hardware and software for wireless community networks. In July 2008, Meraki provided free Internet access to 100 000 people in San Francisco. Fon Wireless is another for-profit company funded by Google along with Sequoia Capital, Index Venture and Skype. Thanks to the shared wireless network services, Fon claims to be the world’s largest WiFi community through its shared wireless network service.

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Exploring backbone services In 2005, Google, Goldman Sachs and Hearst invested more than 100 million dollars in Current Communication Group, a company specialized in power-line broadband. Current broadband allows users to send data up to 10 times faster than typical technologies. New investment money is currently expanding deployments in the United States and overseas. Seemingly, high-speed services have become a strategic issue.

Going Wimax Sprint Nextel Corporation, a telecommunications company, announced in May 2008 a formal partnership with Google to deploy WiMax 26 technology. With an expected market of 100 million people by the end of 2008, Sprint opens a consistent market to Google that will provide search, collaboration, social-networking applications and services.

3.2

Democratizing access for billions of users

Google is planning to build a bridge for remote areas and emerging countries. Because of high infrastructure costs, a lot of remote areas, not only in the USA but also across the world, remain completely untapped with Internet access. However, these large populations lacking Internet access might soon be able to go online. Google is supporting two technologies to cover these markets. Satellite Launch In September 2008, Google, along with HSBC holding, Liberty global and Allen&Co made a 60 million dollar investment in O3b Networks, a company dedicated to offering high speed and low cost Internet services to emerging countries. In order to reach more than 150 countries and a growing demand, the system has been designed to be scalable and to easily allow additional satellites. Google applications will be offered to potential customers. Wireless Balloons This innovative technology relies on the launch of free-floating balloons by paid farmers in remote areas. The balloons could provide internet and phone access even more effectively than satellites, according to Space Data Corp which announced in February 200827 it might team up with Google to set up this service. Still, as of today, there is no clear agreement between the two companies.

Telecommunication technology providing broadband high speed without cable requirements The Wall Street Journal - http://online.wsj.com/public/article/SB120347353988378955.html

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Google’s interest in brand new Internet access technologies and services gives us clear signals about the forthcoming challenges: - In developed countries, Google must secure and invest in high-speed connection services that will enable its sturdy applications to work. - Whether be it in developed nations or in emerging countries, unconnected people represent a huge and new potential market for Google. There is a unique and historical opportunity to provide Google services on new communication services and platforms - Google would prefer to make co-investments or partnerships rather than directly acquiring these new technologies

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Google and the developers

As publicly underlined by Steve Ballmer 28 , in an IT ecosystem, developers matter as content providers. Google fully understood the benefits of online products and service creators for their advertising models. They consequently designed processes and tools in favor of open and free development. KSF

Scalability

Network

Data

Openness

Cocreation

Importance

Low

Normal

Low

High

4.1

Business Model High

Google Code Promoting innovative open source applications to increase Web traffic. In 2005, Google launched Google Code. It is a platform making available all the resources useful for open source software developers: Google’s code samples, guides, and tutorials. Moreover, with Search Code, Google allows developers to search for open source codes. Another way to emphasize on innovative open source applications is the free hosting of open source projects on the Google Code platform, which includes more than 50 000 projects. This platform contributes to promoting a more open Web and to supporting innovative open source software. To promote the open source community, Google also organizes several events intended for developers: o Google Summer of Code is a yearly program offering student developers stipends to write code for open source projects o Google “developer days” are global, they are one day events that include seminars and code labs on Google web products

http://fr.youtube.com/watch?v=KMU0tzLwhbE

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Supporting an open Web. Supporting the open source community is not only a philanthropic action. It indirectly enables to open the Web further. As we will see in the next paragraph, this is very valuable for a two-sided market platform like Google. Free public relations. Developers are indeed Google’s best public relations. Google puts its new products on Google Labs very early. It allows Google to have external developers feedback and to add features they would like to see. Moreover, it allows Google to benefit from the free developers’ word of mouth.

4.2

Financing Firefox

In august 2008, Google announced that it had extended the deal with Mozilla (Firefox open source browser-maker) for another three years. Since 2005, Google pays the browser-maker for assigning Google's search engine as Firefox's default home page and default choice in the search box. Firefox totally depends upon Google: in 2006, Google accounted indeed for 85% of Mozilla’s revenues. In this way, Google promoted the open source community (even if for a number of members in the open source community, it poses a conflict of interest). Today, although Google launched Chrome, it keeps financing Firefox for one reason: with this deal, Firefox users (19% of the world market) are more likely to use Google search engine.

4.3

Entering the offline software market

As seen, Google’s market platform is the whole Web. But the company’s objectives are not only focused on Web but also on the offline software market. In 2007, Google launched Gears which is an open source browser extension for creating offline Web applications. Thanks to Gears, you can access your Gmail account or Google Calendar offline. Since Google Gears is based on an open source technology, it runs not only with Google applications but also with any Web application in order to encourage openness. This is also a way to address the desktop applications market and to become a serious Microsoft Windows competitor.

4.4

Promoting open source applications on mobile platforms

On the mobile market, Google’s goal is similar: supporting innovative applications to promote new mobile usages. To do this, Google’s tools are quite identical. In order to develop valuable mobile applications, Google has launched the Android Developer Challenge, which will provide $10 million in awards for the greatest mobile applications designed for the open source Android Platform. Although parts of the code are proprietary and closed sources, everything is done to make the development of mobile applications easier: code is based on a Java-like language, tutorials are easily available. Google has also adapted Gears to mobiles and offers now offline mobile applications like Google Docs or Google Calendar.

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The promotion of a more open Web and Mobile environment

The developers’ pool is nothing but a tool to expand Web usages. The following step is a totally open Web. Since Google is at toll, Google’s business model is indeed based on interoperability and circulation of data and users. KSF

Scalability

Network

Data

Openness

Cocreation

Importance

Low

Normal

Low

High

5.1

Business Model High

Opensocial: network effects on an open Web

As seen, whereas Facebook platform is limited, Google’s is the whole Web. This explains Google’s strategy on the social network market: rather than launching a Facebook competitor (except Orkut which is successful in Brazil, Google never managed to enter the social network market), Google launched OpenSocial in 2007, which is a cross-platform of APIs for social networks. OpenSocial is a perfect example of Google’s goal to promote interoperability in order to benefit from more network effects.

Google’s Opensocial partners

Google has developed OpenSocial along with MySpace and a number of other social networks. Applications implementing the OpenSocial APIs are interoperable with any social network system that supports them, including features on sites such as Hi5.com, MySpace, orkut, Netlog, Bebo, Engage, Friendster, hi5, Hyves, imeem, NetModular, Ning, Plaxo, Six Apart, Viadeo, Linkedin, etc.

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Google’s Opensocial vs Facebook expected networks effects

5.2

Gears: interoperable standards for offline capabilities

With Gears, Google’s goal is also to make this technology the single standard for offline capabilities. According to Sundar Pichai, director of Product Management at Google, “The big thing we are trying to do is add this phenomenal capability [Gears] to the browser. We want to see this accepted as a standard”. Accordingly, Gears is also an initiative to promote interoperability: opening Gears to all Web applications is the best way to make Web and offline applications more open. There are a lot of other examples showing Google’s objective to open the Web. Among others, Youtube’s APIs allow users to export very easily video content to other platforms. And the deal between Google and AOL includes clauses imposing interoperability between AOL messenger and Gmail.

Creative destruction

Google is not only creating or developing the advertising market, but also destroying foreign markets to strengthen its own model. Following this model, Google destroys value either to monetize directly its services through advertising or to reinforce its global ecosystem

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KSF

Scalability

Network

Data

Openness

Cocreation

Importance

Low

Normal

Low

High

6.1

Business Model High

Google’s destructive effect on other industries’ value

Creative destruction29 refers to a force that will create a long-term sustainable growth after a short-term destruction of values. This force can be perceived as the innovation that leads to more competition against old industries. This innovation will radically and positively change the environment of a given industry even though it may generate a lot of distortions when implemented (destruction of employment and industries). We can identify a few examples of creative destruction from Google:

29 Joseph A. Schumpeter. Capitalism, Socialism and Democracy" (New York: Harper, 1975)

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6.2

Creative destruction in specific industries

Creative destruction in the web analysis industry Web analytic software provides wide information of online behavior (such as the number of pages viewed, unique visitors, bounce rates, session durations etc.). Before Google entered the market, the latter was dominated by Clicktracks, IndexTools, SiteCatalyst. With the purchase of Urchin, Google offered a high performing web analysis for free, hence destroying the core business of the traditional web track analysis software/environment/companies. Google model: this offer is an opportunity to give direct link to Google Adsense service and purchase key words for advertising.

Creative destruction in the Mapping industry/Service Whereas in the past we had to purchase maps on restricted areas, Google now offers high-resolution satellite images for most urban regions across the world. Even if competing with services such as Viamichelin or Blay Foldex, Google has compelled traditional company to provide a free service and change their former business model based on paid content. Google model: the idea beneath this service is to dominate the mapping industry and use it as a springboard for geo-localized advertising. Creative destruction in Google Documents Since 2006, Google offers new office tools and applications (Gmail, Google talk, Google agenda) for free. New features allow several users to work or share the same document. This new kind of Office 2.0 tool has been designed for small and large companies. Google model: this offer is a direct threat to common office software such as Microsoft Office and a smart way to reinforce Google’s user ecosystem. Creative destruction in Audience Analysis Google Ad planner is a research and media planning tool that pledges to connect advertisers and publishers. It provides a large range of statistics on a targeted audience to scale advertising campaign. Google model: by doing so, Google favors transparency among website audience and optimizes advertising campaign. It democratizes powerful tools that threaten Nielsen and Comcast’s business model.

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Creative destruction in Mobile OS Recently announced by Google, the Android Operating System is an open source platform for mobile. Android is disturbing Symbian and Windows Mobile OS hegemony. It should dramatically change the lock value chain of the mobile industry. Google model: For Google, Android is the Trojan horse that will reinforce its ecosystem of users and allow the sale of geo-localized services while giving more mobility. Nokia’s move toward illustrated the impact on mobile OS providers.

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Conclusion Google’s persistent growth is obviously based on excellent technological products, long-term strategic vision and the explosion of the Internet market. Yet, Google did not try to optimize existing models: contrary to traditional industries, the company always focused on changing the rules of the game, whether be it through internal innovation or by absorbing external ideas and assets. In 1996, when most players considered the research for information as a solved problem, they began designing an efficient search engine. In 2000, when walledgarden portals such as Yahoo were efficiently monetizing through displaying ads, Google began adapting Overture’s performance-based ad system that lead to Adwords. In 2006, when many analysts criticized the acquisition of Youtube, Google was already planning to use that tool to get shares in the television advertising market.

Google’s innovation machine Google’s ability to create new products, services and monetization models relies on a wide range of reasons: -They implemented an original “build-it ourselves culture”. As expressed by Google’s CEO Eric Schmidt “if the company were founded today on an empty lot, we would build the buildings brick by brick 30 ”: they tend not to appeal to external providers and to reproduce internally solutions already existing on the market. -They are able to absorb external innovation. In July 2008 they had acquired no more than 53 companies in fields of activities ranging from 3D software, to aerial photography or communications security. -They maintain internal innovation. Their well-known human resource model encourages engineers to create personal projects during their time-off, which resulted in the creation of products such as Gmail, Orkut or Google News. Parallel to that, they are able to attract talented engineers and to create an ecosystem of startuppers through important internal incentives. -They manage risk. First by tracking all kinds of data within and outside the company: “We know the status of our projects on an instantaneous basis; we know our revenue; we know our clicks31”. Second, they refuse risk adverse behaviors and encourage uncertain initiatives: their failures (Google Checkout, Google Catalogs or Google Coupons to name a few) are not trashed in pure loss. They are either morphed to new products or considered as part of the risky innovation process.

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http://blog.wired.com/business/2007/04/my_other_interv.html idem faberNovel 42, boulevard de Sébastopol • 75003 Paris • Tél. +33 1 42 72 20 04/ Fax +33 1 42 72 20 03

These success factors can be exported to other industries Innovation’s management for all Google’s innovation management can obviously be applied to other industries. Industrial creativity mainly depends on corporate culture and on organizational structures. These factors are mainly implemented to fast moving ecosystems such as digital industry, biotechnology or clean-techs. Still, well-established industries must be ready to adapt to disruptive evolutions of their own ecosystem. As seen in this paper, Google accelerated changes of entire sectors of the economy from traditional media supports to cartography. Innovation processes can be designed for all kinds of companies and industries. They imply reforming hierarchical structures, decision-making procedures or project management methods. However difficult these changes may be, they can open vital sources of growth or help these industries prepare for potential threats. Web models are not web-only Apart from the innovation model, all factors justifying Google’s success come from a web environment. Business models, partnership policy, relating to competitors, marketing, and consumer analysis all have been deeply affected by the Internet logic. Whereas pure Internet players often borrow success factors from brick-and-mortar industries, the latest are less eager to exploit the new digital models within their environments. Still, most of these Internet models are easily exportable. Offering open APIs to co-create value, developing open-source business models, favoring interactions with and between customers, encouraging community of providers, or tracking user data: all these web-native mechanisms can and should be adapted to all industries.

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Stéphane Distinguin CEO and Founder 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 42, bd de Sébastopol 75003 Paris Tél. : +33 1 42 72 20 04 Fax. : +33 1 42 72 20 03 www.fabernovel.com

faberNovel 42, boulevard de Sébastopol • 75003 Paris • Tél. +33 1 42 72 20 04/ Fax +33 1 42 72 20 03