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What’s strategic for Google?

December 30th, 2009 | online advertising, search, strategy, tech companies

Google seems to be releasing or acquiring new products almost daily. It’s one thing for a couple of programmers to hack together a side project. It’s another thing for Google to put gobs of time and money behind it. The best way to predict how committed Google will be to a given project is to figure out whether it is “strategic” or not.

Google makes 99% of their revenue selling text ads for things like airplane tickets, dvd players, and malpractice lawyers. A project is strategic for Google if it affects what sits between the person clicking on an ad and the company paying for the ad. Here is my rough breakdown of the “layers in the stack” between humans and the money:

Human - device – OS – browser – bandwidth –  websites - ads – ad tech – relationship to advertiser – $$$

At each layer, Google either wants to dominate it or commoditize it. (For more on the strategic move known as commoditizing the complement, see here, here and here). Here’s my a brief analysis of the more interesting layers:

Device: Desktop hardware already commoditized. Mobile hardware is not, hence Google Phone (Nexus One).

OS: Not commoditized, and dominated by archenemy (Microsoft)!!   Hence Android/Google Chrome OS is very strategic. Google also needs to remove main reasons people choose Windows. Main reasons (rational ones – ignoring sociological reasons, organizational momentum etc) are Office (hence Google Apps), Outlook (hence Gmail etc), gaming (look for Google to support cross-OS gaming frameworks), and the long tail of Windows-only apps (these are moving to the web anyways but Google is trying to accelerate the trend with programming tools).

Browser: Not commoditized, and dominated by arch enemy! Hence Chrome is strategic, as is alliance with Mozilla, as are strong cross-browser standards that maintain low switching costs.

Bandwidth:  Dominated by wireless carriers, cable operators and telcos. Very hard for Google to dominate without massive infrastructure investment, hence Google is currently trying to commoditize/weaken via 1) more competition (WiMAX via Clearwire, free public Wi-Fi) 2) regulation (net neutrality).

Websites/search (“ad inventory”): Search is obviously dominated by Google. Google’s syndicated ads (AdSense) are dominant because Google has the highest payouts since they have the most advertisers bidding. This in turn is due largely to their hugely valuable anchor property, Google.com. Acquired Youtube to be their anchor property for video/display ads, and DoubleClick to increase their publisher display footprint. On the emerging but fast growing mobile side, presumably they bought AdMob for their publisher relationships (versus advertiser relationships where Google is already dominant). The key risks on this layer are 1) people skip the ads altogether and go straight to, say, Amazon to buy things, 2) someone like Facebook or MS uses anchor property to aggressively compete in syndicated display market.

Relationships to advertisers:  Google is dominant in non-local direct-response ads, both SMB self serve and big company serviced accounts.  They are much weaker in display. Local advertisers (which historically is half of the total ad market) is still a very underdeveloped channel – hence (I presume) the interest in acquiring Yelp.

This doesn’t mean Google will always act strategically. Obviously the company is run by humans who are fallible, emotional, subject to whims, etc. But smart business should be practiced like smart chess: you should make moves that assume your opponents will respond by optimizing their interests.

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  • semilshah
    This is my favorite Cdixon.org post to date. Very applicable to many other sectors and instructive. Another good take on Google's announcement today about cloud Docs is by @Furrier, located here: http://siliconangle.com/blog/2010/01/12/google-...
  • traxor
    Google is such an interesting company that I think it makes people want to use their services. They seem more 'friendly' than most other places and that's a great thing :).

    Loving the article on their strategic plans for control.

    Maybe it'll end up like Minority report, wherever we go there will be computers talking to use about Google, saying our names etc.
  • Chris,
    You left a out a big one. In ad tech Google's new ad exchange and real time bidding is a key touch point and lockin to their customers. By building an exchange to sit between digital media buyers and all types of digital media (video, search, mobile, display, etc) Google is effectively intermediating at a very strategically important level. Especially with real time bidding and its technology integration requirements, network effects and eventual natural monopoly, Google can become the dominant gatekeeper to all types of digital media buying.
  • What Google really needs is a decent competitor. Someone who iterates just as fast, and has similarly solid cash flows to permit a patient and experimental approach to innovation.

    Microsoft would be the ideal candidate, but no-one trusts 'em. Personally, I'd like to see IBM take Google head on.
  • seems like IBM is pretty much strictly in the consulting business these days.
  • A common misconception. IBM is everywhere, from chip technology, to open source, to RFID. They still have a phenomenal R&D capacity, but seem to eschew most of the business areas where Google is present.

    If they wanted to, they could cause Google a lot of pain.
  • Thnx for this eyeopener. I'd forgotten about IBM actually.

    But in tech, and especially where tech touches the consumer, there is a big gap between "they could" and "they can". It takes drive and DNA. Does IBM have that?
  • Without search, google will be just on of the milions. Everyone is looking for something every day.
    Other sources of income are, in my opinion, not so strong as search.
    And loosing this, google loose all.
  • Mark Stoneham
    Any firm that derives 99% of its revenue from one source has to be vulnerable, even if it's not obvious in the current paradigm. At some point Google needs to diversify its revenue base, and they won't do that by killing competitors by giving away products (MS and ChromeOS).

    And while search ad revenue isn't about to fall off a cliff, inevitably there will be something that grows around Google where they don't participate and can't buy in. They are more vulnerable to new ideas than they are to challenges to their existing strengths. For example, imagine someone building a position as the gatekeeper for display ads in the same way Google is for search ads...
  • i think there may be a third leg of their strategy, collaborate

    it may well be dominate, commoditize, or collaborate
  • Interesting. Any particular areas where you think that's happening?
  • Social media
  • True. I think that's out of necessity because the can't nuke them and
    social is perhaps the only thing google's been repeatedly bad at.
  • So will there be other examples of that combo?
  • Other example of collaborate: ad creative. They've partnered with the organizations that control the big ad dollars -- ad agencies.

    But.

    They've also got a commoditize horse in the race with their display ad builder. And as the tech gets better expect them to continue to build automated and DIY tools for higher-complexity creative that they want to serve.
  • Great question. I'd have to think about it a lot more to say something intelligent. The jury is still out on a lot of areas. Going against Apple on OS/phone for one seems very hard. Telecoms are protected by sheer amount of capital invested (even Goog couldn't afford to build worldwide last-mile infrastructure).
  • i've been playing with an android phone i'm not supposed to talk about so i
    won't yet, but i am feeling that android to the iphone is very much windows
    to the mac. it's close enough and available on many handsets with many
    configurations. apple has done it again. hard to believe.
  • you mean google has done it again, right? if so, yes, amazing.
  • yup. it's not as good as the iPhone, but its close enough in my opinion
  • Chris,
    Love the "anything that sits in between the human and the advertiser" analogy.

    Human - device – OS – browser – bandwidth – websites - ads – ad tech – relationship to advertiser – $$$

    I think there are a few things missing from this list.

    Anything that can close the feedback loop between ad spend and profit margin falls in google domain too.

    The phone:
    Users see and ad and call to complete the sale. Google Voice, Gizmo are primary pieces in it. Google would soon release a telephone exchange in the cloud as Google Apps tool. Google analytics integration of the call conversion data is the next step.

    CRM:
    Salesforce would be a target, if only it were a little cheaper. But I think Google would push its Google Apps for your domain + Google App engine + Google Web Tool kit community to get startups to develop a better CRM.

    Other tools to run SMBs:
    Quicken etc would soon have competitors that would plug in to the above Dev platform and tie into Google Checkout.
  • Thanks - agree and very interesting points.
  • abhi
    this is an excellent post. absolutely excellent.
  • Very excellent post, but you haven't gone granular enough with your value chain:

    Human - device – OS – browser – bandwidth – websites - ads – ad tech – relationship to advertiser – $$$

    You've skipped two important recent Google moves to commoditize the complement: Google DNS (placed between browser & bandwidth) and goo.gl URL shortening (which could be placed at a number of levels, but for now, websites).

    I very much agree that Google's Net Neutrality stance is a wise strategic move.
  • The way I think about the stack, even if Google DNS literally sits between browser and bandwidth, it can strategically fit somewhere else. Seems like DNS's greatest value to Goog is to get aggregate user website behavior to then improve search engine and ad tracking...?

    URL shorteners seem to me a lot like a second layer of DNS (a not very secure and reliable DNS unfortunately).
  • Thanks Chris for giving a breakdown of the stack. Very helpful.

    A few layers are missing though - between ad tech and $$$.
    Namely: Means of online payment. And tracking.

    Google has a good handle on the tracking part. But I think they are missing the online payment boat. (Google checkout is not very good...)
  • Yeah I kind of lumped a lot of stuff in ad tech which could have been broken out into many more parts.

    Google checkout: my sense is its more important to the Goog strategically as a way to eventually do true CPA ads where the action is actual purchase.
  • Nice work !!
  • Brilliant analysis Chris.
  • Chris it's an interesting post. I think people interested in Google really should read Auletta's book on Google. It's current and the intro alone has oustanding data on the shifting media trends. I'm assigning the book at NYU this Spring.
  • is it actually good? i read a bit of the book and although I love his New
    Yorker pieces he seemed pretty out of touch with tech world.
  • lots of noogets. thx.
  • Gary Luu
    Chris, I really enjoyed this post. Short of going to business school, what are some resources you would recommend for learning more? Do you think going to business school is worth it to learn this material?
  • I think you can get a lot of this from books. Michael Porter invented this kind of strategy. Any book by Clay Christensen is great. Frankly (perhaps self servin) I think the best thinking is going on these days on blogs.
  • RandyB
    One further point - remember who Google's *customers* are: advertisers, not Internet users. In fact, Internet users are the *supply* that Google "sells" to their customers. Thus, Google's strategic plan as outlined here works as long as their strategic moves have the net effect of granting Google control of a greater share of the available supply, thus allowing Google to set or control prices to their customers more completely.
  • Nice. Spot on.
  • Do you think that "dominate or commoditize" thinking really drives product commitment at Google? Or is it an ex post facto rationalization or a useful model for an outsider?

    Here's another explanation for Google's behavior: "We're making a lot of money on ads, let's milk that and run as many cheap experiments as we can to see if we can create a second line of business." Does this model also fit the facts as well as the "dominate or commoditize" model?

    On a related topic, I wish more people knew about Christensen's theory of standardized interfaces: http://j.mp/5JYxyO. It's a useful model for thinking about the Web's constant attempts to propogate new standards.
  • Chris, you referred to Google having lots of HBS grads now, but influence and decisions seems firmly in hands of engineers. A lot just emerges from what their coders want to tinker with. Google launches a lot of initiatives which get a lot of PR and scare existing market players, but quite often they don't follow through (and their lack of customer support is a big achilles heel). They often don't seem to care whether the new initiative is a money maker; if it commoditizes a space then that's just as good. With such a cash cow, they can afford to play around (or scorch-earth a sector).
  • I agree a lot of what's built comes from engineers. I'm talking here about what they put real muscle behind. E.g. advertising Chrome on their home page lately.
  • another way to look at it is that Google is a large organization, with lots of smart people with decent autonomy to take action and lots of resources to apply to different problem.

    They just do stuff because they can.

    Your domination/commoditization analysis is spot on but I think it's an outside, post fact view. Inside it's much more random.

    they say that Microsoft started to lose it's way somewhere in the mid 90s when it achieved its core mission: "a personal computer on every desk". To a large extent that is happening to Google too: they somehow managed to "Organize the world's information" and like an aging red-star are expanding all over the place...
  • I expect there is a lot of chaos and randomness there but the big decisions about where to invest hundreds of millions of dollars are made by very senior people who understand the kind of strategy I'm describing here. And I would argue that where they've invested heavily has been pretty much along the lines that this strategic analysis would predict.
  • I think it's less about where the folks at the top decide to apply the millions of dollars but what's the DNA of the organization and the shared goal of all it's employees.

    Ask a typical google employee (including upper management) and they won't say that is google's strategy (heck, many even don't see themselves as an advertising company).

    So like the Roman empire (sorry for the analogy abuses :-) once everything that can be conquered has been the army grows restless and things fall apart ... even if the Emperor has a good strategy on how to govern and applies resources accordingly.
  • Nivi - I think a better answer to your excellent question would be in my analysis Occam's razor strongly favors the strategic analysis I present here (which I take from many others - Porter, Christensen). I have no insight into what actually goes on in the minds of people at Google. But as when we analyze chess games I think you start by trying to figure out what someone should do and then look at what they actually do.
  • I love Christensen btw and a lot of my thinking comes from his books. Was planning to blog more about disruptive vs sustaining innovations in the future. Thx for the link...
  • Nivi, thanks for the link from EE Times - solid.
  • I am absolutely sure "dominate or commoditize" thinking is at play. If its not, they don't understand micro-economics, which I'm sure they do. The stuff I'm discussing is also standard Harvard MBA stuff, which Google is now full of.
  • jacopogio
    What do you think are the weakest points for Google ? (Going back to IBM opening the path to unknown MS... And MS leaving space to unkwown Google...)
  • I wonder if Facebook, LinkedIN and Twitter are competitors because data members give them (e.g., your statements, profile and social graph) could be used to improve click through rates on ads.

    On a related note: Facebook has eyeballs and advertiser relationships, and LinkedIN and Twitter seem well positioned to build these if they partner.
  • Some obvious weak points are:

    1. Government intervention driven by consumer privacy concerns - more likely in the EU than US.

    2. Inability to keep talent motivated. What's the motivation for key talent at Google? If they do well, who cares, they were expected to given that they have all the resources and leverage of Google.

    3. Search and search advertising no longer being the dominant way of finding information.

    With the possible exception of the govt intervention scenario, I agree though that it will be slow erosion rather than any sudden drop.
  • Great question. If I only knew... I mean the most formidable competitors are MS and bandwidth guys. I think people skipping Google and going straight to Amazon is a real risk - Google works the worst on precisely the most monetizable areas. see my many earlier posts on this e.g http://cdixon.org/2009/12/19/anatomy-of-a-bad-s...
    But these are more like to erode and not displace a la MS & IBM...
  • jacopogio
    For the sake of this last 2009 discussion, here are my own 2 chess-player's cents ;-):

    the next-Google will come out from a "not so important" license given by Google to an unknown start-up for a new device that will have mass explosion (IBM-MS) or
    from an unknown startup using a new easy-simple approach to a fundamental of Google Business (let's say: payed direct local content supplied live to the users, without any search page in between) (MS-Google).
    Let's wait a few years or ... monthes ?

    Best Wishes to you Chris and to all your readers !!
  • re next google: that's how it always seems to happen. if you read Clay Christensen, you should look for things that people think is a toy but is steadily getting better - e.g. Hunch ;)
  • Ha, I thought of Hunch instantly when you posted about looking for things that look like toys, but are constantly improving!
  • Chris - really sound analysis; Thanks for putting it down on paper for the rest of us. Happy new year! Best, Peter
  • Can you give an example of a business that owns all the 'layers in the stack', whether its tech related or not? Fashion related companies like American Apparel came to mind. Just wondering if you had specific companies in mind while writing this.
  • freerobby
    After the Sun acquisition, an argument could be made for Oracle.
  • Exxon. They own or commoditize every layer in their stack.
  • Well, most "stacks" (in economics they call them "value chains") are much simpler than in tech. (One more reason to love tech!). To maximize profits, you don't need to own every layer, you just need to own some and then commoditize the rest. That's what MS did with the PC for example. (BTW, when a layer is commoditized you can still profit, you just need to take a low cost strategy - a la Dell and Walmart).
  • The layers controlled by Dell and Walmart, even Microsoft seem closest to the consumer. How does your distance from the consumer on the value chain affect the need to take a low cost strategy whether it is commodotized or not?

    Relative to the twitter ecosystem, if twitter is the equivalent of Microsoft (owning a particular layer), then could you call all the twitter clients a commodity? And in that case, are they simply in a race to the bottom? Since its in the interest of twitter to commodify that layer as you talked about in your previous post, http://cdixon.org/2009/09/14/the-inevitable-sho..., what is pushing all the money being invested in these third party apps? I can't imagine they're all betting on being acquired by twitter.
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