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Technology strategy and management

Google: What It Is and What It Is Not


Google went public in August 2004 at $85 a share and quickly saw its stock price more than double. It rose to enormous heights in terms of valuation (price-to-earnings ratio), and quickly exceeded the market capitalization of Ford and General Motors combined, as well as Yahoo! Some observers wondered if we were again heading into an Internet-fed bubble (this time, however, focused on one firm). The Google case was discussed in the innovation class I teach at MIT, leading me to reflect here on what I think Google is and is not.

First, Google is clearly about the value of technological innovation, both to users and investors. The PageRank algorithms, developed initially by Google founders Larry Page and Sergey Brin while they were students at Stanford University, interpret links to Web pages as "votes" of importance. Along with other algorithms that analyze the chain of hypertext links leading to focal sites, Google offers a much superior way to search the Web compared to brute-force methods that search primarily for key words and their frequency. There is still plenty of room to improve on search technology, but Google has shown that, at least in this case, having the best solution is worth something in the marketplace. As Xerox, Lotus, WordPerfect, Novell, Sony, and Apple learned years ago, not all companies with the best solutions or most innovative technologies end up as market leaders or financial juggernauts.

Second, Google is about innovation in a business model. Rather than relying on the usual straightforward payments for ads such as banners, or payments for "click-throughs" to an advertiser's site, Google did something different. It got advertisers to pay for being listed alongside search results as "Sponsored Links," and to pay regardless of whether users clicked on the ads. Google also convinced advertisers to bid for being listed ahead of others. The underlying insight is that most Web searches—approximately 40%—have a commercial motivation, with people looking for products or services. In addition, most purchases over the Web—approximately 75%—begin with a Web search. So advertisers on search engines pay for something valuable to them. Google exploited this behavioral feature of Web users and "monetized" its growing position as the leading search engine. Google also moved into the business of providing advertisers who will pay for listings to some of its partners—such as Earthlink and AOL—generating another source of revenue and saving itself money.

Third, Google is an example—though not the best example—of the power of what economists and strategy experts have called "network externalities," with "positive feedback loops" and "increasing returns." The more users who come to Google for their searches, the more advertisers come, the better the Sponsored Links become, the more revenues come into Google, the more it invests in having comprehensive searches through its Web-crawling computers, and then more users come, more advertisers come, ad infinitum, perhaps. We have seen the phenomena of network externalities and positive feedback loops in other technologies with more technical "lock-in" effects to users through platform interface standards. Examples of technical lock-in include the CBS-led standards for color television broadcasting and TV sets, VHS over Betamax in video recorders and prerecorded tapes, Windows over the Macintosh in PCs and applications, Microsoft Office over Lotus and WordPerfect in desktop applications, and Internet Explorer over Netscape Navigator in browsers and Web site design.


Perhaps the biggest concern should be that Google is diverting so much time and money to things that have little or nothing to do with improving its search technology.


But Google is more like eBay or Amazon.com, where users continue to flock to the same site because of an indirect externality. The more users who go there, the more benefits the provider can offer to users, without a technical lock-in. Amazon, theoretically, can get better discounts on books as its scale and bargaining power increase. It can also offer many more reader evaluations and other services. eBay simply leverages the fact that most people want to buy or sell goods from the auctioneer that receives the most Web traffic.

So, we should be grateful for Google. But there are at least two things that Google is not.

Google is not a story about "first-mover advantage." It may be the first search engine that many people use, but Google was relatively late to the Web search business, gaining momentum only around 2000. Yahoo, Altavista, and Inktomi were there years before, but failed to hold onto their leading positions in the market and the technology. We might say that Google is about "second-mover advantage." Its founders learned from existing search engines and business models, and devised a better way to manage the technology and the business...which leads me to another thought on what Google is not. Google does not seem to be a "winner takes all" (or nearly all) story, such as with Microsoft and its desktop products including Windows, Office, and Internet Explorer, or Japan Victor with VHS in the home video-recorder market, or even Amazon.com with books and eBay with auctions.

Google itself took advantage of the fact that Web search is not a very "sticky" activity. Years ago, I would type www.altavista.com when I wanted to search for something. Then one day I heard about Google and started typing www.google.com and soon put it in my Favorites list. Now it is embedded in my browser. I also see the Google toolbar embedded in many different Web sites, including the MIT Web site. And there is little to stop someone else—maybe another couple of computer science students at some other university—from developing a better way to perform Web searches. Even Google searches produce thousands of irrelevant listings. There will be a better way someday.

Investors in Google's stock are either momentum speculators (buying the stock because it is hot and going up) or they believe Google is a winner-takes-all kind of phenomenon, fed by early-mover advantage and positive feedback with increasing returns to scale. But Google management seems to know that being the best search engine provides no lasting advantage. This is why the company has rolled out, in beta or production mode, a wide variety of products and services that management hopes will keep people coming back to Google.com. The Web site produces approximately half of Google's searches and revenues. The other half come from affiliated sites, led by AOL, that embed the Google search technology, but could easily switch to some other search engine if the right one came along.

The new products and services are quickly making Google.com into an all-purpose portal, much like Yahoo!, MSN, and AOL. Google now offers a searchable email program; a short-messaging service for mobile wireless devices; a print service to search online books; an index of Web images as well as a service to view images from satellites; chat groups; a targeted news service; a catalog service that translates printed catalogs into digital form; and Froogle, which is quickly becoming the best tool to do price comparisons on the Web.

Most interesting, though, is Google Desktop Search, introduced in October 2004 as a beta release. It creates an index of the content on your computer (including email in Microsoft Outlook), as well as tracks all your Web searches, if you want this function. These are features that Microsoft has been promising for the next release of Windows, called Longhorn, and now pushed back to 2006. I have downloaded the beta and it works remarkably well, though it doesn't index my Eudora email. Perhaps Microsoft will figure out a way to link to the Google desktop index to import a user's history, much like importing Favorites from one browser to another. If so, then Google Desktop Search will not hold users very well. But if Google can protect this data, then it has personalized search and tied the user to its solution.

In any case, we have a battle on our hands, centered around search behavior and technology. Users will benefit from the various innovations from the Google portal, probably no matter what the outcome. Investors in Google's stock may not be so fortunate, however. Unless Google's many efforts succeed in retaining users, the battle is far from over. But perhaps the biggest concern should be that Google is diverting so much time and money to things that have little or nothing to do with improving its search technology. If Google wants to remain ahead of Yahoo!, Microsoft, and any newcomers that emerge, while retaining behemoth customers such as AOL, it had better remain the best search engine on the planet.

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Author

Michael Cusumano (cusumano@mit.edu) is a professor at the MIT Sloan School of Management and author of The Business of Software, Free Press, 2004.


©2005 ACM  0001-0782/05/0200  $5.00

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The Digital Library is published by the Association for Computing Machinery. Copyright © 2005 ACM, Inc.


 

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