everything you wanted to know about google

Everything you always wanted to know

about Google…But were afraid to ask

Paris, December 2008

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

..…….

2

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3

Google key success factors : Web specific ?

Scalability

• Ability to easily grow at

marginal costs

• Applied to infrastructures :

ability to adapt its size to

high load & volumes

• Applied to business

models : ability to

monetize millions of users

Network effects Data mining

Openness Cocreation Business model

• The traditional walled

garden1 media strategy

becomes irrelevant

• Content and services must

be open and interoperable

to favor audience

circulation

• The utility of a good or a

service varies with the

number of users

• The reach of a critical

mass of users constitutes

a significant barrier to the

entry

• The web offers the

opportunity to exploit and

analyze a very large

amount of data

• Users’ behavior can be

analyzed to create

monetizing value

• Non-traditional actors

become part of the value

chain

• Users, content creators

and external developers

are given the tools to

create new markets and

enrich services

• Advertising is not a market

but a business model

• Any market that attract

advertising is a target for

Google

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


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4

Why won’t Google be affected by the crisis ?

Why is Google trying to change the mobile world ?

Why isn’t YouTube a content portal ?

Why does Microsoft fear Google ?

How Google wants to compete with Facebook ?

Why is Google buying satellites ?

How does Google buy traffic ?

Why did Google acquire DoubleClick ?

Why doesn’t Google monetize all its services ?

How does Google capitalize on Open Source developers work ?

How did Google capture the offline advertising market ?

Why is Google stealing our voices ?

Is PageRank a really competitive advantage ?

How does Google turn advertising into information and performance ?

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

1

2

3

4

5

6

7

8

9

11

12

13

14

10


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5

Why won’t Google be affected by the crisis ?

During a crisis,

performance

advertising gains

market shares

+ 3% 2007-2008 1

YouTube

monetization

increases

Estimates 2008 :

Revenues = 200 M $1

Monetisation of

the Internet

Mobile audience

260 millions mobile

subscribers

worlwide oct 2008 1

Explosion of the

non advertising

revenues

+450% 2007-2008

Performance

advertising

On line

video

Internet

Mobile

Licenses and

other

revenues

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

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

estimates

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

Revenues 2008 Revenues 2012

Bn$ 201

Bn$ 35 1

1


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6

Why is Google trying to change the

mobile world ? (1/2)Mobile industry is based on a “ traditional” locked values chain.

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

TerminalOperating System

Portal Operator Web Contents

Examples:

Limited Network AccessAccess restricted to services/contents

and to their improvement

• Terminals assigned to a unique operator

• Difficulty of interconnecting networks

• Operator portals favored over other portals

• Services offered by terminal manufacturers

favored over other services

• Closed operating systems

2

The mobile industry is not suited for the Google development model

based on openness, interoperability and network effects.


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7

Why is Google trying to change the

mobile world ? (1/2)

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

1 Operating System

Location-based

services

Cab4me FreeFamilywatch

Games

Golfplay JOYit

Social

Networks

Jaiku 3Wertago

Collaborative

Tools

ShareYour

BoardGrand central 3

2 Federal Communications Commission

Google breaks open the mobile industry value chain to create an environment

that will be fit to the distribution of its products and monetization model.3 Acquisitions

Android : Open Source

O.S.1Lobbying Telco partnerships

• Android Developer Challenge:

Contest for developers to create

new applications for Android

• Open Handset Alliance:

Common initiative of 34 mobile

phone industry players

(manufacturers, suppliers and

distributors) aiming at spreading

Android

• Google candidacy for mobile

license attribution aims to force the

FCC2 to impose an openness

clause to the winner

• A success : clause partially

imposed on the winning bidder,

Verizon.

• Pressure from Google to force

operators to offer its applications

as default options

• Sharing of advertising

revenues between Google and

operators

2

In addition, Google developed and acquired mobile devices applications :


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8

Why isn’t YouTube a content portal ? (1/2)

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

YouTube has already won the audience battle …

…

1 NewYork Times

2 Hitwise 2008

75%60%

9%16%

4%8% 2% 3% 1% 1%

May 2008

May 2007

Organise informationGive access to

information

Monetise contents

through various

sources of audience

•A new information silo: video

search

•Next : Speech to text

technology : information

searches within video

contents

• YouTube bandwidth

spending estimated to reach

1M$/day1

• Broadcasting of contents

through Google websites as

well as other sites

• Revenue sharing logic

Market shares of 5 leading video websites,

United States (may 2008 vs.may 2007)

[%]2

3


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9

• YouTube Program Partner :

Payed providers of semi-

professional content

• Broadcasting contracts

with major content providers

Encourage content providers to use the service

Attract as many viewers as possible

Monetize through relevant advertising tools

Unlike its competition, YouTube follows an open logic and focuses primarily on

developing content distribution tools :

YouTube acts as the platform of a two sided3 market composed of content

providers and video seeking users.

Why isn’t YouTube a content portal ? (2/2)

2 Clickable text advertising displayed on a video 3 See Annex

• Broadcasting videos on

YouTube website and other

Google sites (ex :

Google.com, GoogleNews)

• Exporting videos (blogs,

social networks) and

developing API1 for

advanced broadcasting on

third party websites

• Broadcasting on all video

devices : television, mobiles,

multimedia players, video

consoles

• Traditional advertising:

AdSense and banners

• In-video advertising :

Pre-roll, post-roll, overlay2

• Brand advertising:

broadcasting video ads

within an environment

coherent with the brand’s

image

• E-Commerce: Affiliation of

partner websites (Amazon,

Itunes, video games)

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

3


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10

Why does Microsoft fear Google ?

Google’s ambition isn’t limited to “in browser” Web services, but extends to

any online or offline application market.

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

Google partly « destroys » Microsoft’s market when shifting value

from offline to online

• Launching of the Office Google

software pack: a word-processor,

a spreadsheet program, a

presentation tool and a calendar

• Free alternative to Microsoft

Office pack

• Acquisition of SketchUp, a 3D

modeling software with a free

version made available

Disruption of offline application

market segments

• Launching of Google Gears:

Open Source project allowing an

offline use of online applications

• Claimed ambition of becoming

a standard and encouraging

online languages as opposed to

offline programming languages

Consolidation of the online

environment

4


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11

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

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

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

Google wants to become the « social data search engine » and to monetize

this data, leveraging network effects.

Network effects

How Google wants to compete with Facebook ?

Facebook’s platform is limited, Google’s is the whole Web

5

Network

effects

Network

effects


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12

Why is Google buying satellites ? (1/2)

Since 2005, Google has been multiplying investments in all kinds of

infrastructures:

Wifi Gratuit

Wimax

Backbone1BaloonWifi

Satellite

• 60 M$ Investment

• Internet access in

developing countries

• Partnership

• A mobile high-speed

internet access

technology

• A 100 M users

market by the end of

2008

• 100 M$ investment

• Expansion of high-

speed networks

• Partnership

announcement

• Internet access

technology superior to

satellites for isolated

areas

• Free Wifi in Mountain View

• Investment in Fon: shared Wifi

access

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

6


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13

Internet infrastructures is actually Google’s business

infrastructure:Traffic on Google websites depends on internet infrastructure development and

availability (Backbone, Wifi, Satellite,…)

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

chain:

Strengthen and secure existing infrastructure

Favor high-speed Internet access

Prioritize Internet access for unconnected countries or populations

• Strengthening and securing existing infrastructure

lightens Google’s dependancy on its providers

• Favouring high-speed Internet access means more

time spent and usage volumes, thus increases

Google services usage

• Future web users are Google services’ next

users

Why is Google buying satellites ? (2/2)

Through infrastructures investments, Google reinforces its traffic providers

and increases access to its services.

6


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14

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

turning to advertising… Truth is Google largely buys traffic from providers

•Firefox: 60 million daily

users in 2008

•Google finances 85% of

Firefox in exchange for

having its search engine

embedded in the browser

Browsers

• In 2006, partnership

deal with Dell to have the

Google search engine

appear by default on Dell

computers

• In 2008, partnership

deal with Apple to have the

Google search engine

appear by default on

Iphones (13 million devices

sold by october 2008)

• Partnerships with

manufacturers allow the

search engine to be

guaranteed to in a prime

position.

Manufacturers

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

massive audiences.

• The Google Toolbar is

part of the web navigator,

which makes Google the

default search engine

• Adobe installs it as part

of a package with

Shockwave(2006)

• Sun has been installing

it as part of a package with

Java since 2005 (20 million

uploads/month)

Toolbar

• In 2005, Google bought

a 5% stake in AOL for 1

billion$ (20 million

subscribers at time of deal)

• Google became AOL’s

white label search engine

• Google expands its

advertising network reach

Portals

7


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15

Why did Google acquire DoubleClick ?

• In 2007, Google acquired DoubleClick, one of the world leaders in display

advertising :

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

Advertising

houses

< 100k

UV2

100k-

1M UV2

>1Mon

UV2

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

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

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

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

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

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

Market shares of main online

advertisers in relation to website

traffic 1

Number of advertisers

Tra

ditio

na

l

adve

rtis

ing

mark

et

Banner Market

Text ad market

Ad budget per

advertiser

Google acquired DoubleClick to gain an expertise (display) and global market

shares (highly popular websites)

2 Unique Visitors

Google « moves up » the long tail

of advertisers

8

To position itself on the banner

market

To reach for highly popular

websites


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16

Why doesn’t Google monetize all of its

services?Some Google services are free of charge and monetized through advertising :

Blogger: blog creating tool

Google Health: service for managing and storing personal medical information

GoogleNews: personalized mash-up of news articles and summary

Picasa: photo sharing service

Google SketchUp: 3D model creating tool

Goog-411: phone information service

…

Google global strategy allows strong indirect monetization of its products

Tools designed to

generate audience are

made available

Products specifically

developed to improve

other Google products

Attract new customers

through loss leaders

Monetization of blogs created on

Blogger through AdSense or

FeedBurner

Google 411 created to better the

video indexing on YouTube

Picasa devised as a loss leader

towards other Google products

These services are actually indirectly monetized :

9


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17

How does Google capitalize on Open

Source developers work ?Google encourages development of open source applications:

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

Increase of total Internet traffic

•New applications create new uses, leading to increasedtotal traffic

Promotion of a more « open » Web

•Increasing the interoperabilitymultiplies network effects1

•Opensource isbecoming an advantage to attackproprietary code strategies

Assembling a free public relations team

•Developers’ chats are a very effective public relation tool

Development of Open Source langages used

by Google

•The number of available Open Source codes encourages the emerging of new products

•Feedback of Open Source developershelps creating new products

Google supports the Open Source community in a spirit of collaborative

creation, one of Google’s strategic pillars

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

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

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

Google Developer Days: seminars dedicated to Google products

1 See Annex

10


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18

How did Google capture the offline

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

Google is exploring the offline ad market!

1 TNS Media Intelligence, US advertising market

Most offline media (television,

radio, press,…) begin to be IP-

ready with online versions

• Ad transfer from online to offline

(YouTube on television)

• Entry on traditional offline markets

(radio, billboards,…)

• Integration of offline techniques

(traditional fixed pricing)

• Partial adaptation of AdWords onto

radio and television

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

Not specifically successful for now…

11

3% 7% 8%

17%

21%

44%Billboards Radio

Internet Daily Press

News Press Television


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19

Why is Google stealing our voices?

In 2007, Google launched Google Voice Local Search in the United States, a

free and automated phone directory service :

Google is creating a database of phonemes, recorded during calls in order to

better its speech to text1 technologies:

What is the business model of this

free and ad-free service ?

Creation of a phonemedatabase

Developmentof « speech to

text » technologies

Indexing of YouTube

audio tracks

Indexing of all audio/voice

sources

Externalizing tasks onto users (« crowdsourcing 3») is a commonly used

process by Google to improve its products.

1 Converting oral information into text

2 First experiments with political videos posted during the presidential campaign of 2008.

3 Neologism created in 2006 by Jeff Howe and Mark Robinson, Wired magazine editors

2

Bla bla

bla

12


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20

Is PageRank a really competitive

advantage ? (1/2)

PageRank is Google’s link analysis algorithm that measures the probability

that a page will be relevant to user’s query :

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

relevance

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

PageRank’s simplified formula is :

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

outbound links contained in pages v)

Google1 claims that PageRank is one of its search engine’s main competitive

advantage :

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

A « champion of

democracy »

The search engine’s

« cornerstone »

A tool unlikely to be

tampered with

13


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21

Is PageRank a really competitive advantage ?

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

Sale or exchange of famous website links

(webringing)

Search Engine Optimization1 techniques

PageRank is only one of many Google’s search competitive advantages. It

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

1 Set of techniques aiming at improving a site’s referencing on a search engine.

Scalable architecture Quick/simple queriesRelevance guaranteed

by 200 other criteria

• Capacity of increasing/

growing according to the

volume of indexed pages

and number of queries

• 2 millions servers by 2008

• Clear query interface

• Simple and quick

presentation of results

• The search engine’s

algorithm was subjected to

450 modifications in 2007

An outdated technology?

Launch of search engines that

don’t use tools such as

PageRank (Cuil, Powerset)

Google’s search engine success relies on other factors :

13


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22

How does Google turn advertising into

information and performance?(1/2) « Advertising income often provides an incentive to deliver poor quality search results»

Sergey Brin & Larry Page

• Influence results by

making paid for clients

appear first

• Example: Opentext/Kelkoo

• Little or non-existent

targeting

• Large size adverts

• Slows down results

display from a search

engine query

Weak relevance

• Impossible to reward

efficient advertising

• Example : television ads

• No direct measure of real

performance

• Example : invoicing

according to the number of

displays (CPM)

Most advertising models present strong weaknesses

Strong intrusionUndefined

performance

14


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23

14

How does Google turn advertising into

information and performance?(2/2)

Displays advertising

Most relevant ad

defines

Quality ScoreDirect impact on advertising value

Qualityscore measures the relevance of the ad and

is determined by the click throug rate on the ad. It

impacts the display rank and Cost per Click:

• Rank: relevant ads are pushed up,

non relevant ads do not appear

• Cost per click of the ad : performant

ads are charged less

RelevanceFor the user

Total cost of the advertising

campaign is determined by the

number of clicks on the ads and

not by the number of displays.

Google’s advertising model benefits the user (improved relevance) as well as

the publisher (performance based billing & rebates)

Less relevant ad

PerformanceFor the advertiser


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24

Google : the network circulation value

creation model

Traditional value creation

Eg : Microsoft

Network value creation

Eg : Google

Customer

products

$

Server

Products

$

The global value of the company relies

on independent lines of

products/business units

Gmail

Youtube

Partners

The global value of the company relies

on traffic between network parts

(proprietary or partners)

Business

Products

$

Entertain

ment

$

Search

engine

Apps

Apps

$

$

$

$

$

$

$$

$

$


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25

Going further : are Google’s key success

factors limited to Google

• Our conviction : Every company innovating in the digital industry must

address and capitalize on the 6 identified key success factors to perform

on digital markets.

• Our proposition : faberNovel proposes to align companies strategy,

development projects and existing products with these factors to ensure

success optimization and market performance.

Download our comprehensive White Paper

« Google’s key success factors »

http://www.fabernovel.com


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26

Annex

• Definition : network effects

• Definition : two-sided market

• Pricing of a two-sided market

• Glossary

• Financial datas

• Acknowledgement

• Contacts


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27

What is a network effect?

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

users as more people use that same service

Phone’s utility is limited if

the network is composed

of 2 users

The utility for a user

raises if the network

broadens

According to Metcalfe’s

law, the utility(U) of a

network is proportional to

the square of the number

(n) of its users

U ≈ k*n2

Network effects creates critical masses of users.

They represent significant barriers to entry for competitors.


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28

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

clients/providers to interact and which optimizes the revenue distribution

among these groups with the objective of maximizing market sizes.

Exemple of the video game market

Network effects in action

Side A

Developers

Side B

Consumers

Price A Price B

• Utility to a new developer

increases as the community of

developers grows (shared

knowledge)

• Utility to a new consumer

increases as the community of

consumers grows

(secondhand market)

• A potential market for a

developer gets bigger as more

consumers enter the said market

• The number of games available

to the consumer increases with

the number of developers

working on the platform

Internal effects Crossed effects

Internal

network

effects

Crossed network effects


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29

Pricing of a two-sided market

Side A

Price A > 0

Platform1

• The platform may charge a side

• Example 1 : Apple Appstore charges

developers by taking a revenue share

on sold applications

• Example 2 : Microsoft makes

consumers pay for video games

• … or subsidize a side

• Example 3 : Google Android finances

developers through a contest

• Example 4 : Youtube finances video

content providers

Face A

Price A < 0

Platform1

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

and vice versa

Who should you be charging?

Who should be subsidized?

The platform must subsidize the groupe that is most price-sensitive and charge the

group that is most sensitive to the other group’s size.


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30

Financial data (1/2)

Revenues and Net margin (M$)

2002 2003 2004 2005 2006 2007

100 106 3991465

30774203

439 1466 3189 6139 10604 16594

Revenues

Net

margin

CAGR Net margin 02-07 : 112%

Revenue distribution/activity (B$)

CA 2007

65%

34%

1%

10,6

5,8

0,2

Licences and other

revenus

Partner websites

(AdSense)

Google web sites

16,6Total

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

CAGR Revenues 02-07 : 107%

Net margin’s growth outperform

revenues’ growth

Most of Google’s revenues still

come from its own websites

Advertising revenue share to partner

web sites is increasing2

and is the highest of the market

78%2005 2006 2007

79% 85%


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31

Financial data (2/2)

2005 2006 2007

6,1

10,5

16,4

Traffic acquisition costs

Advertising revenues

2,1 3,3 4,9

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

2005 2006

2005 2006 2007

6139

599

9,0%

10604

1229

11,0%

16594

2120

12,0%

Turnover

R&D

investments

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

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

Controlled traffic acquisition costs 34,9% of advertising revenus in 2005 vs 30,1% in 2007

Source: rapport annuel Google 2007

+ 26%

1,9 2,4


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32

Glossary

• API : application programming interface. Standardized programming protocol

allowing applications to communicate

• Internet Backbone : main trunk connections of the Internet, made up of a large

collection of interconnected high-capacity data routes and core routers that carry

data across the countries and continents

• Crowd sourcing : act of outsourcing a task to users

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

• O.S. : operating system

• Overlay ad : clickable text advertising displayed on a video

• Scalability: property of a process, which indicates its ability to handle growing

amounts of work easily

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

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

paid search results)

• Speech To Text : technology converting spoken words to machine-readable input

such as text

• Walled Garden : closed or exclusive set of information services provided for users

by a network or portal


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33

Acknowledgements

To faberNovel contributors :

• Amaury de Buchet, VP Consulting

• Cyril Vart, VP Strategy & Development

• Alexis Arquié, Junior Project Analyst

• Mounir Fassouane, Junior Project Analyst

To the bloggers :

• Olivier Ertzscheid from affordance.typepad.com/

• Google Operating System : googlesystem.blogspot.com/

• Richard MacManus from readwriteweb.com/

• Techcrunch.com & Mobilecrunch.com/

• Frédéric Cavazza from fredcavazza.net/


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34

Stéphane Distinguin

Founder and CEO

[email protected]

Cyril Vart

VP Strategy & Development

[email protected]

Pierre Fremaux

Project Analyst

[email protected]

Matthieu Lecomte

Junior Project Analyst

[email protected]

Tél. : +33142722004

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