Google team android_final

MGMT 619, Winter 2008 Capstone Project Team Android

Team Android Swami Gurumoorthy, Mihir Sambhus, Vaidya Venugopal, Venkataraman Sankar, Jesse Green ii

Table of Contents I. Wall Street Journal Article and Executive Summary.........................................................vii Wall Street Journal Article .....................................................................................................................vii Executive Summary.................................................................................................................................1 II. External Analysis...................................................................................................................2 Industry Definitions.................................................................................................................................2 Mobile Advertising Industry.................................................................................................................2 Mobile Operating System Industry .....................................................................................................2 Six Forces Analysis – Mobile Advertising.................................................................................................3 Level 1 Analysis....................................................................................................................................3 Level 2 Analysis....................................................................................................................................3 Level 3 Analysis....................................................................................................................................5 Six Forces Analysis – Mobile Device Operating System...........................................................................6 Level 1 Analysis....................................................................................................................................6 Level 2 Analysis....................................................................................................................................6 Level 3 Analysis....................................................................................................................................8 Macro Environmental Forces Analysis.....................................................................................................9 Global Trends.......................................................................................................................................9 Social Trends........................................................................................................................................9 Technological Trends.........................................................................................................................10 Governmental/Political Trends..........................................................................................................10 Ethical Concerns................................................................................................................................10 Macroeconomic Trends.....................................................................................................................11 Demographic Trends ........................................................................................................................11 Competitor Analysis...............................................................................................................................11 iii

Mobile Advertising Industry Competitor Analysis..............................................................................11 Mobile OS Industry Competitor Analysis...........................................................................................19 Intra-Industry Analysis...........................................................................................................................23 Intra-Industry Analysis – Mobile Advertising.....................................................................................23 Intra-Industry Analysis – Mobile Operating Systems.........................................................................27 Threats and Opportunities Analysis.......................................................................................................30 Threats and Opportunities – Mobile Advertising...............................................................................30 Threats and Opportunities – Mobile Operating Systems...................................................................32 Summary of External Analysis................................................................................................................32 III. Internal Analysis.................................................................................................................34 Business Definition / Mission.................................................................................................................34 Company Philosophy.........................................................................................................................34 Organizational Structure and Controls..................................................................................................35 Strategic Position Definition..................................................................................................................36 Corporate Level Strategic Position.....................................................................................................36 Business Level Strategic Position.......................................................................................................40 Resources and Capabilities................................................................................................................41 Financial Analysis...............................................................................................................................47 IV. Strategy Effectiveness Analysis ......................................................................................52 Google’s Strategic Move........................................................................................................................52 Effect of Strategic Move on Industry Conditions...................................................................................53 Mobile OS Market..............................................................................................................................53 Mobile Advertising Market................................................................................................................54 Resources Needed for Strategy Implementation...................................................................................55 R&D Resources..................................................................................................................................55 Operational Resources.......................................................................................................................56 iv

Marketing & Sales..............................................................................................................................56 Financial Resources............................................................................................................................56 Overall Effectiveness of Strategy ..........................................................................................................56 V. Recommendations..............................................................................................................57 Short Term Recommendations..............................................................................................................57 Evangelize Android Platform..............................................................................................................57 Ride the Mobile TV wave to expand Mobile Advertising...................................................................58 Make AdWords platform attractive by bundling online and mobile offering....................................58 Longer Term Recommendations............................................................................................................59 Champion the cause to accelerate adoption of 4G Mobile Broadband.............................................59 Innovate Business model to embrace user generated Ad content ...................................................59 Use Targeting and analytics to raise the bar in Mobile Ad platform .................................................60 Strategy Implementation.......................................................................................................................60 Short term Strategy Implementation – Evangelize Android Platform ...............................................60 Changes required to implement recommendation............................................................................61 Long Term Strategy Implementation - Accelerate adoption of 4G Mobile Broadband .....................62 Changes Required to Implement Recommendation..........................................................................62 Corporate Social Responsibility/Ethical Decision Making......................................................................63 VI. Conclusions........................................................................................................................64 Exhibit 1. Mobile Advertisements Industry EcoSystem.....................................................65 Exhibit 2. Dual Sided Advertising Market..............................................................................65 Exhibit 3. Mobile OS/Platform Industry EcoSystem...........................................................66 Exhibit 4. 6 forces Analysis, Mobile Advertising – Level 1& 2 .........................................67 Exhibit 5. 6 forces Analysis, Mobile Advertising – Level 3................................................72 Exhibit 6. 6 forces Analysis, Mobile OS – Level 1 & 2.........................................................73 Exhibit 7. 6 forces Analysis, Mobile OS – Level 3..............................................................78 Exhibit 8. Mobile Advertising market share in 2011..............................................................78 Exhibit 9. Mobile Data Usage..................................................................................................79 Exhibit 10. Average Mobile App. Price- US consumers........................................................79 Exhibit 11. Total Wireless Users.............................................................................................80 v

Exhibit 12. Penetration of Wireless Users in different age groups......................................80 Exhibit 13. Resources /Capabilities of competitors - Online Advertising...........................81 Exhibit 14. Value /Price/Cost Analysis – Mobile Advertising...............................................82 Exhibit 15. Resources /Capabilities of Competitors - Mobile OS.........................................83 Exhibit 16. US Mobile Advertising Spending Projections in 2000.......................................83 Exhibit 17. Mobile Advertising Industry Timeline..................................................................84 Exhibit 18. Google Organization Structure............................................................................85 Exhibit 19. BCG Matrix............................................................................................................86 Exhibit 20. Google’s Value Chain ..........................................................................................87 Exhibit 21. Value /Price/Cost Analysis with Mobile...............................................................88 Exhibit 22. VRIO Analysis for Google....................................................................................89 Exhibit 23. Product Portfolio Analysis...................................................................................90 Exhibit 24. Mobile Ad Product Life Cycle...............................................................................91 Exhibit 25. Valuation Assumptions........................................................................................92 Exhibit 26. Current Valuation..................................................................................................93 Exhibit 27. Scenario Analysis Valuations..............................................................................93 Exhibit 28. Methods of Value Creation...................................................................................96 Exhibit 29. Recommendation Timeline..................................................................................96 Financial Exhibit A. Google Inc. 7 Year Statement of Income..............................................97 Financial Exhibit B. Google Inc. 5 Year Balance Sheet........................................................98 Financial Exhibit C. Google Inc. 5 Year Statement of Cash Flows.......................................99 Financial Exhibit D. Comparative Financial Analysis.........................................................100 Financial Exhibit E. Graphical Comparative Ratios...........................................................102 Financial Exhibit F. Google Inc. Income Statement Trends..............................................105 Financial Exhibit G. Google Inc. Balance Sheet Trends....................................................106 Financial Exhibit H. Stock Performance Jan 2005 – Feb 2007...........................................106 VII. Bibliography....................................................................................................................107 vi

I. Wall Street Journal Article and Executive Summary Wall Street Journal Article Google, Bidding For Phone Ads, Lures Partners1 By KEVIN J. DELANEY and AMOL SHARMA November 6, 2007 Google Inc. is trying to shake up the wireless industry by helping to create cheaper phones that can access advanced Internet services -- and carry its lucrative advertising. Now that the Internet giant has cemented an alliance with 33 partners, the question is whether they will follow through on its attempt to change the rules of the game. After months of anticipation, a group including Google and a number of mobile-handset makers, cellular carriers and other technology companies plans to make new software available -- free of charge -- to power mobile phones that will start hitting the market in the second half of 2008. The move paves the way for mass-market cellphones that will bring consumers' experience on the mobile Web closer to that of personal computers. And Google is betting that its ad revenue will surge as a result. Yesterday's announcement could prove a short-term disappointment for consumers who were eager for more details -- and photos -- of what some have termed the "Google Phone" or the "Gphone." Google didn't announce the creation of any single Google-powered device or show what one might look like. Still, the move shows Google's latest tack for breaking down barriers to expanding its advertising and services businesses. It also highlights Google's belief that its large ad business can benefit if it broadens Web usage -- in this case on mobile phones. Even if "Android," as the platform is called, falls short, it highlights an important shift: Carriers and handset makers are seriously considering changes to the economics of how phones are sold to consumers, as well as offering more open access to the Web and third-party applications. The Android platform announced yesterday by the Google-led Open Handset Alliance includes several layers of software for phones, among them an operating system, a user interface and applications such as advanced Web-browsing software. Among the handset makers that have signed on to the initiative are Taiwan's HTC Corp., Samsung Electronics Co. and Motorola Inc. Operator partners include Deutsche Telekom AG's T-Mobile, Sprint Nextel Corp. and Japan's NTT DoCoMo Inc. Android is a bid to change how the wireless industry operates. Carriers traditionally have decided what applications most consumers see on their cellphones, setting rules and vii

negotiating fees for software developers to gain access. Google has struggled at times in recent years to get its products -- including Google Maps, Gmail email and its search engine -- onto mobile phones in a way that's easy for people to use. With Android, software makers can theoretically write applications that run on any user's phone -- and consumers can freely browse the Web. But until new handsets based on Android come to market, it won't be clear how far operators have gone to satisfy Google's desire for open mobile software. Some carriers have said they still want to make sure Android doesn't allow sensitive user information to fall into the hands of rogue third-party developers, leading to invasions of privacy and security risks. Those issues partly explain why large U.S. operators such as AT&T Inc. and Verizon Wireless, a joint venture of Verizon Communications Inc. and Vodafone Group PLC, have yet to sign on to Google's initiative. Verizon Wireless is still weighing whether to join, a person familiar with the company's thinking said. AT&T, in part because it exclusively carries Apple Inc.'s iPhone in the U.S., is restricted from partnering with Google, people familiar with the matter say. One issue for the carriers is Google's interest in bidding for wireless spectrum in a coming auction run by the Federal Communications Commission, people familiar with the matter say. If Google, which has said it will likely bid, buys spectrum and partners with another company to build a new mobile network, it would become a direct competitor to the operators. The Google software initiative arrives in a field already crowded with cellphone software platforms, including ones from Microsoft Corp. and Palm Inc. Companies that aren't part of Google's alliance question whether Android represents a major breakthrough. Nokia Corp., the world's largest handset manufacturer with more than one billion current users, said it has already embraced an open approach with its high-end cellphones, which use the Symbian operating system and have a large community of application developers. "It's great to see others following the trail we've been blazing," said Bill Plummer, a top Nokia executive in North America. Tech consortia for decades have been notorious for failing to live up to their promise. Google Director of Mobile Platforms Andy Rubin acknowledged the troubled history of previous consortia, but said that Android was different because "we're actually releasing in one week this software." Google executives were coy about any eventual plans for Google-branded phones. "If you were to build a Gphone you could build it out of this platform," Chief Executive Eric Schmidt told journalists during a conference call. But he said he hoped there would be thousands of mobile phones based on the Android platform. Google has used prototypes of Android-powered phones internally -- including one code-named "Dream" -- and says that the software will run on most phone designs, including touchscreen devices or phones with slide-out keypads. viii

The Google-led alliance plans to release the Android platform for free use by carriers and handset makers; it plans to provide software developers with an early version next week. The prospect of richer cellphone features and lower-cost phones has enticed several carriers to sign on. T-Mobile USA, which expects to have a Google-powered phone in the market by the second half of 2008, wants to develop new social-networking applications, initially on its own but ultimately with the help of independent developers. Cole Brodman, chief development officer of T-Mobile, says Android is a breakthrough because it gives software developers access to information they didn't have before, including a user's location, communications history, contact list and "presence," a signal of whether someone's phone is on or off. Sprint hasn't agreed to carry a Google-powered phone yet, but signed on to the Android alliance while it continues talks. John Garcia, the carrier's senior vice president of product development, said using Android in phones would make it easier to get a variety of mobile applications to consumers. Mr. Garcia said mobile-game makers routinely have to test their applications on an array of Sprint phones, writing specific programming code for each one. That could become a thing of the past if an open platform becomes widespread. Carriers will be able to customize the "open source" Android software as they see fit. They can include a package of Google's home-grown mobile applications -- such as its search engine and email -- or just use the open Android platform. The details would be decided in conjunction with Google and the handset partner. Google won't make money on Android itself, but the company believes it will create new opportunities for Google to sell ads on mobile phones, something executives have characterized as the company's biggest business opportunity. Google is betting that easier access to the Internet from mobile phones will lead people to use its services more, as has been the case with Web access on the personal computer. Google's Mr. Rubin said ads will appear on the phones as they normally do when a user surfs the Web. The company may also sell ads for some developers of applications that run on the phones. (The name of the new platform stems from Google's 2005 purchase of Android Inc., a Silicon Valley startup co-founded by Mr. Rubin.) Google said it would likely share revenue from ads with wireless carriers; the carriers then could reduce the cost of handsets or wireless fees for consumers. Google also could make money in ix

other ways, possibly by getting a share of monthly revenue from carriers or selling a rate plan for a package of applications. Google is counting on the many developers who build applications for PCs and the Web to start making products for the phone. Google said the Android platform will make it easy for developers to write applications that meld different data sources, such as a service that shows users where their friends are at any given moment on a map. For U.S. consumers, Android could speed the arrival of advanced applications already available abroad, such as multiplayer gaming. Google's strategy of cooperating with multiple handset-maker and operator partners to develop perhaps thousands of different phone models differs starkly from that of Apple, which developed a single iconic mobile device -- the iPhone -- that consumers now associate with its brand. x

Executive Summary Google is the market leader in the online search business with 59% market share and has built a core competency in search. Google monetizes traffic to its ubiquitous search engine and other applications such as Google maps, Gmail, using its ads business. Google has been able to successfully create markets with its disruptive business models. Given the enormous growth potential, Google has been pursuing ways to expand its market presence in the mobile industry. On November 6, 2007, Google announced an alliance with 33 partners to develop a new free OS and software platform for a variety of mobile devices code named ‘Android’. Google also decided to bid on the C-band of the 700 MHz wireless spectrum at the FCC auction, a move that makes the wireless spectrum open and reduces Wireless Service Provider control. One challenge that Google faces is that the growth promised by mobile advertising in 2000 hasn’t yet been realized as mobile data growth has been slow because of a variety of factors. Google has to figure out a way to collaborate with the operators. As mobile data usage becomes more prevalent, competitors are shaping up. Microsoft’s recent bid to acquire Yahoo poses a major threat as the combined entity will be able to compete better against Google. Mobile plays a big role in the synergies of the two companies. Google needs to diversify its business to reduce its dependence on internet search and move towards a dominant constrained corporate strategy. Android is likely to be an important enabler for mobile data penetration and hence we recommend Google to aggressively pursue Android evangelization. Google needs to push Android penetration fast by partnering with mobile handset manufacturers to get Android on the phones and evangelize Android in the application developer community. In the short term, Google should focus on pushing ads in local search and mobile TV as these are likely to form the killer applications on the mobile phones. Google should look at mobile as a different business model than internet and provide better targeting and profiling features with its mobile advertisement platform. Longer term, Google should 1

pursue its efforts to accelerate adoption of broadband mobile with the help of its partners to grow the mobile ads market even faster. II. External Analysis Although Google’s strategic move involves multiple industries, the objective Google is trying to achieve is to make information easily accessible subsidizing that via advertisements. We have focused on the mobile advertising as the primary industry and mobile device operating systems as an enabler industry. In the document, we have analyzed the industries as appropriate in the relevant sections. Industry Definitions Mobile Advertising Industry The industry can be broadly split into the advertising sector, technology sector, content sector and the telecommunications sector. The industry ecosystem is shown in Exhibit 1. Mobile advertising is a two sided market with advertisers and content publishers forming the two sides2. The advertisers pay the mobile ad networks to carry the advertisement inventory whereas the content providers generally get free subsidized access to the inventory (Exhibit 2). The mobile ad servers allow advertisers to target the advertisements to the appropriate demographics. The advertising agencies provide customized services to the advertisers to manage their campaigns. The mobile consumers watch the content from the content providers’ mobile sites or applications, and will see targeted advertisements along with the content. Wireless Service Providers form a very important part of the value chain as the end consumers subscribe to the carriers for mobile service. Mobile Operating System Industry The Mobile OS industry is a highly dual sided market3 which links two groups – handset manufacturers and application developers – using a common platform (Exhibit 3). This industry has a very strong cross-side network effect where increasing adoption in one group is more valuable to the other group thereby forming a virtuous cycle. However unlike the personal computer space where service providers do not have much say on what software is installed on users computers, wireless carriers wield huge influence on 2

the software and OS that is provisioned on handsets. So far wireless carriers have been reluctant to allow end users to install third party apps directly on their apps. But this has been changing in the last year as carriers have realized they can’t stop the inevitable. Six Forces Analysis – Mobile Advertising Level 1 Analysis The Level 1 analysis for the mobile advertising industry can be found in Exhibit 4. Level 2 Analysis Barriers to Entry The players in the industry need both the advertisers and mobile content publishers with a lot of viewership to succeed. Also, as the variable costs to support an additional advertiser or content publisher is very low, there are high economies of scale. Even though the capital costs of building a new mobile ad network are not high, the ad networks need to partner with the mobile service carriers to get access to demographic information to target their ads better. Also the mobile ads industry is nascent and evolving industry and the various ad networks try to provide differentiation in their offerings. Overall, these factors create very high barriers to enter and succeed for the competitors in the mobile ads business and thus are favorable for the incumbents. Rivalry Mobile Advertisements Industry is expected to grow at more than 100% CAGR to more than $10B in 2012. There are no clear winners yet in the market and the market is very fragmented. The current leader in the mobile ad serving market is a Sequoia backed firm AdMob. Consolidation has started, and bigger players have recently started focusing on this market including Google with its AdWords and AdSense mobile, Yahoo with its Panama mobile (Apex) platform, Microsoft, and AOL and Nokia with acquisitions in internet and mobile advertising space. Current exit barriers in the industry are low with bigger players acquiring startups, and the only transaction costs are intangible costs and brand costs. As all the competitors are very diverse, it is hard to predict the moves competitors will be making, such as Microsoft’s bid for Yahoo recently. Overall we expect the rivalry to intensify, but given the high demand conditions, we think the industry rivalry force is moderately favorable at this point. 3

Buyer Power The 2 strategic buyer groups in this industry are the mobile content publishers such as Yahoo, Sony, etc. and advertisers such as Coke, Disney etc. The advertisers pay money to post their ads in different formats. The content publishers display the ads on their mobile sites or applications and thus buy the ad inventory to display on their site. Both the groups are highly important to the ad networks as they need both ad inventory and publisher websites to display the ads from the ad inventory. The mobile ad network hasn’t become as important to the advertisers4 and content publishers as mobile technology is still evolving and companies are coming up with different ways to push highly targeted ads to consumers without intruding too much. Both the advertiser and publisher groups are fragmented with a few bigger players, who although do pose a threat of backward integration, need all of the other players in order to ensure the success of the network long-term. Overall we think the Buyer Power force is neutral to the industry as both the buyer groups are very important to the firms, but given the fragmented buyer groups, they really cannot exert too much power over the ad networks. Supplier Power Given the two side nature of this industry, mobile content publishers and advertisers are the two major supplier groups. Content publishers host the ads along with their content to target the audience and thus supply the viewer eyeballs. An ad network firm in this industry that can connect these two groups can be of tremendous value in this nascent market. Also as suppliers, both the groups are strategically important to the firm to create a network effect and generate the growth. While the industry is widely fragmented, posing a forward integration threat, big companies could gobble up smaller firms that have the first mover advantage. The high growth rate of this industry is also is very attractive for the supplier groups to command a higher power. Given these factors, we rate the Supplier Power as neutral to this industry Threat of Substitutes Internet based Cost per click (CPC), Cost per Action (CPA) model of internet ads, eCommerce ads, TV, Newspaper ads are major substitutes for mobile ads. Increasing proliferation of mobile devices will force the content publishers and advertisers to move 4

away from the traditional form of ads to mobile-based ads. Internet based ads will be a major threat for mobile ads for several years until the advertisers see more potential in the market. However, other traditional form of ads such as TV and newspaper ads could see a reduced spending as advertisers move to mobile based ads. As content publishers and advertisers see more value of the ad networks, they could forge a long term relationship. However, advertisers do not have higher switching costs and can very easily reach out to substitutes. Given these factors, threat of substitutes are moderately unfavorable to the industry. Complements Key stakeholders in the value chain including advertisers, content publishers, and ad servers can easily cooperate to offer better bundled offerings such as free internet ads included with a certain volume of mobile ads. Through ad-insert type of services in networking gear that provide more information on user groups, mobile service carriers could complement the ad networks to offer higher value proposition for better targeted ads to the advertisers. There are several big players in the industry. They could force a takeover and asymmetrically integrate with ad networks to offer more value. Relative concentration of the complementors is not high in this nascent market. Overall, we think the complementors are a neutral force in this industry. Level 3 Analysis Our L3 analysis for mobile ads industry is outlined in Exhibit 5. We conclude that the mobile ads industry is a moderately favorable industry. Given the dual sided nature of the industry and the importance of partnering with wireless operators, we have ranked the Barriers to Entry force as the most important force in this industry. Given the growth potential and consolidation happening in this still young industry Rivalry plays a very important role in the industry profitability. Only 3-4% of online advertising budget is spent on the mobile ads, given the uncertainty in the medium. Given the huge chasm the mobile ads industry will have to cross to become mainstream, Threat of Substitutes is rated as the 3rd most important force in the industry. Buyers and suppliers in this dual sided market are the same. Buyers and Suppliers groups in this industry are very fragmented and form a very long tail. They play a minor role in the industry. Industry growth will be driven by the complementors such as handset manufacturers, wireless 5

operators, consumers, and application developers. Although there are already 3 billion handsets deployed worldwide and data penetration is increasing, it’s only a matter of time before these players have to sit down (like in the Open Handset Alliance (OHA) partnership), and solve the challenges for mutual benefit. We have rated this factor as the least important as this force doesn’t shape the industry profitability. Overall, we feel this is a moderately favorable industry with possibility of high profit margins. Six Forces Analysis – Mobile Device Operating System Level 1 Analysis The Level 1 analysis for the mobile operating system industry can be found in Exhibit 6. Level 2 Analysis Barriers to Entry Barriers to Entry in the Mobile OS market are moderately high, primarily due to the small number of phone manufacturers. The existing players in the mobile OS industry will fight hard to hold their ground and are in a favorable position to push their new products and work closely with phone manufacturers to provide driver software for their hardware. Currently, there seems to be a fair amount of product differentiation. The two major players, Symbian and Microsoft, offer software developer kits for application developers. Unfortunately, when the application is built for one platform, it usually cannot run on the other. The switching costs in this industry are also high. Phone manufacturers usually choose a platform and have their in-house software team write a complete set of applications for it. The costs to re-write the applications for a new platform are both expensive and time consuming, especially in the phone equipment market which is extremely dynamic. Overall, the strong barriers to entry make it moderately favorable to the Mobile content industry. Rivalry The Mobile OS industry is a very high growth and fast changing industry. Only five years back, cell phones were primarily used for voice communications, and now smart phones have flooded the market with integrated GPS, Camera and a whole new set of applications geared towards business and personal customers. This fast paced 6

business has led to extensive product differentiation which makes the product anything but a commodity. The biggest resource in this industry is engineers. They are primarily semi-fixed costs. When business is not good, the industry is known to reduce costs by lay-offs. These employees are also not unionized thus reducing the exit barriers. Overall Rivalry among competitors is considered favorable on the Mobile content industry. Buyer Power There are two major buyers in this market – Application developers and Phone manufacturers. There is also a big network effect created between these two buyers in this industry. Applications written for a particular platform plays a very important role in the decision making process for phone manufacturers, when choosing an OS for their phones. Application developers tend to write applications for platforms which are market leaders. The two groups have started working closely to provide feature rich applications as seen in the recent agreement between Motorola and Yahoo5. Mobile OS developers are strategically important for phone manufacturers to help run their hardware, but the fact that the equipment industry is extremely competitive and their razor thin margins force them to squeeze their suppliers – the OS developers. The OS industry has worked hard to differentiate to increase their profits and reduce the effects of the squeeze. Application developers are always looking to develop applications quickly and with limited resources. Their switching costs are also high as they need to re train their employees on a new platform and re compile all their old applications to run on their new platform. Overall Buyers influence is considered neutral on the Mobile content industry. Supplier Power Application developers are highly important to the platform as they increase the value drivers that mobile platforms offer and there are virtually no substitutes for them. Customers are increasingly placing higher value to applications that are deployed in the platform and hence application developers bring more value to the platform (network effects). However this advantage in bargaining power is nullified since they are a highly 7

fragmented group. Overall suppliers influence is considered neutral on the Mobile content industry. Threat of Substitutes The key advantage of Mobile applications is to enable access to content virtually at any place. The alternatives that we consider (mainly PCs) do not offer this convenience although the costs of switching are very low. Overall substitutes influence is considered neutral on the Mobile content industry. Complements Wireless network service providers are the main complements to Mobile Content platform industry. Engaging Mobile applications need higher bandwidth data networks like 3G/4G - infrastructure that took almost a decade to set up - for faster access. Service providers can also influence handset manufacturers to choose a particular platform although we have seen that with the iPhone, a brand name can determine what software platform is provisioned. Overall the high concentration of network operators and their ability to influence demand pull make them unfavorable complements. Level 3 Analysis Our Level 3 Analysis for the Mobile OS Industry is outlined in Exhibit 7. Our analysis concludes that the Mobile OS market is relatively Neutral with a score of 3. In this two sided market, we feel that the buyers and suppliers, especially the Mobile Manufacturers, have the most power as they decide which OS powers their phones. In the Mobile value chain, the mobile phone manufactures are squeezed the most in terms of price and are always looking to differentiate their products to increase their bottom line. The service providers on the other hand have been maintaining tight control on what applications go into mobile phones. This has been a detriment to application developers who now have to sell their products to the service providers instead of the consumers directly, thereby limiting much needed innovation and stinting growth in this sector. There are numerous changes happening in this industry, which includes the opening up of the new C Block of the 700 MHz spectrum. Our belief is that this would shift power from the complements (service providers) and bring the power into the application and 8

OS developers. Our Level 2 analysis indicates that the complements are the main section of the industry making it more unfavorable. The jury is out on how the latest trends in the industry would impact the industry, but it will definitely be more favorable to the industry. Macro Environmental Forces Analysis Global Trends Global mobile penetration is currently at 50% and expected to reach 1+ handset per person in 2011, with the growth primarily coming from emerging Asian markets6. In countries such as India and China, where wireline services are not developed, wireless adoption is set to explode. This growth paves way for enormous revenue potential for mobile ad markets. Mobile ad industry is expected to grow to $24B in 20137. Because of cut-throat competition, ARPU is decreasing and service providers are looking to differentiate by adding a lot of multimedia mobile services such as video and GPS. With mobile broadband looking promising, mobile video is set to become a killer application8 and provides a lot of opportunities for exploiting the ad revenue growth. Mobile TV users have increased 68% compared to 38% growth in total mobile data market in 20079(Exhibit 8). Social Trends Mobile phones have become a highly personalized choice of communication to exchange photos, videos, ring tones etc. It is increasingly becoming a fashionable need for the youth market in the age group 13-34.10 With OpenSocial, MySpace & Facebook type of applications, users in this age group are increasingly using mobile phones for their social networking11. Users in the age groups 35-54 are also adapting to use add-on services. Exhibit 9 shows the social trend of usage from several countries. These trends provide many opportunities to target ads based on the social groups, customer preference and location. Exhibit 10 shows that US consumers are most willing to pay for Location Based, maps services and entertainment services. 9

Technological Trends Service providers are migrating from 3G to 4G to add rich services and enriched user viewing experience. WiMax adoption by carriers is also helping broadband proliferation, especially video services which are estimated to account for 40% of revenues in 2012. Smartphones are increasingly becoming the communication device of choice and manufacturers are keeping open the option to support multiple OS platforms such as Symbian or Android. These technological advancements will help the growth of the mobile ad industry. Governmental/Political Trends Any company that wins the 700 MHz C-Block wireless spectrum will have to abide by FTC regulations on the usage of the spectrum. While Google’s move forced to open up the spectrum, carriers have strong lobbies with the Government and could try to counter Google’s move to disrupt the market. Unlike the internet, wireless service providers have the user data and are obligated to protect customer privacy. Ad networks have to work with carriers to ensure privacy and at the same time invent techniques to better target the customer ads based on the various social groups. If Microsoft’s bid for Yahoo is successful, this poses a major threat to Google in the ad space. Google might hence try and lobby the political circles to try and break the deal and help Yahoo backdoors. Ethical Concerns Google, with its “Do No Evil” philosophy, might have to fight hard against service providers to win the war of the open wireless spectrum. Even if it wins the bid, it has a uphill battle to ethically partner with mobile Figure 1 - Real Annual GDP Growth service providers without damaging its public image. Google’s Open Alliance Forum has several powerful stakeholders with different goals. Forum members should act ethically 10

responsibly and share the pie. Mobile spam and inappropriate advertisements with adult content could also become a major concern in this industry. Macroeconomic Trends GDP growth varies widely across the world12, but the trend is clear from Figure 1. Emerging markets in Asian and Latin America will continue to enjoy the growth while US and European markets will stay flat. China and India have seen phenomenal growth over the past 5 years with a boom in the IT and manufacturing sector. Growth is expected to continue albeit at a slower rate. With the recent threat of recession and stagflation increasing, US markets could pull become a drag on world markets and average GDP could be lower than the estimated. This could impact consumer spending on smartphones which could cause firms to cut back on their mobile investments. Demographic Trends Mobile device penetration is growing fastest in the 13-24 age group, while the penetration is lowest in the 13-17 teens age group13 (see Exhibits 11 and 12 ). SMS use is very common in this age group. Social networking among this age group is also becoming more popular. Penetration is higher across other age groups. Mobile users in the 25-44 age group look for business applications. Varying usage patterns across age groups call for targeted text and video based ads to reach out these diverse groups. Competitor Analysis Mobile Advertising Industry Competitor Analysis Competitors The mobile advertising market is still in its infancy and is highly fragmented with many relatively small companies competing at the moment. Among the most promising of these companies are AdMob, Third Screen Media (recently acquired by AOL), Ad Infuse, and Smaato. Many of the large players in the internet advertising industry are vigorously looking for ways to transfer their dominance in that market into the mobile advertising market through internal research and development and acquisitions. For example, Google has already developed mobile versions of its AdWords and AdSense advertising platforms and are developing Android, a new mobile device platform through 11

which they hope to push advertisements to mobile users. They also recently acquired DoubleClick, which, although is primarily an internet advertising marketer, has been making inroads into the mobile market. Yahoo has also created their own mobile content and advertising platform, called Apex, that leverages its sophisticated internet advertising knowledge. Microsoft has also taken its MSN services mobile and recently acquired Screen Tonic, a European based leader in mobile advertising. In addition to this acquisition, Microsoft is pursuing a now hostile bid for Yahoo. This move has major implications for Google and the internet and mobile advertising industry. It is still unclear, however, exactly how the merger would change the landscape of the competition if it does indeed happen. It seems likely that the same large players that currently dominate the internet advertising market will eventually be the ones left slugging it out for mobile advertising market share. Because of this and since the mobile advertising market is still too small and new to have a useful amount of industry data, much of our competitor analysis in the advertising space will focus on the internet advertising market with the assumption that the competition in the mobile ad space will be similar in nature. There are many players in the internet advertising market including Google, Yahoo, Microsoft, AOL (Time Warner), IAC, MySpace, Facebook, Valueclick, NexTag, and literally thousands of other companies including advertising firms, media companies, and other individuals and businesses who sell advertising on web sites or via other electronic means such as email. Despite the huge number of players, the market is dominated by a few large firms that have turned internet advertising into big business. The top four firms in this market account for approximately 57% of the worldwide market. Figure 2 - Internet Ads Revenue Market Share Google leads the pack with a 30% market share, followed by Yahoo with a 15% share, and Microsoft with 7% (See figure 2). 12

Primary Competitors The two major competitors to Google in the online advertising market are Yahoo and Microsoft (via their MSN division). All three of these firms enjoy relatively large networks of both advertisers and users, their brands are well known, and all enjoy large shares of the internet search market (See figure 3). This last point has become increasingly important as advertisers strive to put more Figure 3 - Search Engine Market Share relevant ads in front of users. Search based advertising allows them to do this by displaying ads related to the search keywords a user enters. Search based advertising made up 40% of the U.S. internet advertising market in 200714 and, again, Google, Yahoo, and Microsoft are the top three firms in the market (See figure 4). Competitor Strategies Google Business Level Google’s search tools and internet software products are targeted towards all internet users which can safely be called the mass- market today. They emphasize their cutting- edge search algorithms and information sorting capabilities in all of their products in an attempt to differentiate themselves from their competitors. Google is, therefore, using a broad differentiation business level strategy. Figure 4 - Search Based Advertising Market Share They can also be classified as using a variety based strategy since they are striving to meet the internet search and information location needs of a broad set of customers and have not diversified into other software and hardware markets. Corporate Level While upwards of 99% of Google’s revenue comes from advertising sales15, 91% of after TAC revenues come from ads displayed on Google owned sites. These include search results pages, Gmail, Google Docs, Orkut, etc. The remaining 9% of revenues 13

come from ads displayed on what Google calls “network sites” which are sites that allow ads to be placed on them in exchange for a payment from Google. This split varies around these percentages, and thus, Google is employing a dominant constrained corporate strategy. Yahoo Business Level Like Google, Yahoo markets their websites and products to all users of the internet. Also like Google, they too seek to differentiate themselves from other internet portals. However, Yahoo attempts to do this by attempting to provide an all-in-one content destination where users can search, read news, email, book travel, view photos, and shop, to name a few, all from one place with a consistent user interface. But differences aside, Yahoo is still attempting to differentiate themselves in the mass market which equates to a broad differentiation business strategy. Within this strategy, Yahoo could be classified as using a cross between a needs and variety based strategy. Although they do only provide internet based services, the variety of services they provide is larger than that which Google provides. Corporate Level Yahoo generates revenue from two sources. They call the first source “Marketing Services” which includes advertising and advertising consulting fees. This is basically advertising revenue and encompasses approximately 88% of Yahoo’s revenue. Their second source of revenue is from fees that are charged for premium services at their and their affiliated websites. These fees account for the remaining 12% of total revenue. Although these two sources are vertically related, they are not exactly the same business and, thus, Yahoo is employing a dominant corporate strategy. Microsoft Business Level Microsoft also employs a broad differentiation based business level strategy, but does it in a much more diverse fashion than do Google or Yahoo Microsoft has many different business units ranging from PC operating system software, to video game systems, to online services. Some of their business units may be focused on niche markets, but generally, they are targeted towards the mass market. They also primarily compete on 14

differentiation by designing their products with appealing and/or useful features in comparison to producing products at the lowest possible cost. Corporate Level As mentioned above, Microsoft has much more variety in their products and revenue sources than do Google or Yahoo. Their business units and corresponding revenue in FY2007 are detailed in Figure 5 below16. Figure 5 - Microsoft Segment Revenue While most of their business units create software as all or part of their business, the software products are targeted towards different uses and users. Therefore, for our purposes, we will consider them different businesses. Based on this premise, Microsoft does not obtain greater than 70% of their revenue from any single business. Since most of their business units do share numerous links and common attributes, we can classify Microsoft as employing a related constrained corporate strategy. Achieving Strategic Positioning Competitors achieve their strategic positions by effective use of resources and capabilities. Exhibit 13 compares the value and cost drivers and the resources and capabilities of the three market leaders in the online advertisement industry. On the innovation front the key value attributes are reach, relevancy and quality of search. Google is highly creative in designing a wide variety of user-attractive applications centered on search technology. Yahoo is similar to Google in its product portfolio. On the marketing front, Google became popular primarily through viral marketing. Microsoft has the marketing muscle to push its software products for PCs and laptops. On the cost front, Google has a focused investment strategy spending 11-12% of revenue in R&D expenses. Microsoft and Yahoo spend around 14% of 15

revenue towards R&D. All three companies have very good brand perception with Microsoft leading the pack. Google enjoys a higher customer loyalty by focusing on free value added end-user applications. Value - Cost /Willingness to Pay Analysis In this section, we examine the buyer’s willingness to pay by comparing the key attributes such as the reach, relevancy, quality, market and cost factors that drive the value and cost in the search advertisement industry for Google, Yahoo and Microsoft. The steps used to determine the value, price and cost using these attributes is described below. Exhibit 14 presents the quantitative model used in this analysis to determine the value perceived by a buyer. Value The first step is in this process is to estimate the value of the three leaders in this industry. Reach is an important measure of the number of impressions a firm can make. This is primarily determined by the popularity of search engine and various applications provided by the firm to the end-users. Privacy and the viral effect of these applications are increasingly playing an important role in achieving a wider reach. Relevancy of a search is the next important factor that attracts end-users to generate a high click through rate. Quality is another important attribute and this is a direct measure of the ROI in terms of how many clicks converted into a sale or a registered action for an advertiser. Quality is also measured by the ease of user interface to place and monitor the advertisements. Market factors such as the brand equity and customer loyalty add a lot of value to the firms in customer retention and expanding the market value. For each one of these attributes a weight is assigned and the three companies are ranked. Based on this analysis, total value perceived for all these attributes is 3.94, 2.95 and 2.21 respectively for Google, Yahoo and Microsoft. Price Based on the efficient frontier report17, the price of an advertisement is the average cost per click charged by these firms. While Google and Microsoft match their price, Yahoo offers a lower price point. Cost 16

The next step is in this process is to estimate the factors that drive the cost. The average cost of an advertisement depends on several factors that are specific to each of these companies. For example, a majority of Google’s cost would be from its COGS on its storage servers. But the same servers are also used for other applications. Yahoo and Microsoft also achieve cost synergies by leveraging their infrastructure from other technologies. The exact cost is not easily determinable and hence we have used their Gross Margin and the average price (ASP) to come up with the cost structure. Relative Value, Price and Cost Relative value, price and cost are obtained by dividing Yahoo and Microsoft value, price and cost with Google’s value, price and cost, respectively. These values form the basis for determining the economic contribution and the buyer surplus for the three leaders. Economic Contribution and Buyer Surplus Figure 6 shows the economic contributions and the buyer surplus for the three firms. Google commands the highest economic contribution, 27% higher than Yahoo and 48% higher than Microsoft. Google also has the highest buyer surplus, 33% higher than Yahoo and 78% higher than Figure 6 V-C Competitor Analysis Microsoft. This chart clearly speaks volumes about the dominance of Google in the search ad industry. Comparative Financial Analysis In evaluating the financial position and performance of Google versus its primary competitors, several key metrics and financial ratios from the past six years have been selected for comparison. These have, in turn, been broken down into five categories; Growth, Profitability, Liquidity, Leverage, and Operational Efficiency (see Financial Exhibit D). Because of the differences in Microsoft’s business strategy, its ratio comparisons may not be as applicable as the comparison between Google and Yahoo. Because of this, an average of the three firms in each category is included in the 17

comparison in lieu of an industry average. The value of this is still somewhat questionable, especially with only three firms making up the average, but it at least gives a reference point when comparing data. Growth Google has experienced tremendous growth in the past five years with an astounding 114.6% average yearly revenue growth rate. Since Google is the youngest company of the bunch, this may be expected, but even in 2006 and 2007, Google has achieved revenue growth of 72.8% and 56.5% respectively. After recovering from the end of the internet bubble in 2001 when it suffered declining revenues, Yahoo experienced increasing growth from 2002 through 2004 when its revenues grew 120%. However, partly due to an overall economic slowdown in the US beginning in late 2005, Yahoo’s revenue growth has slowed since. Microsoft is the most mature company of the three and so it is no surprise that its revenue growth is both smaller and less volatile. Microsoft followed a pattern similar to that of Yahoo, with increasing growth from 2001 through 2004, then pulling back until the past year when growth increased again. Microsoft averaged 12.5% yearly growth between 2002 and 2007 and never varied more than 4.5% from that average. See Financial Exhibit E for a graphical comparison of the three companies’ five year growth. Profitability While Google has not had the highest profit margin of the three since 2002, and even lagged both Yahoo and Microsoft for much of the time period, their margin had been constantly increasing since 2003 until the most recent year. In 2006, Google led the three with a 29.90% profit margin but slipped just back behind Microsoft in 2007. Yahoo had impressive profit margin growth between 2002 and 2005, but then took a major hit in 2006 dropping from 36.1% in 2005 to 11.7% and then 9.5% in 2006 and 2007. Part of this drop could be explained by increased spending on research and development which increased in 2006 and 2007, and increased its capital expenditures that increased from approx $409 million in 2005 to $698 million and $602 million in 2006 and 2007, respectively18. These expenditures were likely due to the increased competition Yahoo was facing from Google. Microsoft consistently maintained net profit margins between 2002 and 2007 with an average margin of 27.9% over the six years. 18

The return on equity and return on assets for all three companies generally followed the same trends as their net profit margins although Yahoo did not typically earn as good of a return on their assets or equity as Google and Microsoft were able to and was hit much harder in this aspect by the popping of the internet bubble in 2001. Google has consistently been able to earn a greater return when compared to total assets than has Yahoo or Microsoft. See Financial Exhibit E for a graphical comparison of the three companies’ five year profitability. Liquidity Analyzing the current ratios of the three competitors shows the superior liquidity position that Google is in when compared to Yahoo and Microsoft. This is partially because of Google’s cash position. Google’s ratio of cash and short term investments to assets has consistently been much higher than has Yahoo’s or Microsoft’s. Google stands a very low risk of having any trouble paying its short term liabilities. See Financial Exhibit E for a graphical comparison of the three companies’ five year liquidity positions. Leverage Currently, none of the three companies hold any long term debt. Yahoo and Google did incorporate some debt into their capital structures in the past, but Google paid theirs of in 2004 and Yahoo in 2007. See Financial Exhibit E for a graphical comparison of the three companies’ five year debt positions. Operational Efficiency Of the three companies, Google has kept the lowest average DSO (Days Sales Outstanding) over the last five years. They have averaged 35.1 days over that period compared with Yahoo’s 44.8 days and Microsoft’s 63.0 days. As mentioned previously, Microsoft may have a significantly higher DSO because of the differences in the nature of their businesses and industries in which they are in. See Financial Exhibit E for a graphical comparison of the three companies’ five year DSO performance. Mobile OS Industry Competitor Analysis Competition Mobile OS industry is an oligopoly competition that can be broadly classified into three major groups with a few main players competing for market share. The three groups 19

are the Mobile OS platform group, Mobile application development group and the User Interface (UI) framework group. Primary Competition Primary competitors in the Mobile application industry are based on three factors: • Economies of scale / OEM adoption • Third party software ecosystem • Openness of API While in the Mobile OS group Symbian, Microsoft Mobile, RIM and Linux are the main players with 95% market share among them in 200719, the Mobile application development environment is primarily dominated by Sun’s JavaME and Qualcomm’s BREW platforms. Symbian (65% market share in 2007, see Figure 7) was formed in 1988 as a consortium of Nokia, Ericcson, Motorola and Figure 7 - Mobile OS Marketshare Samsung. It has been the de facto standard for a mobile operating system as far as installed base and software architecture system primarily due to its association with Nokia. Windows mobile (12% market share) is an evolution of Microsoft’s long standing attempt to break into the Smartphone OS market. Microsoft’s footing was primarily based on one handset manufacturer – HTC – although there has been the now popular Blackjack models from Samsung in the last year. Apple’s OS-X that has been used in the iPhone was introduced in the second half of 2007 and is estimated to have captured almost 28% in the U.S. and 6.5% of the global market share in Mobile OS market20. Apple recently announced opening the iPhone SDK to third party developers. 20

RIM OS (6% market share) that is used in Blackberries is not a commercially available OS but a proprietary solution. However it exposes API’s so that third party developers can create applications for its OS. Competitor Business and Corporate Strategies Symbian Business Level Symbian follows a broad differentiation business level strategy by focusing on performance value drivers. Unlike other operating systems, Symbian was specifically developed for the mobile device and so it is extremely efficient with processor overhead and power consumption. Symbian has been optimized to run on a memory footprint as low as 32 MB so that applications can have the lion’s share of the total memory available. Corporate Level Symbian follows the dominant constrained business strategy with about 90% of its revenues coming from licensing fees. Microsoft Business & Corporate Level Strategy As discussed in the earlier Mobile Advertising competitor analysis, Microsoft employs a a broad differentiation based business level strategy, and a related constrained corporate strategy. RIM Business Level Like Microsoft RIM follows a focused differentiation strategy by targeting business customers. It started as a company that offered pagers for IT professionals in critical support functions. Over time it has evolved to add e-mail and other services under a very secure environment. Instat’s research shows that Blackberry is the brand choice for over 30% of devices21 that are provided by employers. Corporate Level RIM follows a related constrained strategy where a major chunk its revenues comes from devices (73%)22 but then it is closely related to revenues from services and software fees. 21

Apple Business Level Apple who ignited the personal computers revolution in 1970 follows a focused differentiation strategy by capitalizing on the convergence of the personal computer and digital consumer electronics by creating aesthetically designed products such as iPod, MAC and iPhone. It has innovative business models to seamlessly integrate its consumer products with applications (e.g. iPod + iTunes). Corporate Level Apple follows a Dominant constraints strategy with 84%23 of its sales coming from sale of MAC, iPod and iPhone products and the rest from iTunes and software applications and services. Competitors Strategic Positioning Exhibit 15 shows how Google’s competitors build their market position by leveraging their resources and capabilities. Microsoft and RIM increase their value to enterprise customers by offering highly differentiated services. For these players, increasing value provides better returns than cost efficiencies. Symbian builds a unique position by complementing their value and cost drivers rather than substituting them. Apple has developed a niche position by bundling highly stylized services – iTunes – with their product. All these players built unique imitation barriers and customer retention measures to defend their positions. Implications of Competitive Analysis Industry In the sections above, we have detailed that the Mobile advertising market is highly fragmented and is in infancy. Bigger players, especially Microsoft’s MSN division, Yahoo, AOL, and Google want a piece of the pie and are gobbling up smaller players to be a dominant force in the mass market mobile advertising industry. Although the primary revenue drivers for all of these players are advertisement, they have all differentiated themselves with some of them primarily based on their search technology, while the others attempt to provide an all-in-one content destination with some licensing and usage based revenue. The industry as a whole is betting big on mobile ads as it provides a more personal and targeted audience for their customers. 22

The Mobile OS industry is more concentrated with the big players owning 95% of the market share. The key to succeeding in this industry relies primarily on partnerships with mobile phone manufacturers and to have easy to use tools available for developers to churn out cool applications. Yahoo has taken the lead with a new mobile platform and now with its Yahoo Mobile Software Development Kit (SDK) offering. For Google to succeed in this industry, it needs to leverage its existing dominance in the internet advertising. Also, its bet with Android will definitely help with adoption rates and porting all of their applications for mobile devices. In addition to enhancing mobile browsing experience, Android will provide an advertisement platform that can support applications and bring revenue for both the developers and Google. Rivalry and Google’s Strategy Google’s Android is changing the game in Mobile OS industry, which until now was a paid offering. Android, built on Linux, is a freeware and comes with a SDK. For a start Android should be able to take share away from current Linux OS customers. Both Symbian and Microsoft will now fight hard to keep their share of the market. In the case of Nokia, which helped develop Symbian and uses it for all of its phones, Symbian will continue to enhance its feature set as Nokia phone sales depend on this OS. In the advertisement areana, we have already seen moves by competition aimed at stifling Google’s grand plans. Microsoft has made a strategic move to acquire Yahoo, which consolidates the second and third place competitors. Overall, in both industries, we find that Google has made adequate plans, big names in Open Handset Alliance as partners, and a release of their AdWords and AdSense platforms for mobile to counter any competitive threats. Intra-Industry Analysis Intra-Industry Analysis – Mobile Advertising Industry evolution Mobile Advertising industry kicked off around mid 2000 when NTT Docomo & Dentsu’s established a joint venture in Japan24 and when AT&T PocketNet banner ads started their ads trial in US in 2001. Initially it followed the internet model of presenting banner 23

ads similar to ads on browsers on internet and SMS ads which were somewhat similar to emails. The mobile industry was highly hyped like any other industry in the dot.com boom in 2000 and was projected to grow to $2B - $6B by 2005 (Exhibit 16). The projections were not realized and the industry is at about $1.6B in 200725. These early experiments failed primarily because the business models were around the internet and didn’t take into account the different industry structure in mobile. Today Mobile Advertising has evolved and covers a wide range of segments such as advertising on mobile browsers in search and mobile websites, advertisement sponsored directory assistance and advertising in multi-modal applications using voice and data. Exhibit 17 depicts the timeline of how the industry evolved. Strategic Groups The Mobile Advertising platform industry is still young and evolving and is a very fragmented industry. The Mobile Advertising platform industry is divided into the following strategic groups: Mobile Ad networks, Mobile Ad Servers, Content Providers running their own ad business, Wireless Service Providers relying on mobile advertisements to generate more revenue or subsidize subscriber prices. Another important strategic group to watch out for this industry is the internet ad networks and servers which are trying to enter the mobile space. Refer back to Exhibit 1 for a graphical depiction of these groups. Mobile Ad Networks Mobile ad networks connect the advertisers who conduct mobile advertising campaigns with the content publishers that are willing to display the advertisements. Based on relevancy algorithms and advertiser preferences, ad networks match inventories of advertisements to websites. Unlike the internet, ad network industry where Google is the clear leader, there is no clear leader in the mobile ad network today. Third Screen Media (TSM) was the first ad network for mobile. It serves more than 225 million monthly advertising impressions across more than 185 mobile content sites including AccuWeather, Boston.com, Fox News, Maxim, WWE, etc. TSM was acquired by AOL for about $90 in mid May 2007. Admob is the largest mobile ad network today claiming to be serving over 2 billion targeted ads each month26. Google AdWords and AdSense was released on mobile mid 2007. Yahoo’s Panama mobile ad platform was announced 24

in Dec ‘07 and in Feb ’08 Yahoo announced Apex – its multi platform digital ad effort. Millenial Media’s Decktrade platform has a similar model to Google AdSense. Mobile Ad Servers Mobile Ad servers serve highly targeted ads to mobile consumers. The targeting could be based on user preferences, profile, location, social network of the users etc. – data available to mobile ad servers through their partnerships with wireless service providers and data they have collected over a period of time. Ad servers also provide ad campaign management platform. ScreenTonic is one of the Ad servers that serves text and banner ads on portals, text messages and mobile web pages based on location based services. Microsoft acquired Screentonic in May ’07 and will likely use it to serve ads on mobile devices, Xbox, and windows live mobile spaces. Nokia acquired an ad serving company – Enpocket in September ’07 to enter this market. Doubleclick – acquired by Google in April ’07 - has a mobile platform (DART) to serve targeted ads to mobile users. Smaato provides ad serving platform to distribute ads to mobile phones in running applications in addition to the browsers. This format allows mobile game and application developers to monetize their applications using mobile ads. Mobile Content Providers Popular mobile websites and applications are very valuable to the advertisers, as they bring in a lot of mobile consumers. The most popular types of content driving advertising traffic are expected to be mobile TV, music, and search and display. (Exhibit 8) Some ways content providers can monetize their content are calendar applications that can promote event ticket sales, contact applications for business leads, mobile video applications, and mobile games. Their revenue source is either subscription or mobile ads. The larger content providers such as TV content providers like CBS maintain their own advertising network as well. Mobile content provider Accuweather.com, Mobile video provider mobiTV, mobile games provider EA mobile, etc. are some of the larger players in this group. Wireless Service Providers 25

The Wireless Service Providers (WSP) such as AT&T, Verizon, Vodafone, T-Mobile, are the gatekeepers of the handsets and content available to their subscribed users. They control which devices can operate on their networks and what applications can run on the phones. There are primarily two mobile browsing models. WSPs control the on-deck or WAP-deck experience. These are the services offered by the WSPs and advertisements and content for the on-deck experience is completely controlled by the operators. Off-deck model refers to the services that are not part of the handset and WSP services. These are the services consumers directly access. The main control WSPs have in this case is whether to allow off-deck experience or not. Most of the ad networks offer ad syndication for the off-deck model. Internet Ad Networks and Ad Servers This strategic group comprises of the current market leaders in internet ad network and serving businesses. This strategic group is very important for the future of mobile ad space, as these companies will try to gain a foothold once the model is proven. Also they will have an advantage of their size in internet space and a large customer base of advertisers and content publishers which they can pull in. Market leaders in this space are Google AdWords/AdSense platform, Yahoo’s Panama ad network, Microsoft Adcenter (including its acquisition of aQuantive), DoubleClick’s DART platform for ad serving, etc. Mobility Barriers In the mobile world targeting is very important, so the gap between mobile ad networks and ad servers needs to reduce. Google has bought DoubleClick which can potentially combine the user behavioral targeting with the ad network that Google has. Microsoft’s adCenter and aQuantive Ad network platform is enhanced to provide behavioral targeting through its acquisitions such as Screentonic. The WSPs are trying to monetize their networks further and don’t want to turn into “dumb pipes” as they have become in the internet space. The internet ad platforms and servers are also entering this space as mobile advertising starts to pick up. They have been trying to establish a presence in the market with preemptive and market exploratory acquisitions. 26

Disruptive Innovation Mobile ads promise was seen by some of the early mobile ad platform startups. The early startups started with simpler solutions such as SMS based ads or banner ads on mobile browsers. Both these forms of advertisements have annoyed customers. There are still a lot of challenges to be solved before the market realizes it’s potential. Technology has to improve and ad targeting needs to be very innovative and can’t follow the internet ad serving model to allow the mobile ads business to Figure 8 - U.S., Wireless Voice ARPU gain traction. The mobile handsets have to improve to make the phones easier to use for data access. Given all the constraints, advertisers haven’t flocked just yet to the mobile ads platform. They are still only testing the waters and the bigger ones are hedging their bets by putting in only 3-4% of their online ad budget in mobile.27 Once the promises of targeting, reach and usability are addressed, the mobile ads business will become a much more lucrative business as the clickthrough rates are 10 times higher compared to internet ads28. As the market is at the tipping point, the incumbents have started watching the industry very closely and are entering early. As their Voice ARPUs have faced downward pressure as seen in Figure 8, WSPs are looking at innovative revenue models such as subsidizing the subscription fees by making consumers watch more ads. WSPs face a serious threat from Mobile Virtual Network Operators (MVNO) carriers such as Virgin Mobile in US and Blyk in Europe that are trying this type of disruptive model. Intra-Industry Analysis – Mobile Operating Systems Industry Evolution Mobile applications have their roots from early day PDAs. Over the years, handset manufacturers combined the features of a PDA and phone into a single device – the “smartphone”. According to Instat a smartphone is defined as “a mobile phone running 27

an operating system for which the handset’s owner can download programs written by an ecosystem of third party developers without the support of handset manufacturers or mobile operators”. Customers who have feature phones (a.k.a. dumb phones) have to almost always switch newer handset models when they wanted new and improved features. With the advent of smartphones and faster networks, downloadable mobile applications are becoming more prevalent. The two most popular applications according to Instat29 are Personal Information Management (PIM) and e-mail. Of late, location based services (LBS) that allow users to choose their points of interest have become an attractive mobile application with the rapid adoption of GPS technologies. As smartphones integrate more and more functionality that are currently accessed from different devices such as personal navigation devices (PND), portable media players (PMP), Cameras, PDAs and such the growth of mobile applications will further increase. ABI Research30 estimates that the global smartphone market will grow from $18.5 billion in 2006 to over $74.9 billion in revenues by 2012. One out of every 4 mobile phones will be a smartphone. As the wireless industry growth saturates, carriers have realized that they have to differentiate themselves on data services. The increasing number of features on upcoming smartphones clearly indicates that smartphones are no longer primarily for business users. In earlier years, smartphones were mostly adopted by business and enterprise users who needed to be connected to their office at all times. But now with the increasing features in these devices and the services they support, even general consumers want that level of connectivity. Data usage is beginning to take off with rollout of 3G and 4G technologies and this will increasingly shift focus to what kind of applications will be provisioned on the phone. What this means is there needs to be a platform to support these complex offerings that will enable long term growth. Strategic Groups The mobile platform ecosystem has following strategic groups based on their value drivers. Mobile OS 28

Operating systems which include an integrated application platform that allows third party developers to create software applications that can work together seamlessly. Examples of these include Symbian, Linux, Windows Mobile, RIM OS, and Palm OS. Application Development Environment Middleware application environments are operating system agnostic. They allow applications to be developed without accessing core OS features. These include JavaME, BREW, and S60. User Interface Frameworks Graphics component engines give applications a desired look and feel. These include GTK+ and Trolltech. Mobility Barriers There are several mobility barriers that players use to defend their strategic position against encroachment from rivals. These are processing power and software limitation, portability of applications, OEM support, software vendor ecosystem, out of the box solution. Disruptive Innovation Mobile applications were originally meant to replace PDA basic functions like PIM applications. As the mobile application industry evolved, new applications started to supplant some of the functionalities of a laptop. For example a business traveler that uses a laptop for the sole purpose of checking e-mail can now carry a Blackberry phone to do the same thing31. Similarly applications that offer location based services are replacing the traditional 411 enquiries to access points of interest. Instat’s research report Converged Devices: SmartPhones vs Laptops and PDAs in Business Markets states that “The respondents, all of whom are in the US, were fairly open to the idea of using their smartphone as their primary computing device, but it would require a larger screen and keyboard”. This disruptive trend is still in its early stages but the shift is getting pronounced in recent times. 29

Threats and Opportunities Analysis Threats and Opportunities – Mobile Advertising Threats The mobile advertisement industry has been around for a while, but has been underperforming significantly when compared to past expectations (Exhibit 16). There are several reasons why the industry has disappointed so far. Wireless Data Growth not as expected Mobile ads industry depends highly on the data penetration on mobile phones as video ads, search ads and banner ads are the primary growth drivers. The growth in data penetration has been shunted primarily because data access prices are still too high in the US. Also data speed hasn’t been fast enough to allow widespread broadband browsing experience on the phones. Until the iPhone was released, phones didn’t focus on usability and ease of browsing. Last but not the least, carriers want to control the browsing experience on the phones. This has caused severe constraints on the phones as users are not easily able to navigate to various sites, download applications, and view videos unless operators integrate the content providers’ applications on the phones. User Targeting vs. Privacy conundrum The vision of targeting ads to consumers based on their preference, demographics and location hasn’t worked out so far because of the partnerships needed to make it happen. The technology has been in place, but the ad platform companies need to work with wireless service providers very closely to provide better targeting. With wireless service providers also wanting to monetize from the mobile ads, the partnerships haven’t been working out too well so far. On the other hand the users’ privacy concerns have been hampering penetration of location and behavioral targeting. Its Complex! Mobile is not the same as Online AT&T Pocketnet’s trial of pushing banner ads to mobile phones in 2001 failed because users were asked to pay for the bandwidth used while pushing ads to their phones; ads that took up more than half of their screen size. The mobile world is complex and very different than the internet ad industry. Here’s what content provider CBS SVP Cyriac Reading had to say at a recent mobile advertising panel discussion32: 30

“How are we expecting [advertisers] to take [the mobile phone] as an advertising device seriously if we keep telling them about the unbelievable complexity that arises out of the fact that we have 20 carriers in the US, 2 basic technologies – GSM and CDMA, and 2 downloadable standards – BREW and J2ME with different versions on different handsets, and then we have mobile TV and VCast but only on some handsets for $50/month. Why don’t you add a few more complexities and then talk to the advertisers and say – Why don’t you spend a few thousand dollars on mobile advertising to try out, it’s really fun! That’s why iPhone version 1.0 has such a high penetration! It’s simple!” Ad platforms, advertisers, content providers and wireless service providers have to think creatively and collaboratively to provide a very different way to distribute ads to mobile phones. Standard banner ads don’t work on the smaller screen size of the mobile phones. Dropping a successful business model that has worked so well on the internet has been hard for the players. Innovation is required to make mobile ads successful. Without that, the consumers will get annoyed and turned off with this model quickly. Opportunities No clear market leader established yet There are smaller players in the industry where a lot of consolidation has been happening. But nobody has been able to establish a clear market leadership position yet. Admob serves about 2 Billion ad impressions per month. This is still very small compared to the internet space. This provides a very lucrative opportunity for the incumbents in internet ad networks and wireless service providers as they can tap into their existing networks and fuel the market. Incumbents can also establish their presence by acquiring market leaders in the space. This will help them learn the new industry as well. Data penetration projected to increase There are several drivers behind this projection. The decelerating voice ARPUs has motivated to push wireless data as the next growth area. The handsets available today are more feature rich and are able to offer a great multimedia experience33. To go with this, 4G networks will soon bring broadband capabilities to the phones making them very powerful and useful devices. With FCC mandating the winner of the C block of 700 Mhz spectrum auction to open up its network, wireless service providers will have to look at newer ways to monetize their networks. 31

Targeting works wonders for advertising Mobile advertising satisfies some of the basic advertising requirements, however, needs such as Reach, Targeting, Engagement, Viral and Transactions34 haven’t been achieved yet. To make an ad campaign work on mobile, the advertisers will be able to do targeting better with a more engaging and interactive user experience. The campaigns will be inherently viral if they are highly creative, as mobile is a highly viral medium. One more feature of mobile world is the immediacy factor. If the ads are tied to a transaction, the consumers will find it very convenient and useful. The company which satisfies these requirements will be far ahead of the competition. And there is a lot to look forward for the winner. Because of the two-sided market, with the increase in the clickthroughs, the advertisers will flock to the winner. Threats and Opportunities – Mobile Operating Systems The major threats and opportunities have been identified and discussed in the industry six forces analysis. Also as businesses understand the value of using mobile applications for different business processes (information gathering, collaboration etc) to utilize resources to the maximum extent and be profitable, opportunities will evolve. Similarly there will be a virtuous cycle because of new applications like video sharing and unified messaging that will lead to increased advertising opportunities. As the user interface experience becomes more sophisticated (like the touch UI in Apple iPhone) due to improvements in hardware, it will have a positive reinforcing effect on the mobile platform. On the flip side, the emerging category of “ultra low-cost handset” - in countries like India35 - that offers stripped down cell phones at a very low price will be a major threat for this industry. Summary of External Analysis In our Industry Analysis, we found that the Mobile industry is growing at a rapid pace on all fronts, including mobile content, mobile internet speeds and mobile adoption. Today the mobile content usage is at the Tipping Point36. Google, with its announcements of Android platform and bid for 32 Figure 9 - Global Advertising Spend by Category

700Mhz wireless spectrum is championing the cause of mobile data. Apple, with its banner launch of iPhone in 2007 also has acted as a connector, to create the buzz around mobile data access. Consumer demand for data access on mobile phones has been established with the iPhone, with its bundled data plan, taking almost 28% of market share from the sales in Q437. In the words of Apple CEO Steve Jobs at the iPhone SDK conference: "As you know, the iPhone really brings the internet to a mobile device for the first time, you have the internet in your pocket -- and that's being borne out by usage stats for mobile browser usage. 71% of US mobile browser usage!" Our industry Analysis concluded that Barriers to entry are pretty high at this time, primarily because of much needed partnerships with Mobile Service providers to get more information about the users. The 700MHz spectrum auction has cleared the way for a shift in control from the service providers to everyone else in the value chain, which includes phone manufacturers and content / application developers. With this growth in the market, there is huge potential for Mobile advertising as well. The mobile ad industry is expected to grow much faster than the other advertising channels according to a study conducted by IBM’s Institute for Business Value38 (see Figure 9). The industry has realized that mobile has unique strengths such as context, immediacy of response, and personalization 39. They understanding that mobile experience is different than the internet experience has translated in innovations of technology and business models in mobile ad industry especially because half of the big brands are concerned that mobile advertising will be considered too intrusive by consumer40. Based on our analysis, we conclude this section by saying the industry is poised to explode and there are many opportunities for both mobile advertising and mobile OS/platform players in this market. 33

III. Internal Analysis Business Definition / Mission Google's mission is to organize the world's information and make it universally accessible and useful41. Well known for its search technology, Google was incorporated in September 1998. Its servers running all over the world keep track of Websites, and make this information freely available through their search results. It has successfully integrated this technology into its numerous products which include a free email service, document editing on the web, news feeds, maps, stock quotes, image search, shopping, online payment service and custom search tools for business websites. Google has been able to gain market share from its main competitors Yahoo and Microsoft through its ease of use and improve its brand image the world over. Although most of its products are free, Google generates revenue through its advertising product, Google AdWords. This innovative advertising program delivers advertisements on websites whose content is relevant to the product. Google uses its AdSense program as a platform for third party web sites to “lease” some real estate to Google on their websites to deliver relevant ads. Company Philosophy “Never settle for the best”42 Values are driven through the company’s “Ten Things”. Some of the important points from this list which makes Google successful today is focusing on the user (i.e. deliver value to the user who comes to your site and not make changes according to shareholders views). Also, the “10 things” clearly identify what employees need to keep in mind when working on a product – needs to be fast, delivered wherever the user is, and provide the best user experience. They also stress on the fact that being greedy is not an option when designing a product. Another important point to be noted is Google uses most of its products internally - their internal e-mail system is Gmail, their internal scheduling system is Google Calendar, etc. This “eats its own dog food” policy not only 34

conveys the confidence Google has in its own products, but also enables a more reliable and user friendly product. Organizational Structure and Controls Andy Grove, founder of Intel Corp. observed, “From the outside it looks like Google’s organizational structure is best described by . . . Brownian motion… in an expanding bottle. Does [Eric Schmidt] think it will work forever?” In his video response, Eric Schmidt confirms that the description is accurate, but only for its creative workforce. Google runs its finance, legal, investment, M&A and sales in a traditional way although its creative side, engineering and R&D, can be described as Brownian motion. As seen in their organizational chart in Exhibit 18, at the management level, the creative workforce falls under the President (Products) and President (Technology). As mentioned earlier, their Engineering and R&D departments do not follow a hierarchical structure. Managers are more like tech leads who program at least half time. The company follows agile programming throughout the company, which enables programmers to move from one department to the other very easily. In most software companies, corporate structure limits the movement of employees between projects, resulting in employees being overworked and burnt out, thus reducing productivity, innovation and morale. Google eliminates this by encouraging employees to move between projects at any time without any questions asked. This prompts us to ask how this system makes sure programmers don’t leave trouble projects behind with buggy code, in short, what controls are used in monitoring appraising employee behavior. This is where employee rewards / incentives come in. Reward levels are tied to the importance of a project, so employees working on more important projects are rewarded better. The environment can be best described as a bunch of start-ups within a company. Since employees work on any idea that comes to their mind, they are rewarded when their products turns out to be tremendously impactful. So what are the rewards? - Financial rewards can be anything from gift certificates and massage coupons to huge bonuses and stock option grants. Non financial rewards include recognizing employees responsible for important product launches in quarterly all-hands meeting by putting up their pictures and receiving applauds from everyone 35

around. One of the employees on his blog mentions “Gives me a tingle just to think about it. Google takes launching very seriously and I think that being recognized for launching something cool might be the strongest incentive across the company. At least it feels that way to me.”43 Who decides how well you should be rewarded? In Google employees reviews weigh heavily on peer evaluations and not what your manager thinks of you. This process was deeply rooted from early in Google days and is taken very seriously by employees since they think of it as a big deal to get rave reviews from their peers who are very intelligent. Also, these reviews determine the level of reward received. Strategic Position Definition Corporate Level Strategic Position Business Portfolio In a Letter to prospective shareholders, Larry page said “Sergey and I founded Google because we believed we could provide a great service to the world -- instantly delivering relevant information on any topic. Serving our end users is at the heart of what we do and remains our number one priority” 44Google has not deviated from this mantra over the years. They have focused on primarily collecting and aggregating information available on the Worldwide Web and providing it in a useful format to the user. The various products in their portfolio which provide this service include, Google Search, Google Maps, Google Booksearch, Google Desktop Search, Google Finance, Google News, Google Product Search, Google Image Search, Google Video and Youtube, and more45. Not only are these products limited to a computer connected to the internet, but most of these products are available on mobile phones too. Google also provides an advertisement platform to its users – AdWords and AdSense. In addition to providing information available on the web, Google also provides products which make internet communication easier with Gmail, Google Calendar, Google Talk, Blogger, Picasa, Orkut, Groups, Sites and Google Apps. 36

Rumelt’s Classification Of Google’s 2007 advertisement revenue, 91% came from advertisements delivered through Google’s websites. 7.3% of the revenue comes from its network websites, delivered through their AdSense program.46 Since the introduction of the AdSense program, Google’s internal website revenue has ranged between 81% and 91% (see Figure 10). Customers choose to deliver their advertisements through specific channels such as Figure 10 - Google Revenue Sources Search and network websites because they add unique value. This makes Google a Dominant Constrained company rather than a single business firm. As Google makes in roads into the mobile industry, we do not believe it would change its classification, as its revenue model remains unchanged where it now has a new channel to deliver the advertisements. Acquisitions and Partnerships: Since 2001, Google has acquired more than 50 companies47. Most of these acquisitions were small companies, and some of the larger companies include YouTube ($1.65bn) and Postini ($625m). Google is also in the process of making its biggest acquisition of DoubleClick for $3.1bn. As mentioned earlier, the internet industry has been growing at a very fast rate. New startups with creative products are all over Silicon Valley and most of them are looking to be acquired by big firms. Google and its competitors have been acquiring these small companies over the years, primarily to acquire intellectual property. Using the framework, “When to Ally and when to Acquire”, it is clear that Google’s acquisitions are primarily aimed at exploiting reciprocal synergies. Its value of the YouTube acquisition was heavily weighed on the customers whom YouTube brought to Google as the video hosting site benefits from huge network effects, and Google’s own video application was not positioned well to catch the next wave of video services. By the acquisition, Google reduced their cost of entry into the 37

Video social market, as the market was just starting to grow and its future prospects were unclear. Also, Microsoft and Yahoo were in talks to acquire YouTube. YouTube is better off partnering with a bigger search firm such as Google as advertising revenues could be maximized with an integrated platform offering which includes video and non video. For Google, the growth of social networks such as MySpace and Facebook posed a major challenge as Google did not have a platform to compete with them. One question that needs to be answered – is the video sharing industry attractive. BusinessWeek estimates that the cost of keeping YouTube up runs up to $1million a month48. Also, movie houses are wary of a video sharing website where they don’t have much control today, which might drive up litigation costs for Google. So far, Google has made some inroads into how it’s going to monetize YouTube. It has started offering advertisements on YouTube but the jury is still out as to if this has been successful or not. In the mobile industry, Google needs to forge partnerships to succeed. Unlike the PC market, Google needs to work closely with both handset manufacturers and service providers to successfully integrate its applications within their products. Google has partnered with handset manufacturers such as Motorola, Samsung, LG and Sony Ericsson49 to integrate its search product into their phones. Google has partnered with service providers like KDDI, NTT DoCoMo, China Mobile, Sprint Nextel, T-Mobile and Telecom Italia to provide content. These partners are also part of the Open Handset Alliance which has helped created the Android platform. Compared to its rivals, Google has less experience both acquiring and partnering with other firms. Most of their acquisitions have been very small and so have integrated into the company very well. Its acquisition of DoubleClick would bring in more challenges especially in trade regulations, implementation of new procedures, policies, the time spent on integration and coordination of sales and marketing functions. Business Portfolio Analysis: BCG Classification After our evaluation of Google’s business portfolio, we have reached the following conclusions. Refer to Exhibit 19 for Google’s products categorized graphically on the BCG Matrix. 38

Advertising on the internet, which includes search, video, and other media rich outlets is projected to grow from $16.9 billion in 2006 to $31.3 billion in 2011 – a 13.5% CAGR50. This growth is three times as fast as total ad spending. Of all these avenues on the internet, Search has the biggest 51 piece of the pie at 40%. IDC’s internet advertising report estimates that Search based ads is going to lose its share and drop to 32% by 2011, although the absolute dollars spent on search ads will increase. Google, which commands 56% of the search Figure 11 - Data ARPU Trends in Deveoped Wireless Markets business and 23.5% of the online advertisement market, will likely hold its place even with talks of a possible Microsoft-Yahoo merger, which is expected to reach around 17% of the market. This we believe is the reason for Google’s search based revenue business to be a Cash Cow. The lost market share from search is supposed to be replaced by video ads, especially with higher broadband adoption rates. Its recent acquisition of YouTube is Google’s answer to strengthen their foothold in the ad market. The video ad market is still in its nascent stage and Google has started displaying ads on YouTube videos. We believe YouTube is a Star business for Google. Looking at the Mobile industry, the Average Revenue Per User (ARPU) for wireless carriers from data jumped 43% from last year.52(see Figure 11) The data revenue not only constitutes SMS, but also mobile internet, which stands at 55% in the US, 35% in Western Europe and 70% in Japan and Korea. The growth over 6 years is shown in the figure below. This is especially good news for Google, as this shows that users are willing to use mobile devices to access the internet and not use it just for messaging. The increase is also attributed to better data speeds with the deployment of 3G services worldwide. Google has already released a mobile version of their AdWords and AdSense platform. Also, the Android release is set to further increase data usage. Google’s market share 39

is not high yet, but it has the right ingredients to win in this space, making us believe that this is currently a question mark for Google, but soon to be a Star With the increase in mobile data and device usage, maps have already made their way into devices with GPS integrated into them, or with Google’s new location finding feature using cell triangulation technique in Google Maps for Mobile. This is attractive as mobile devices are very personal and Location Based services further enhances the attractiveness. According to HitWise53, Google’s share has increased by 10% in just one year and would be at the top within the next 2 years. Google Maps has found its way into most mobile devices and Android comes packaged with Google Maps. This makes us believe that this Google Maps is a Star. In the Web based email market, Google still is behind Yahoo and Microsoft in terms of customer base. The good news however is, within two months of its official beta launch in Feb 2007, by April, Google’s share increased by 17%. Web Email users have a considerably higher switching costs than other online services, but Google’s product is appealing to the younger generation. This makes Gmail a question mark. Business Level Strategic Position Google’s has a BHAG (Big Hairy Audacious Goal)54 of “Organizing the world’s Information and making it universally accessible and useful”55. This mission drives the strategies of individual Business Units. Google’s three pillars of strategy are Search, Applications and Advertisements. Search has been Google’s flagship product. Google started monetizing its search product with its AdWords advertisement network starting in 2000. Google has also invested in producing a disruptive suite of applications such as Google Docs, Google Maps/Earth, Google Mail, YouTube video application etc. Google offers these applications free to increase market share, while it increases the value offered from these applications. Once the applications reach a tipping point, Google starts monetizing the application by serving ads. Google’s search tools and internet software products are targeted towards all internet users which can safely be called the mass-market today. They emphasize their cutting- edge search algorithms and information sorting capabilities in all of their products in an 40

attempt to differentiate themselves from their competitors. Google is, therefore, using a broad differentiation business level strategy. They can also be classified as using a needs based strategy since they are striving to meet the internet search and information location needs of a broad set of customers and have not diversified into other software and hardware markets. Google expects its core search product will still be their next billion dollar opportunity56. Google’s affiliate network or off Google site ad revenue has been growing over the past few years (get numbers) and is growing significantly with the advent of very powerful and highly contextual social networking sites. Other off Google ad activity represents display advertising where Yahoo is the leader, trials in print and radio advertising (dMarc Broadcasting) and video advertising (YouTube). Google’s Enterprise business is growing but a much slower pace in terms of market share and monetization. Overall technology innovation in consumer side has overtaken enterprise innovation over the past few years. But Google is pushing into this space with Search Appliance which was been sold more than 10,000 customers in 2007. Now Google’s SAAS (Software as a Service) solutions with its hosted applications, security suite (acquired from Postini) are packaged for the enterprises, creating breakthrough opportunity. As 99% of all of Google’s revenue comes from advertising, Google is very focused on providing high value to both advertisers and publishers. Google invests in maintaining high quality of ads, context relevancy, high clickthrough rates, acquiring more traffic via affiliate publishers, and giving more control and metrics to advertisers to tweak their campaigns. Google’s recent acquisition of DoubleClick was made to increase Google’s ability to provide behavioral targeting for ads which would result in better clickthrough rates. Resources and Capabilities This section discusses Google’s value and cost drivers and how it uses its resources and capabilities to achieve a sustainable competitive advantage over its rivals. Based on the current market performance we identify the value and cost drivers. We then use the Value Chain, VRIO, Product Life Cycle and Crossing the Chasm frameworks to analyze these drivers. 41

Value-Minus-Cost Discussion Google’s Value-minus-cost analysis was discussed in the Willingness to Pay Section earlier. This analysis is detailed in Exhibit 21. After the strategic move, we expect the value minus cost to change based on the growth, competition and cost structure. This is illustrated after the value chain and VRIO discussions. Value & Cost Drivers Brand equity, disruptive innovation and “No constraints” design capabilities are the key factors that drive Google’s value. Google primarily reduces cost through effective use of a common search platform and by leveraging it across several applications and services. Value and cost drivers of the firm and their linkages among the value chain activities are discussed below. Value Drivers Largest single source of information Google’s story is built around providing a simple, faster and effective access to online information. There is no other company that has the largest online storage of information as Google. By supporting web pages in over 35 languages and information portal that can be customized into more than 100 languages, Google has built the largest footprint of customers, the single most important factor in the industry. Business model centered around search Google’s entire product framework is centered around their core competency – search. Google spends 70% of its resources on its core competency and the rest on its applications 57(Figure 12). With 6 billion searches per month, Google commands 58% share of the total worldwide search (see Figure 4 Figure 12 - Google's Product Framework earlier in the document). Search also serves as the common platform to deliver ads across traditional, online media and SMB customers. Intuitive targeting 42

Google’s AdSense for content and search targets the relevant audience to deliver ads specific to the website content that increases the ROI for its advertisers. The company also provides a simple bidding and reporting tools to place and measure the effectiveness of the ads in terms of CPC (cost-per-click) and CPM (cost per thousand impressions) for traditional customers. It also provides Google Analytics, a tool that can be used by sophisticated SMB customers. Quality of service Quality of search results is an important value driver that helps retain end user loyalty and attract more eyeballs. Google continually invests and improve its search technologies to have the competitive edge Innovation Google is an idea factory58 and continues to offer a lot of value through its suite of innovative and free applications such as Google Maps, Gmail, Google Earth, iGoogle, Google Docs to increase its user base. With YouTube acquisition and MySpace partnership, Google has filled its innovation gaps in video and social networking product segment. Excellent Brand Image Google is a classic example of a company that built a powerful brand simply by word-of- mouth. It is ranked 20 in top global brands list and is worth $18Billion in 2007 59. Cost Drivers Effective information storage Google has a world class infrastructure of storage servers racked up in thousands of clusters in dozen data centers around the world. By building its own software to manage these servers, Google has kept its cost under control. Every group of new servers installed adds a minimal variable cost and uses the existing software. This also minimizes cost. Cost benefit based investments Google constantly evaluates its immediate and longer term ROI before investing more in core search, ads and also new services60. Cost Arbitrage 43

Google has significantly grown global talent in low cost countries such as developers in India and China and leveraged the cost arbitrage. It has also historically kept the R&D cost under control between 12% of revenue61. Open Source Software Google uses Linux based Open source software for its development and uses MySQL to organize its database. There is only one software code repository and engineers are encouraged to share the same codebase. Value Chain Exhibit Exhibit 20 illustrates the links among various value chain activities. Links Across Primary Activities in the Value Chain Links within Marketing and Sales Google’s focus to be the information leader calls for enlarging the footprint and promoting its brand through word of mouth. By enhancing its war chest of novel applications that solve users information quest, Google has continued to improve its brand. Also by focusing on vertical sales strategy for its traditional customers, it has been successful in monetizing the opportunities. Links between Inbound/Outbound Logistics and After Sales Google has developed powerful yet simple tools for different customer segments that help them monitor the value their customer receive from their ads and search services. Google closely partners with the ad networks and the content publishers to forge a strong and sustaining relationship. Links Across Primary and Secondary Activities in the Value Chain Technology Development and Operations By leveraging a single source across a plethora of applications, Google controls cost of software operations. In spite of the massive information growth requirements, their disciplined investment strategy forces them to invest selectively on projects with a good long term ROI and expand their modular server infrastructure. Google has also filled its product gaps with strategic acquisitions. Marketing and Sales and Technology Development 44

Google’s strategy to attract more and more eyeballs is strongly backed by an army of innovative engineers who perform extremely well in an open culture to share ideas and convert them into new products and services to enter new market segments. V-C profile after Strategic Move In this section, we estimate Google’s V-C profile for the years 2008-2011, after its move into the mobile advertisement industry. Figure 13 shows the relative V-P-C after the strategic move. Google is expected to add more value through mobile content publisher partnerships, Figure 13 - Google's Relative Value, Cost, & Price design applications tailored to smartphones and pay increased attention to user privacy which is important for the mobile users. Hence the relative value will increase in the coming years to stay competitive in this market. On the cost front, Google has to invest significantly in pushing the android platform into the market. In addition, it will have significant R&D investments to develop new applications. Most of the mobile user information is controlled by wireless service providers and TAC would be higher to attract these new users. Hence the cost structure will increase in the initial years and is expected to taper down as the market takes off. Google will try to attract the mobile advertisers by offering competitive price and bundle discounts. As it increases the value of the services, it could increase the price with a strong customer footprint. Exhibit 21 shows the detailed analysis of this approach. VRIO Analysis Exhibit 22 shows the various resources and capabilities and how they drive the value and cost for the firm. The key resources are their strong user-base, advertiser network, open alliance partners and their in-house talent. Major capabilities of the firm include their ability to build around their core competency – search, their ability to enhance their search technologies and their ability to innovate and scale serving an increasing global 45

end-user and customer base. Google’s strong brand image, their eyeballs and a strong AdSense and AdWords network provide them a sustainable competitive advantage over their rivals. Customer Retention Strategy Retaining end-users and customers is extremely important to Google to create a network effect. By providing free value added services to end users centered around its search technology, Google has been extremely successful in retaining and attracting more users to migrate to its services. Google’s strong focus on end users ensures that the eyeballs stay loyal to Google. Recently Google has announced several value added services such as Goog411 and Google Docs to enable more user migration. On the advertiser side, brand management and customer satisfaction are key to its success in customer loyalty. By segmenting the advertisers into small business, online and traditional customers it serves the diverse needs of these segments effectively. Google offers different level of value added products and services to these segments. Small business customers who do not have their own resources to place ads, get simple tools to order, track and monetize revenues. Powerful online analytics are tailored to the needs of online media companies to monitor their ROI. Traditional marketing companies such as Sony, Target, Tesco and financial companies have their own advertisement agency networks that manage their promotions. Google has dedicated account managers to collaborate with these agencies and constantly monitors customer satisfaction metrics. Google has developed its partnership network significantly over the past 3 years and continues to invest and strengthen its Customer Relationship Management. Product/Service Portfolio Analysis In this section we look at various products and services that Google offers to both end- users and advertisers (see Exhibit 23). For the end-users Google offers a wide variety of value added differentiated products. These are free and customizable. Some examples include Google search, YouTube, Google Maps, Gmail, Picasweb, iGoogle and Orkut. All these applications integrated around search and hence the network effect is tremendous. 46

For the advertisers, a wide range of tools such as AdWords, AdSense, Analytics that help monitor the user traffic trends, click rates and conversion rates. In addition, Google also provides tailored report generation tools to calculate ROI based on these metrics. Product Life Cycle Internet search advertisement industry is in the growth phase of its life cycle. Currently, the industry growth rate is high, with intense rivalry between Google, Microsoft and Yahoo. As companies move away from mass advertising in TV and newspapers to targeted advertising, the number of tools and applications to place the online advertisements are growing. Exhibit 24 shows the various attributes used to justify this classification. Financial Analysis Google’s Five Year Performance Google has been growing at an astounding pace for the past five years. Since 2003, Google’s average yearly growth rate has been 114.6% (Financial Exhibit D). This growth rate is obviously not sustainable for the long term and, as expected, has been declining over the same period. However, Google’s overall financial position is strong and they are in a good financial position to continue to compete in the markets they do business in. In order to get a better picture of Google’s financial performance over the past five years, an analysis has been conducted using the same five categories as in the Comparative Financial Analysis; Growth, Profitability, Liquidity, Leverage, and Operational Efficiency. Google’s past and current Income Statements, Balance Sheets, and Statement of Cash Flows can be referenced in Financial Exhibits A, B, & C. Growth As mentioned, Google has been growing rapidly, although at a decreasing rate. While revenues grew at an annualized annual pace of 106% over the past 5 years, net income also grew at an annualized annual pace of approximately 111%. As mentioned above, revenue growth has been slowing since 2002, but Google is still growing much faster than any of its major competitors. Annual revenue growth from 2006 to 2007 was 56.5% while Yahoo and Microsoft grew at only 8.5% and 15.5% respectively during the same period (Financial Exhibit D). Google attributes most of its revenue growth, especially in the last year to increases in the total number of paid clicks, rather than to 47

increases in its fees62. They have also seen international revenues increase not only in absolute amount, but also as a percentage of total revenue.63 Especially at a time when the US dollar is weakening against foreign currencies, this helps Google’s top line. Profitability Google’s net profit margin has fluctuated over the past five years. It has been increasing for 3 straight years topping out at 29% in 2006 before pulling back in 2007 to 25.3% (Financial Exhibit D). This was due mainly to an increase in costs of revenues during 2007 which had been declining since 2004. Google’s costs of revenues are a reflection of the source of its advertising revenue. Their AdWords product, which displays ads primarily on Google owned web pages, generates much higher profit margins than does their AdSense product, which pays network partners to allow ads to be displayed on their web sites. The fees that Google shares with these network partners are called traffic acquisition costs (TAC). During periods where ad revenues generated from ads on Google owned sites is growing faster than those generated from ads on network partner’s sites, both TAC and cost of revenues will decrease. From 2004-2006, this was exactly the case (Financial Exhibit F) and both TAC and costs of revenues as percentages of revenues declined. In 2007, however, the trend has changed. The proportion of revenues from network sites increased driving TAC and cost of revenues higher, which ultimately led to a lower net profit margin. Recent contracts that guarantee minimum payments to certain network partners, namely MySpace, that have not monetized into revenue as well as expected have also been a drag on margins and are a continuing concern for the future. Google has also had very good returns on its assets during the past five years. They have averaged a 18.7% ROA during this time (Financial Exhibit D). This is primarily due to its quickly growing revenues paired with its ability to keep operating costs, such as the costs associated with running its massive data center, relatively low. In addition, Google’s business is easily scalable due to the fact that data centers are relatively easy to scale at reasonable costs. Liquidity 48

Google’s high growth and cash generating abilities have made their assets very liquid. Their current ratio increased from 2.38 in 2003 to 10.00 in 2006 before pulling back to 8.49 in 2007 (Financial Exhibit D), primarily due to the events discussed in the profitability section above. Google carries a large amount of cash and short term investments on their balance sheet as well. At the end of 2007, they had over $6 billion of cash and cash equivalents, representing 24% of total assets, and over $17 billion of current assets (Financial Exhibit B & G). This cash, when paired with their cash from operations, gives makes Google’s short term default risk very low. In addition, Google has currently unused letters of credit totaling $38.1 million64 that could be called upon if the need arises. Leverage Prior to 2004, Google did carry a small amount of long term debt, less than 3.5% of revenues, but it does not currently carry any. Google raised approximately $7.5 billion from equity issues in the last 4 years.65 Their stock has far outperformed the S&P 500 during this time (Financial Exhibit H) and analysts remain positive about the stock in the long term even after recent concerns over the recent increases in TAC discussed earlier.66 Because of their current cash position, robust profits, and sought after equity, there is little reason to think that their debt structure will change in the near future. Operational Efficiency Google has been very good about collecting on its accounts receivable as demonstrated by their low Days Sales Outstanding (DSO) when compared to their competitors (Financial Exhibits D & E). Their DSO has been slowly rising since 2004, however, so this is something that should be addressed should this trend continue. Google has also been able to grow their headcount significantly in the past five years without experiencing a significant reduction in revenue per employee. Google has increased its headcount by 25 times, from 682 full-time employees at the end of 2002, to 16,805 at the end of 2007.67 However, during that time revenue per employee actually increased from $644,000 in 2002 to $1,080,730 in 2005. Since 2005, it has 49

only fallen to $987,440 despite an 88% and 57% increase in full-time headcount in 2006 and 2007(Financial Exhibit F). Valuation In this section, we discuss Google’s enterprise valuation using the Discounted Cash Flow (DCF) framework. Exhibit 25 shows our valuation assumptions and calculation for the weighted average cost of capital (WACC). Exhibit 26 shows the DCF based valuation. Based on the historical trends and management’s outlook of future growth and analyst’s forecasts, we have estimated Google’s growth to be 37% in 2008. With increase in YouTube and other applications, we expect Google to continue their growth reaching 40% in the year 2013. We assumed a terminal growth rate of 7%. We estimated their COGS to be flat at 10% of revenue, while the TAC to be higher at 33% of revenue. To maintain their superior value, we assumed increase in R&D expenses at 13.7% of their revenue. We also expect their SG&A expenses to come down due to their cost efficient online marketing tools. After adding a cash equivalents of $17.28B (Google has no debt), we estimate the enterprise value to be $154B. Google has 316M outstanding shares and this translates to a stock price of $494.39. Google traded at $434.12 on March 7, 2008. The difference is due to the prevailing market conditions and the economic outlook impacting the stock market. Scenario Analysis Mobile ads industry is a very fluid industry and a lot of changes are expected in the industry in the next couple of years. The detail of the valuation of the scenarios can be found in Exhibit 27. For valuing the scenarios we have made some assumptions which are outlined in the exhibit. The WACC of mobile ads market is assumed to be the same WACC as Google’s overall WACC. Terminal growth in mobile ads market is assumed to be between 4-5% after 6 years as it is a growing market. TAC will be higher for Google in mobile ad space, as there are a more people in the value chain to share the pie, namely content publishers, wireless service providers, and end users in some cases. R&D, SG&A and COGS costs as percent of sales are assumed to be lower compared to Google’s overall ratios as there will be synergies that mobile ads business can leverage from existing businesses. 50

In scenario one, the mobile ads market is expected to grow as expected by analysts to about $24B in 2013. Google will be better positioned to serve the mobile ads market with the innovations it has been pursuing with mobile platform and mobile ads, and with its internet search and ads leadership. The incremental value of this option for Google is $6.7B. In scenario two, mobile ads market grows as expected, but Google is beaten by its competitors and is able to achieve only 13% market share of the mobile ads business. A very strong mobile focused combined Microsoft/Yahoo entity, or a mobile only ads business prospering faster than Google could lead to this scenario. Once competitors build up market share, it will be very hard to Google to penetrate. The incremental value of this option is $1.1B. In scenario three, the mobile ads market is not growing as expected for various reasons – consumers look at ads on mobile as intrusion, mobile ad companies not able to provide innovative solutions to mobile advertisers, mobile data penetration doesn’t happen, etc. In this model, the mobile ads market is projected to grow to about $6.75B in 2013. The incremental value of this option is $0.98B. Scenario four assumes that Google doesn’t put any more investment in mobile business and instead allocates those resources to gain more market share over competitors in online ads market. Paid search is still a fast growing market and an incremental market share in this market makes a huge difference to Google. The incremental value of this option is about $25B. Scenario five is the worst case situation for Google where Google removes its focus on the mobile market, and its competitors (including merged Microsoft+Yahoo) eat into its online ads market share; also the mobile ads market picks up and competitors pick up that market. In this scenario Google will put in more money into R&D, increase the payouts to content providers, eventually putting a heavy downward pressure on its margins. The incremental value of this option is about ($42.7B). 51

Real Options Analysis Using real options analysis and allocating probabilities for the real option scenarios, we get the option valuation for a Go/No-Go decision (Figure 14). Given Google’s approach to new markets and given the fragmented nature of the market, we presume that Google will be successful compared to competitors in gaining market share. Also Figure 14 - Decision Tree Diagram given the growth observed so far in mobile data and ads industry, we are assigning higher probability for the market to succeed. The ‘Go’ scenario will increase Google valuation by about $4.2B while the ‘No Go’ scenario will reduce Google value by $2B. Given the net present value of the two options, we are recommending Google go ahead with aggressively investing in and pursuing the mobile ads strategy. IV. Strategy Effectiveness Analysis Google’s Strategic Move Google’s November 6th announcement of the new Android Platform developed by the Open Handset Alliance was very different from expectations that Google was going to announce a new handset. This new platform is aimed at Google’s attempt to break down barriers to expanding its advertising and services businesses. Google believes that this would help broaden data usage on mobile phones, benefiting its large advertisement business. With this move Google has entered the mobile platform market currently dominated by Symbian and Microsoft. This “Blue Ocean”68 strategic move by Google can be viewed as a way to rewrite the industry and not compete head on. Currently carriers are hindering advertisement growth in the mobile industry by their 52

closed network approach. For an effective mobile advertising, online advertisers are looking for specific user profiles, ability to measure user activity, and increasing mobile activity with a better user interface. Google’s move is aimed at wielding control over from the operators by pressing for open networks and open devices is effectively changing the game. Google has now bid on a wireless spectrum auctioned by the FCC. The rules of the auction have checks in place for the winner to support open devices to operate in this spectrum. Effect of Strategic Move on Industry Conditions Mobile OS Market Rivalry We believe this move by Google will not impact the rivalry situation as much. This move will considerably increase the size of the smart phone market around the world. (See Figure 15) Buyer Power With Android being offered free of cost, Google is banking on increased advertising revenue. This is good news for phone manufacturers who do not compete in the mobile advertising business as this would reduce their costs and increase sales for them. In the case of the application developers, Android also offers free development kits and reduces time to market for developers. If this new business model in the OS market picks up, it does bring some power back to the industry. Supplier Power Currently supplier power rests on the fact that application developers can easily switch to PC application development and thus only moderately favors the mobile OS industry. The Android SDK is free of cost and it is expected to further increase the growth of the Figure 15 - Mobile OS Market Effects mobile smart phone industry. This strategic move increases the power to the industry. 53

Complements The biggest impact on industry conditions because of the strategic moves in the mobile industry is the effect it has on the complements. With closed networks, wireless service providers have hindered innovation and growth in the mobile OS industry. With the current bid at $4.71B for the C Band of the 700MHz wireless spectrum, it is now certain that this spectrum will be open for any devices, thus making it a very attractive industry for innovative products to hit the market. Substitutes The wireless and mobile data industry has slowly reduced the need for users to open up their laptops especially for emails and messaging. With this introduction of Android and the open spectrum, we will expect to see further innovation in applications for mobile. This would help to further strengthen the mobile industry. Mobile Advertising Market Rivalry With Google increasing its focus on the mobile ad business, industry consolidation is imminent. The currently fragmented mobile ad industry would end up more concentrated thus increasing the rivalry in the industry.(see Figure 16) Buyer Power In the PC internet industry, advertisement is a key source Figure 16 -Mobile Advertising Market Effects of revenue. For these publishers, making their content available in more platforms is good. This strategic move by Google would make the mobile advertising industry more strategically important for the content publishers. Supplier Power With the increase in eyeballs for mobile ads, content publishers and advertisers alike would look at this industry as extremely important to them, especially because they can now push their ads to a more targeted audience because mobile devices are more personal than a personal computer. This would help the industry. 54

Barriers to Entry This move by Google will increase the retaliation by competitors. We already see the effects of this move in Microsoft’s bid for Yahoo. If the merger does happen and the industry grows, we will see more players such as Facebook who currently have an effective ad product in the internet social networking industry, enter the market for mobile ads. Complements As mentioned earlier, wireless service providers have closed their network and controlled traffic reaching their customers. As browsers and applications become easier to use on mobile devices, like on the iPhone, and service providers increase 4G network coverage, content publisher traffic will also increase. This would positively impact advertising. Google’s timely move to introduce AdWords and AdSense and the Android platform is a step in the right direction. Also, with the open network clause in the 700MHz Band C, we will see more innovative location based services which is good for targeted advertising. Substitutes In the case of internet advertising, we have seen that newspaper ads have lost some share of the market. Since mobile ads offer a greater opportunity for a target audience, the substitutes will further see their share erode, thereby making it good for the industry. Resources Needed for Strategy Implementation A strategic move to compete in a new industry will need additional resources. We have outlined some of the key resources needed for the strategy to succeed. R&D Resources Over the years, Google has done a great job attracting the best and brightest minds to Googleplex. Their strengths lie in developing cool applications for the internet. To succeed in the mobile industry with an effective Operating System and development platform, they need more than just internet skills. To help with expertise in mobile devices, device drivers for cool add-ons seen in most smart phones today, wireless service, Google has done well in bringing in industry leaders such as Motorola, Samsung, LG, HTC, NTT DoCoMo, Sprint Nextel, only to name a few into their Open 55

Handset Alliance69. Google will also have to build a powerful user targeting platform to increase relevancy of mobile ads. Mobile search will be able to leverage the research done by the core search and local search groups. Operational Resources To handle an increased traffic to their servers, Google needs to invest in more ad servers. To date Google has an estimated 450,000 servers around the world70. They have been effective in making local governments in Netherlands and North Carolina to subsidize real estate and power. Their innovation in custom built cluster servers has helped them achieve superior performance at a very low cost. 71 Marketing & Sales Google needs to leverage their strengths in the internet search and innovative advertising model in the mobile platform. Since mobile advertising offers an added advantage of a more targeted audience, the product development team needs to start looking at how to package AdWords to customers offering them both internet and mobile advertising opportunities. Also, they need to continue to develop / port applications currently intended for PC to suit the small screens of mobile phones. Financial Resources The problem with Google doesn’t seem to be lack of cash, but how to invest its $14 billion cash and marketable securities. The mobile industry is extremely promising and is the next logical step for Google to continue to dominate the advertisement business. Overall Effectiveness of Strategy Google’s move into the mobile ad business can be viewed as a related diversification strategy. Their skills in search technology, context based advertising revenue model and tools to make information retrieval easy can be very easily used in the mobile space thus leveraging their core competence. Integrating mobile applications into the internet PC applications can be done at a fraction of the cost by extending their Operational Economies of Scope. Also, to the advertiser’s network effect which Google enjoys creates a unique value – gives and opportunity to reach a huge customer base through a new medium. To be successful in this new business, Google does not need to change its organizational structure. Also, for Google to succeed, a lot depends on its 56

partners. These partners are important because Google does not have the capabilities which some of them bring to the Alliance, for example support for Bluetooth, WiFi chipsets. Also, some of these partners will help with evangelizing the Android platform. External applications are also important and the OHA has eBay which could integrate applications such as eBay auction marketplace and Skype into the platform. Exhibit 28 details how this strategic move helps with value creation and helps sustain its superior profits. V. Recommendations Google’s products and services enable them to generate revenues from advertisements. Borrowing an analogy from the Crossing the Chasm framework, we have identified mobile advertisement industry to be embraced only by early adopters like MTV, P&G, Disney etc. Google is aiming to provide a whole product solution by combining Android and search technologies. There is a real danger that this market can fall through the crack if this value proposition is not marketed properly to pragmatists. Our recommendations for Google have this theme as the primary goal i.e. what `enablers’ are required to cross the chasm? Short term recommendations have a 1 year time horizon whereas longer term recommendations are aimed at anything beyond this time. Short Term Recommendations Evangelize Android Platform Mobile phones have come a long way from a mere communication device to become a personal identity statement. As carriers break down their walled gardens to increase data revenues, users will start to add more applications for their handsets. Google should adopt a rapid growth strategy to build critical mass for Android because this platform will be the key enabler that will allow Google get more sockets to push ads. One of the barriers that Linux face in widespread adoption is its highly fragmented nature. Failure to build superior value will result in Android being branded as yet another Linux solution. 57

Ride the Mobile TV wave to expand Mobile Advertising Mobile TV has been touted as the next killer app for cell phones and can be the ideal application for Google to target to create the bowling pin effect. New set of emerging technologies like V Cast, MediFLO and DVB-H have emerged to provide digital mobile TV to handheld devices. Deutsche Bank research shows mobile TV ad spending growing up to $5.6 billion and reaching 340 million users72 by 2015. (see Figure 17) For example Anheuser Busch has a partnership with mobile TV content aggregator MobiTV to target the 21-35 year old beer drinkers who are tech-savvy. Google’s presence in the advertising world has been primarily confined to the online network and not in TV because there is typically no way for the user to interact with content (unless there is some Figure 17 - Estimated Mobile Video Spending software in the set-top box). Content producers are also increasingly looking for innovative delivery methods including mobile broadcast television to expand their reach. According to Telephia (now Nielsen wireless)73, the most watched mobile channels are news, weather and sports. By collaborating with content providers like Fox, Universal, Disney, ESPN etc Google can position itself as the go to guy in Mobile TV advertising for networks to connect with the relevant audience with personalized messages. Make AdWords platform attractive by bundling online and mobile offering Google gets 99% of its revenues from AdWords program74. Most AdWords customers pay Google on a cost-per-click basis which means advertisers pay Google only when a user clicks on one of its ads. However as Google strives to provide relevant and useful ads to users by eliminating those with low click through rates, reduce accidental clicks etc their revenues from online AdWords might decrease in the short term. This was confirmed by the Comscore’s latest report that Google showed a 7% sequential 58

decline75 in Jan 2008 vs. December 2007 in paid clicks. To increase revenues from AdWords, Google should bundle online and mobile AdWords to advertisers. Google can offer discounts to stimulate Mobile ad traffic and to identify profitable price sensitive segments. Longer Term Recommendations Champion the cause to accelerate adoption of 4G Mobile Broadband Based upon In-Stat research, the expected revenue from a smartphone user, determined by dividing the ARPU by their churn rate, is just below $7,500, while the expected revenue of a pure phone consumer is closer to $1,25076 . Another survey by In-Stat shows 80% of the respondents said that number of available applications was a very important criterion when they select their smartphones, with 25% downloading over four applications. This seems logical and shows clear evidence that better response times with the introduction of 3G networks has increased data consumption. Future 4G technologies like Long TermEvolution (LTE), Ultra Mobile Broadband(UMB) and WiMAX promise throughputs of upto 100 Mbps77 for mobile applications as opposed to 400-700 kbps for 3G technologies like Evolution-Date Optimized (EV-DO) or High Speed Packet Access (HSPA). Google should adopt a proactive strategy to influence the events in this environment by participating in this evolution rather than simply react to it. This will be crucial to Google in the long run as 4G mobile broadband will be truly a disruptive and game changing technology due to its lower cost, significant performance gains and ability to usher in a new era of personalized devices. Innovate Business model to embrace user generated Ad content Recent trends have shown explosive growth of user generated content (UGC) that is appealing to others (e.g. YouTube). Research78 shows that these user-created content sites contributed to 39% of online video content. As users increasingly participate in social networking sites like Facebook and Myspace, user generated content advertising is fast becoming the new disruption model. This becomes more powerful as consumers resist control over intrusive marketing from providers but trusts recommendations from other fellow consumers. To account for this shift in advertising landscape, Google should reconfigure its ad model to pursue user generated advertising revenue sharing 59

models. Such a model will help Google to drive persuasion and personalization and increase ROI for their advertisers. Use Targeting and analytics to raise the bar in Mobile Ad platform Google needs to come up with solutions that increase ad reach and quality among the targeted audience. For mobile advertising to be successful, reach (exposure to customers), purity (relevance/quality) and analytics are the most important factors79. Google will have to come up with an analytics framework – audience profiling, real-time analysis – to match user interests and customizing the interaction to increase the efficiency of ad spending. Google should partner with carriers, content providers to understand trends that will help in improving relevant ads to the end users. Strategy Implementation Using the strategy implementation framework outlined in Figure 18 , we have chalked out the implementation of the strategy that Google should follow to meet its strategic goals. Figure 18 - Strategy Implementation Framework Short term Strategy Implementation – Evangelize Android Platform As established in our recommendation, Android will be the key enabler for Google to pursue its Mobile advertising strategy (see timeline in Exhibit 29) and so it needs to promote Android as the unified platform for all the players – Application developers, wireless carriers and end users. We use Game theory80 to illustrate how Google can actively shape the game it plays by changing the value net. Google should invest more in trying to commoditize the mobile OS and platform by offering Android free and growing the developer base. This will be a strong response if the Microsoft’s move to acquire Yahoo goes through. Microsoft has a strong presence in the Mobile OS market and Yahoo is strong in mobile applications. Google will change 60

the rules of the game with this strategy and can compete on multiple dimensions with the combined entity. Google should build a highly scalable network with application developers (suppliers in the value net). Android should provide a highly sophisticated UI framework that will allow application developers to create an engaging mobile experience for end users (similar to the iPhone). To encourage more developers in its fold, Google needs to make sure these developers will have a large end user base. To spur adoption of mobile applications and lower costs for application developers, Google has to partner with wireless service providers and MVNOs like Virgin Mobile (complementors in the value net) to subsidize end users’ data service plan. Carriers are squeezed for margins in the voice segment and are looking for innovations to grow revenues. Mobile advertising will change the business model for wireless carriers by generating more “upstream” ad revenues e.g. sugar mama from Virgin mobile81. Users (complements in value net) will get superior mobile application experience and free/subsidized data plans to opt-in for watching short ads on their mobile device. Changes required to implement recommendation Changes in Value and Cost drivers By improving time to develop apps, Google will improve the value it delivers for application developers. Also by enabling Android to integrate different applications seamlessly, it increases the network effects to create new applications. Google will need to increases its marketing budget to enhance the reach of Android. For example Google can increases the trend of “tribing” (affinity towards a community) in the Android developer community by organizing an annual convention similar in lines to MacWorld in San Francisco or Harley Davidson’s motor cycle rally in Sturgis. Changes in Resources and Capabilities The mobile application market is in the early stages of technology adoption life cycle and is endorsed only by early adopters. To cross the chasm and take Android to the main market, Google needs to develop strategic partnerships. Apart from the partners in the existing open handset alliance, Google needs to have stronger tie ups with carriers 61

like Vodafone which has a very strong European presence. Google should also be able to transfer its online application capabilities to Android. To build dynamic capabilities, Google should adopt a double-loop problem solving82 to break down cognitive barriers in marketing activities of the value chain. Changes in organization structure Google will need to create a separate business unit to focus on mobile product applications and marketing. It should divide the products division under SVP of Product Marketing Jonathan Rosenburg into two groups – Online and Mobile. This will allow Google to better monitor resource allocation and ROI on its investments. Critical Risks There are two important risks associated with adoption of Android. First, end users might feel that their privacy is intruded by mobile applications and fail to embrace them. Second is the failure of wireless infrastructure to provide adequate response time for these applications that result in disappointing user experiences. We believe Android’s superior user experience and ad revenue sharing partnerships with wireless carriers will mitigate these risks. Long Term Strategy Implementation - Accelerate adoption of 4G Mobile Broadband To realize the vision of mobile applications with multimedia content, Google needs to make sure the adoption of 4G technologies is accelerated (see timeline in Exhibit 28). In fact Google, if it wins the 700MHz C block spectrum bid, should allocate the 22 MHz bandwidth to pioneer the 4G adoption. If Google loses the bid, it should still actively work with International Telecommunications Union (ITU) and other organizations like the next generation mobile networks (NGMN) to develop a common roadmap for future wireless technologies. Google can even partner with firms like Sprint or become a MVNO like Virgin Mobile. Changes Required to Implement Recommendation Changes in Resources and Capabilities Google will need to develop capabilities in RF technologies including different signaling mechanisms. Google also needs a 20MHz channel bandwidth for which it has already placed a bid for the C block of the 700 MHz spectrum. It also needs stronger 62

partnerships with companies like Clearwire who have capabilities in 4G technologies to move forward with Mobile WiMax. Changes in organization structure Google should a create a division that focuses on 4G technologies under SVP of Engineering and Research Alan Eustace. Additionally it should hire a 4G partnership development executive from outside, working for Suzanne Strasser, who is currently in charge of Executive Strategy and Partnerships. Critical Risks There are two risks in the adoption of 4G technologies. First, the use of cheap phones in low cost countries like India and China where users are concerned more about voice service plans will slow down this adoption Second, the difference in 4G standards like LTE and WiMax might delay adopting these technologies in a wide scale. Metrics and Budget For both the short term and long term recommendation, Google should continually monitor the success of the evangelization and partnership effort, by measuring the adoption of Android by application developers. Google should also monitor the mobile data penetration trends and how it translates into the mobile ad revenue business. We have outlined the extra R&D costs and extra Transaction Acquisition Costs Google will incur while trying to promote Android in Scenario 1 of Exhibit 27. Corporate Social Responsibility/Ethical Decision Making Google has a reputation of having ethical business practices. Google already has a commitment to ethical behavior with respect to paid listings. For example Google accepts AdWords for wine but not hard liquor. One of Google’s core tenant is “Don’t be Evil” intended towards the integrity of search results. But Google’s ethical obligations to users go beyond this statement. Google is the internet façade for millions of people. They use Google for internet search and e-mail communications. Google has the capability to search all the private content and “mine” data about individuals. To address ethical considerations, Google can adopt a framework that addresses two key questions83 63

• “What benefits and what harms will each course of action produce, and which alternative will lead to the best overall consequences? • “What moral rights do the affected parties have, and which course of action best respects those rights?” Such a framework will send a message that the “Don’t be evil” statement is not just a self glorifying public posture but one of true intent. VI. Conclusions Google has been a trail blazer in revolutionizing the web based on its search core competency. Of late the company has fallen from its lofty perch due to high market expectations and a downturn in paid clicks. Over the last few years, Google has been looking out for opportunities in the mobile market. With Android, the first commercially open mobile OS with a readymade ecosystem, Google takes a big leap into getting its online applications and others into mobile handsets. When the hype settles, there will be obvious ramifications from the entrenched players like Symbian and Microsoft in the mobile OS market. As mobile data services gain revenues from voice services, the market for downloadable applications will usher in new contextual advertising opportunities for Google. We have determined that video and location based services will represent the back bone of the mobile application adoption and Google can leverage its existing model to scale well. Also the fact that wireless carriers who are important complementors are slowly rolling out 4G technologies augurs well for Google. By incorporating our long term recommendations, we believe Google’s valuation looks bright in the next 3 to 5 years. 64

Exhibit 1. Mobile Advertisements Industry EcoSystem Exhibit 2.Dual Sided Advertising Market 65

Exhibit 3. Mobile OS/Platform Industry EcoSystem 66

Exhibit 4. 6 forces Analysis, Mobile Advertising – Level 1& 2 67

Exhibit 5. 6 forces Analysis, Mobile Advertising – Level 3 72

Exhibit 6. 6 forces Analysis, Mobile OS – Level 1 & 2 73

Exhibit 7. 6 forces Analysis, Mobile OS – Level 3 Exhibit 8.Mobile Advertising market share in 2011 78

Exhibit 9.Mobile Data Usage Exhibit 10.Average Mobile App. Price- US consumers 79

Exhibit 11.Total Wireless Users Exhibit 12.Penetration of Wireless Users in different age groups 80

Exhibit 13.Resources /Capabilities of competitors - Online Advertising 81

Exhibit 14.Value /Price/Cost Analysis – Mobile Advertising 82

Exhibit 15.Resources /Capabilities of Competitors - Mobile OS Exhibit 16.US Mobile Advertising Spending Projections in 2000 83

Exhibit 17.Mobile Advertising Industry Timeline 84

Exhibit 18.Google Organization Structure Eric Schmidt CEO Drummond, David Brown, Shona Kordestani, Omid Page, Larry Brin, Sergey Girouard, David Hol zle, Urs Reyes, George SVP Corporate SVP Bus iness SVP Global Sales Pres of Products, Presi dent of Genera l Manager, SVP Operati ons and SVP and CFO Development, Operat ions and Bu sines s Asst S ecret ary Technology, Goog le Enterprise Google Fello w Secretary, and Development Di rector Ass istant Secr etar y, General Counsel and Director Schr age, Elliott Armstrong, Tim Ros enberg, Jonathan Eustace, Alan Lee, Michelle VP Globa l VP Advertising SVP Product SVP Engineer ing & Legal Couns el Communications & Sales Management Resear ch Stewart, Bonit a Kamangar, Sal ar Bock, Laszlo - VP, Coughran, W.M. Director VP Product People Operations VP Engineeri ng Automoti ve Management Vertical Sing h Cassidy Murikami,Nori Mayer, Marissa Huber, Jeff VP, As ia - VP, GM VP Sea rch VP Engineeri ng &Latin America Google Japan Ch ou, J ohn ny - VP, Wojcicki, Susan Radcli ffe, David - Manber, Udi Sales and Bus. VP Product VP, Real Estate VP Engineering Development Management Sandberg, Sheryl – Cerf, Vint on - VP Norvig, Peter Merrill, Douglas VP, Gl obal Online and Chief Internet Director of VP, Engineering Sales and Ops Evangelist Search Quality Eun, David - Lee, Kai -Fu - VP, Content VP Engineering Par tner ships Arora, Nikesh - VP Opera tions, Europe 85

Exhibit 19.BCG Matrix Business / Market Growth Rate → Mobile Advertising Gmail YouTube Orkut Google Maps / Earth Internet Search Relative Position (Market Share) → 86

Exhibit 20.Google’s Value Chain Large information storage with optimal power, real estate FIRM INFRASTRUCTURE Build best hardware and software infrastructure. Distributed Data center IT support Promote an Open culture HUMAN RESOURCES Hire passionate, world class talent in line with the company’s culture Maintain single source of information across applications TECHNOLOGY DEVELOPMENT Excellent quality of search results with high Innovate applications for new segments relevancy, speed and attractiveness and strategic acquisitions to fill product gaps PROCUREMENT Profits Procure low cost, modular, scalable, expandable performance oriented data servers INBOUND OUTBOUND MARKETING AFTER SALES OPERATIONS LOGISTICS LOGISTICS AND SALES SERVICE Disciplined ROI Brand equity & Instant online based Simple CPC, Total Customer billing/order management investments CPM reports satisfaction for small Ability to scale business firms Enlarge Advertiser operations inline footprint Survey quality relationships with demand of ads as Sophisticated Analytics, Focus on perceived by Talent Arbitrage warchest of end users APIs for large in low cost customers applications countries for eyeball Common growth Develop software Value driver content Vertical sales publisher for traditional Revenue per employee focus relations makets Cost driver 87

Exhibit 21.Value /Price/Cost Analysis with Mobile 88

Exhibit 22.VRIO Analysis for Google 89

Exhibit 23.Product Portfolio Analysis Application / Tool Value driver Application/Tool Value driver For End User For advertiser Simple search Keyword search Speed Business centric Relevancy phrases Customer toolbar Bidding option Search AdWords For advertiser For End User Content based ads Instant video upload Web publisher gets $ Unlimited uploads for having Google Encryption AdSense search toolbar For advertiser For End User Analytics Integrated mail Traffic trends utilities Unified Customer messaging dashboards capabilites Ecommerce tracking Analytics Tailored reporting For End User For End User Personalized First satellite based interface maps; Wider coverage Integrated with other Location based Google applications services - Google Maps restaurants/shops iGoogle Customizable interface For End User For End User Online photoshop Social networking Instant Group Integration with sharing MySpace 90

Exhibit 24.Mobile Ad Product Life Cycle Newspaper Sales TV ads ads Internet ads Mobile ads Stage of Product Life Cycle Time Introduction Decline Growth Maturity Category Moderate Moderate Large Growth Small Negative High Low Competition Low Low Growing High Products Low Stable/ Growing/High Maturing Low Decling 91

Exhibit 25.Valuation Assumptions 92

Exhibit 26.Current Valuation Exhibit 27.Scenario Analysis Valuations 93

Exhibit 28.Methods of Value Creation Exhibit 29.Recommendation Timeline 96

Financial Exhibit A.Google Inc. 7 Year Statement of Income 97

Financial Exhibit B.Google Inc. 5 Year Balance Sheet 98

Financial Exhibit C.Google Inc. 5 Year Statement of Cash Flows 99

Financial Exhibit D.Comparative Financial Analysis 100

Financial Exhibit E.Graphical Comparative Ratios 102

Financial Exhibit F.Google Inc. Income Statement Trends 105

Financial Exhibit G.Google Inc. Balance Sheet Trends Financial Exhibit H.Stock Performance Jan 2005 – Feb 2007 106

VII. Bibliography 107

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Google team android_final

by Mihir Sambhus on Jan 15, 2011

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Google team android_final — Document Transcript