Google14qen Last Version 1228241181867301 9

Everything you always wanted to know
about Google…But were afraid to ask

Paris, December 2008

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..…….

December 2008 • Everything you always wanted to know about Google… • 2

Google key success factors : Web specific ?

Scalability Network effects Data mining
• Ability to easily grow at • The utility of a good or a • The web offers the
marginal costs service varies with the opportunity to exploit and
• Applied to infrastructures : number of users analyze a very large
ability to adapt its size to • The reach of a critical amount of data
high load & volumes mass of users constitutes • Users’ behavior can be
• Applied to business a significant barrier to the analyzed to create
models : ability to entry monetizing value
monetize millions of users

Openness Cocreation Business model

• The traditional walled • Non-traditional actors • Advertising is not a market
garden1 media strategy become part of the value but a business model
becomes irrelevant chain • Any market that attract
• Content and services must • Users, content creators advertising is a target for
be open and interoperable and external developers Google
to favor audience are given the tools to
circulation create new markets and
enrich services

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

1 Why won’t Google be affected by the crisis ?
2 Why is Google trying to change the mobile world ?
3 Why isn’t YouTube a content portal ?
4 Why does Microsoft fear Google ?
5 How Google wants to compete with Facebook ?
6 Why is Google buying satellites ?
7 How does Google buy traffic ?
8 Why did Google acquire DoubleClick ?
9 Why doesn’t Google monetize all its services ?
10 How does Google capitalize on Open Source developers work ?
11 How did Google capture the offline advertising market ?
12 Why is Google stealing our voices ?
13 Is PageRank a really competitive advantage ?
14 How does Google turn advertising into information and performance ?

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

..…….


1

Why won’t Google be affected by the crisis ?
4 levers will allow Google to increase its revenues amidst the economic crisis
Performance Bn$ 35 1
advertising
Licenses and During a crisis,
other performance
revenues advertising gains
market shares
Internet Explosion of the
Mobile non advertising + 3% 2007-2008 1
revenues
On line Monetisation of +450% 2007-2008
video the Internet
Mobile audience
YouTube
Bn$ 201 monetization 260 millions mobile
subscribers
increases
worlwide oct 2008 1

Estimates 2008 :
Revenues = 200 M $
1

Revenues 2008 Revenues 2012

Google is in a situation in which it can resist the economic crisis and find
new revenue sources, both advertising and non-advertising
..…….
1: faberNovel
estimates December 2008 • Everything you always wanted to know about Google… • 5

2

Why is Google trying to change the
mobile world ? (1/2)
Mobile industry is based on a “ traditional” locked values chain.

Operating
Terminal Portal Operator Web Contents
System

Examples:

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

Access restricted to services/contents
Limited Network Access
and to their improvement

• Terminals assigned to a unique operator • Operator portals favored over other portals
• Difficulty of interconnecting networks • Services offered by terminal manufacturers
favored over other services
• Closed operating systems

The mobile industry is not suited for the Google development model
based on openness, interoperability and network effects.
..…….


2

Why is Google trying to change the
mobile world ? (1/2)
In order to duplicate its open model, Google designed a three fold strategy :
Android : Open Source
Lobbying Telco partnerships
O.S.1
• Android Developer Challenge: • Google candidacy for mobile • Pressure from Google to force
Contest for developers to create license attribution aims to force the operators to offer its applications
new applications for Android FCC2 to impose an openness as default options
clause to the winner
• Open Handset Alliance:
Common initiative of 34 mobile • Sharing of advertising
phone industry players • A success : clause partially revenues between Google and
(manufacturers, suppliers and imposed on the winning bidder, operators
distributors) aiming at spreading Verizon.
Android

In addition, Google developed and acquired mobile devices applications :
Location-based Social Collaborative
Games
services Networks Tools

ShareYour Grand central 3
Cab4me FreeFamilywatch Golfplay JOYit Wertago Jaiku 3 Board

Google breaks open the mobile industry value chain to create an environment
that will be fit to the distribution of its products and monetization model.
..…….
1 Operating System 2 Federal Communications Commission 3 Acquisitions

3

Why isn’t YouTube a content portal ? (1/2)
YouTube acquisition is part of a strategy to monitor key content and audience hubs.

Monetise contents
Give access to
Organise information through various
information
sources of audience
•A new information silo: video • YouTube bandwidth • Broadcasting of contents
search spending estimated to reach through Google websites as
1M$/day1 well as other sites
•Next : Speech to text
technology : information • Revenue sharing logic
searches within video
contents

YouTube has already won the audience battle …
75% …
60%
May 2008
16%
9% 4%8% 2% 3% 1% 1%
May 2007

Market shares of 5 leading video websites,
United States (may 2008 vs.may 2007)
[%]2
1 NewYork Times ..…….
2 Hitwise 2008

3

Why isn’t YouTube a content portal ? (2/2)
Unlike its competition, YouTube follows an open logic and focuses primarily on
developing content distribution tools :

Encourage content Attract as many viewers as Monetize through relevant
providers to use the service possible advertising tools

• YouTube Program Partner : • Broadcasting videos on • Traditional advertising:
Payed providers of semi- YouTube website and other AdSense and banners
professional content Google sites (ex :
Google.com, GoogleNews)
• In-video advertising :
Pre-roll, post-roll, overlay2
• Broadcasting contracts • Exporting videos (blogs,
with major content providers social networks) and • Brand advertising:
developing API1 for broadcasting video ads
advanced broadcasting on within an environment
third party websites coherent with the brand’s
image
• Broadcasting on all video
devices : television, mobiles, • E-Commerce: Affiliation of
multimedia players, video partner websites (Amazon,
consoles Itunes, video games)

YouTube acts as the platform of a two sided3 market composed of content
providers and video seeking users.
1 Application Programming Interface. Standardized programming protocol allowing applications to communicate
2 Clickable text advertising displayed on a video 3 See Annex ..…….


4

Why does Microsoft fear Google ?
Google’s ambition isn’t limited to “in browser” Web services, but extends to
any online or offline application market.
Google sets out to enter the online application market, MSFT’s cash cow :

Disruption of offline application Consolidation of the online
market segments environment

• Launching of the Office Google • Launching of Google Gears:
software pack: a word-processor, Open Source project allowing an
a spreadsheet program, a offline use of online applications
presentation tool and a calendar
• Free alternative to Microsoft
Office pack • Claimed ambition of becoming
a standard and encouraging
online languages as opposed to
offline programming languages

• Acquisition of SketchUp, a 3D
modeling software with a free
version made available

Google partly « destroys » Microsoft’s market when shifting value
from offline to online ..…….


5

How Google wants to compete with Facebook ?
In 2007, Google launched Opensocial : a series of multi platform API allowing
developers to create compatible applications with partnering social networks,
Ex : Slideshare application available on Linkedin and hi5

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

Network Network
effects effects

Network effects
Google wants to become the « social data search engine » and to monetize
this data, leveraging network effects.

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


6

Why is Google buying satellites ? (1/2)
Since 2005, Google has been multiplying investments in all kinds of
infrastructures:
• Free Wifi in Mountain View
• Investment in Fon: shared Wifi
access

Wifi
Gratuit

Satellite Wimax

• 60 M$ Investment • Partnership
• Internet access in • A mobile high-speed
developing countries internet access
technology
• A 100 M users
Baloon market by the end of
Backbone1
Wifi 2008

• Partnership • 100 M$ investment
announcement • Expansion of high-
• Internet access speed networks
technology superior to
satellites for isolated
areas
..…….
1 Long distance high-speed networks, core of the Internet network

6

Why is Google buying satellites ? (2/2)
Internet infrastructures is actually Google’s business
infrastructure:
Traffic on Google websites depends on internet infrastructure development and
availability (Backbone, Wifi, Satellite,…)

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

Strengthen and secure existing • Strengthening and securing existing infrastructure
infrastructure lightens Google’s dependancy on its providers

• Favouring high-speed Internet access means more
Favor high-speed Internet access time spent and usage volumes, thus increases
Google services usage

Prioritize Internet access for • Future web users are Google services’ next
unconnected countries or populations users

Through infrastructures investments, Google reinforces its traffic providers
and increases access to its services.
..…….


7

How does Google buy traffic ?
Google asserts its ability to attract users on the sole basis of its services quality and without
turning to advertising… Truth is Google largely buys traffic from providers

Browsers Manufacturers Toolbar Portals

•Firefox: 60 million daily • In 2006, partnership
users in 2008 deal with Dell to have the • The Google Toolbar is
part of the web navigator,
•Google finances 85% of Google search engine
which makes Google the
• In 2005, Google bought
Firefox in exchange for appear by default on Dell a 5% stake in AOL for 1
computers default search engine
having its search engine billion$ (20 million
embedded in the browser • In 2008, partnership • Adobe installs it as part subscribers at time of deal)
of a package with
deal with Apple to have the • Google became AOL’s
Google search engine Shockwave(2006)
white label search engine
appear by default on • Sun has been installing • Google expands its
Iphones (13 million devices it as part of a package with
advertising network reach
sold by october 2008) Java since 2005 (20 million
• Partnerships with uploads/month)
manufacturers allow the
search engine to be
guaranteed to in a prime
position.

Google has the financial power to buy traffic from partners, accessing to
massive audiences. ..…….


8

Why did Google acquire DoubleClick ?
• In 2007, Google acquired DoubleClick, one of the world leaders in display
advertising :
To position itself on the banner To reach for highly popular
market websites

Google « moves up » the long tail Market shares of main online
of advertisers advertisers in relation to website
traffic 1
Ad budget per
advertiser Advertising < 100k 100k- >1Mon
houses UV2 1M UV2 UV2
Banner Market

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

Text ad market AOL 1,9% 6,5% 5,7%
DoubleClick 9,1% 29,9% 48,0%
Google 71,4% 41,6% 15,8%
advertising
Traditional

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

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

Number of advertisers

Google acquired DoubleClick to gain an expertise (display) and global market
shares (highly popular websites)
1 www.attributor.com/blog/2008/03/ 2 Unique Visitors ..…….


Why doesn’t Google monetize all of its 9

services?
Some Google services are free of charge and monetized through advertising :
Blogger: blog creating tool
Google Health: service for managing and storing personal medical information
GoogleNews: personalized mash-up of news articles and summary
Picasa: photo sharing service
Google SketchUp: 3D model creating tool
Goog-411: phone information service
…

These services are actually indirectly monetized :

Tools designed to Products specifically
Attract new customers
generate audience are developed to improve
through loss leaders
made available other Google products

Monetization of blogs created on Google 411 created to better the Picasa devised as a loss leader
Blogger through AdSense or video indexing on YouTube towards other Google products
FeedBurner

Google global strategy allows strong indirect monetization of its products
..…….


10
How does Google capitalize on Open
Source developers work ?
Google encourages development of open source applications:
• Google code: platform designed for Open Source developers
Supplied with guides, tutorials, code extracts of Google products

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

• Events created for the Open Source community:
Google Summer of Code: grants awarded to Open Source student projects
Google Developer Days: seminars dedicated to Google products

Through support of Open Source community, Google pursues 4 objectives:
Development of Open
Increase of total Promotion of a more Assembling a free
Source langages used
Internet traffic « open » Web public relations team
by Google

•New applications •Increasing the •Developers’ chats are •The number of
create new uses, interoperability a very effective public available Open Source
leading to increased multiplies network relation tool codes encourages the
total traffic effects1 emerging of new
•Opensource is products
becoming an •Feedback of Open
advantage to attack Source developers
proprietary code helps creating new
strategies products

Google supports the Open Source community in a spirit of collaborative
creation, one of Google’s strategic pillars
..…….
1 See Annex

11
How did Google capture the offline
advertising market ?
Online advertising market accounts for only 8% of the US market1:

3% 7% 8%
Billboards Radio Most offline media (television,
44% 17% Internet Daily Press radio, press,…) begin to be IP-
News Press Television ready with online versions
21%

Google is exploring the offline ad market!
• Ad transfer from online to offline
(YouTube on television)
• Entry on traditional offline markets
(radio, billboards,…)
• Integration of offline techniques
(traditional fixed pricing)
• Partial adaptation of AdWords onto
radio and television

Google’s entry on this market anticipates new uses and broadens its offer.
Not specifically successful for now…
..…….
1 TNS Media Intelligence, US advertising market

12

Why is Google stealing our voices?
In 2007, Google launched Google Voice Local Search in the United States, a
free and automated phone directory service :

What is the business model of this
free and ad-free service ?

Google is creating a database of phonemes, recorded during calls in order to
better its speech to text1 technologies:

Creation of a Development
Indexing of Indexing of all
of « speech to
phoneme text »
YouTube audio/voice
database audio tracks sources
technologies
2

Bla bla
bla

Externalizing tasks onto users (« crowdsourcing 3») is a commonly used
process by Google to improve its products.
1 Converting oral information into text
2 First experiments with political videos posted during the presidential campaign of 2008.
3 Neologism created in 2006 by Jeff Howe and Mark Robinson, Wired magazine editors ..…….


13
Is PageRank a really competitive
advantage ? (1/2)
PageRank is Google’s link analysis algorithm that measures the probability
that a page will be relevant to user’s query :

Based on the correlation between the amount of links towards a page and their
relevance
It accounts for the notoriety of the sites that link to the page in question

PageRank’s simplified formula is :

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

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

A « champion of The search engine’s A tool unlikely to be
democracy » « cornerstone » tampered with

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


13

Is PageRank a really competitive advantage ?
(2/2)
A tool that can’t be tampered with? An outdated technology?
Sale or exchange of famous website links Launch of search engines that
(webringing) don’t use tools such as
Search Engine Optimization1 techniques PageRank (Cuil, Powerset)

Google’s search engine success relies on other factors :

Relevance guaranteed
Scalable architecture Quick/simple queries
by 200 other criteria

• Capacity of increasing/ • Clear query interface • The search engine’s
growing according to the • Simple and quick algorithm was subjected to
volume of indexed pages presentation of results 450 modifications in 2007
and number of queries
• 2 millions servers by 2008

PageRank is only one of many Google’s search competitive advantages. It
is certainly not the main entry barrier to competitors on the search market.

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


14
How does Google turn advertising into
information and performance?(1/2)
« Advertising income often provides an incentive to deliver poor quality search results»
Sergey Brin & Larry Page

Most advertising models present strong weaknesses

Undefined
Strong intrusion Weak relevance
performance

• Large size adverts • Influence results by • Impossible to reward
• Slows down results making paid for clients efficient advertising
display from a search appear first • Example : television ads
engine query • Example: Opentext/Kelkoo • No direct measure of real
• Little or non-existent performance
targeting • Example : invoicing
according to the number of
displays (CPM)

..…….


14
How does Google turn advertising into
information and performance?(2/2)
Displays advertising
defines

Relevance Quality Score Performance
For the user Direct impact on advertising value For the advertiser

Most relevant ad
Qualityscore measures the relevance of the ad and
is determined by the click throug rate on the ad. It
impacts the display rank and Cost per Click:

• Rank: relevant ads are pushed up,
non relevant ads do not appear
• Cost per click of the ad : performant Total cost of the advertising
ads are charged less campaign is determined by the
number of clicks on the ads and
Less relevant ad not by the number of displays.

Google’s advertising model benefits the user (improved relevance) as well as
the publisher (performance based billing & rebates)
..…….


Google : the network circulation value
creation model
Traditional value creation Network value creation
Eg : Microsoft Eg : Google

$ Gmail
$ Apps
Server
Products
$
Apps $ $
$
Search $
Customer engine
Business
products Products $
$ $
$ $

$ Partners
Entertain Youtube
ment
$

The global value of the company relies The global value of the company relies
on independent lines of on traffic between network parts
products/business units (proprietary or partners)
..…….


Going further : are Google’s key success
factors limited to Google
• Our conviction : Every company innovating in the digital industry must
address and capitalize on the 6 identified key success factors to perform
on digital markets.

• Our proposition : faberNovel proposes to align companies strategy,
development projects and existing products with these factors to ensure
success optimization and market performance.

Download our comprehensive White Paper
« Google’s key success factors »
http://www.fabernovel.com

..…….


Annex

• Definition : network effects
• Definition : two-sided market
• Pricing of a two-sided market
• Glossary
• Financial datas
• Acknowledgement
• Contacts

..…….


What is a network effect?

• A network effect describes how a service becomes more valuable to its
users as more people use that same service

Phone’s utility is limited if The utility for a user According to Metcalfe’s
the network is composed raises if the network law, the utility(U) of a
of 2 users broadens network is proportional to
the square of the number
(n) of its users
U ≈ k*n2

Network effects creates critical masses of users.
They represent significant barriers to entry for competitors.

..…….


What is a two-sided market?
• A two sided market consists of a platform allowing 2 groups of
clients/providers to interact and which optimizes the revenue distribution
among these groups with the objective of maximizing market sizes.
Exemple of the video game market
Crossed network effects

Internal Price A Price B
network Side A Side B
effects Developers Consumers

Network effects in action

Internal effects Crossed effects
• A potential market for a
• Utility to a new developer developer gets bigger as more
increases as the community of consumers enter the said market
developers grows (shared
knowledge)
• The number of games available
to the consumer increases with
• Utility to a new consumer the number of developers
increases as the community of working on the platform
consumers grows
(secondhand market)
..…….


Pricing of a two-sided market
Price A > 0 Price A < 0
Side A Platform1 Face A Platform1

• The platform may charge a side • … or subsidize a side
• Example 1 : Apple Appstore charges • Example 3 : Google Android finances
developers by taking a revenue share developers through a contest
on sold applications • Example 4 : Youtube finances video
• Example 2 : Microsoft makes content providers
consumers pay for video games

Who should you be charging?
Who should be subsidized?

The platform must subsidize the groupe that is most price-sensitive and charge the
group that is most sensitive to the other group’s size.

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


Financial data (1/2)
Revenues and Net margin (M$) Revenue distribution/activity (B$)

439 1466 3189 6139 10604 16594 Total 16,6

Revenues 0,2
1%
CAGR Revenues 02-07 : 107%

Net CAGR Net margin 02-07 : 112% Licences and other 5,8 34%
margin revenus

Partner websites
(AdSense) 10,6

4203
3077 Google web sites
1465 65%
100 106 399
CA 2007
2002 2003 2004 2005 2006 2007

Net margin’s growth outperform Most of Google’s revenues still
revenues’ growth come from its own websites

78% 79% 85%
2005 2006 2007

Advertising revenue share to partner
web sites is increasing2
and is the highest of the market
..…….
Source: Google financial tables 2007 2 : calculated as Traffic Acquisition Cost/Google Network web sites revenues

Financial data (2/2)
Advertising revenues Turnover
Traffic acquisition costs
R&D
investments 6139 10604 16594

16,4
10,5 30,1% 599 1229 2120
34,9% 6,1
31,5% 9,0% 11,0% 12,0%

2,1 3,3 4,9
2005 2006 2007
2005 2006 2007

Controlled traffic acquisition costs High R&D investments
34,9% of advertising revenus in 2005 vs 30,1% in 2007 +88%/year between 2005 and 2007

+ 26%

1,9 2,4

2005 2006

Data center costs are under control
In Billion $ : +26% 2006/2007 (vs +72% revenues)
..…….
Source: rapport annuel Google 2007

Glossary

• API : application programming interface. Standardized programming protocol
allowing applications to communicate
• Internet Backbone : main trunk connections of the Internet, made up of a large
collection of interconnected high-capacity data routes and core routers that carry
data across the countries and continents
• Crowd sourcing : act of outsourcing a task to users
• Data center : facility used to house computer systems and associated components
• O.S. : operating system
• Overlay ad : clickable text advertising displayed on a video
• Scalability: property of a process, which indicates its ability to handle growing
amounts of work easily
• Search Engine Optimization : process of improving the volume and quality of
traffic to a web site from search engines via natural search results (as opposed to
paid search results)
• Speech To Text : technology converting spoken words to machine-readable input
such as text
• Walled Garden : closed or exclusive set of information services provided for users
by a network or portal
..…….


Acknowledgements

To faberNovel contributors :
• Amaury de Buchet, VP Consulting
• Cyril Vart, VP Strategy & Development
• Alexis Arquié, Junior Project Analyst
• Mounir Fassouane, Junior Project Analyst

To the bloggers :
• Olivier Ertzscheid from affordance.typepad.com/
• Google Operating System : googlesystem.blogspot.com/
• Richard MacManus from readwriteweb.com/
• Techcrunch.com & Mobilecrunch.com/
• Frédéric Cavazza from fredcavazza.net/

..…….


Stéphane Distinguin
Founder and CEO
stephane.distinguin@fabernovel.com

Cyril Vart
VP Strategy & Development
cyril.vart@fabernovel.com

Pierre Fremaux
Project Analyst
pierre.fremaux@fabernovel.com

Matthieu Lecomte
Junior Project Analyst
matthieu.lecomte@fabernovel.com

Tél. : +33142722004

..…….


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