PVAMU Business Administration Google Inc Early Success Case Study Case: Google Inc. Only Stage I analysis And following questions to be submitted: GOOGLE

PVAMU Business Administration Google Inc Early Success Case Study Case: Google Inc.

Only Stage I analysis And following questions to be submitted:

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GOOGLE INC.

1. What explains (key factors behind) Google’s early success?

2. Is search a winner take-all category?

3. Could Google outbid Microsoft for AOL’s traffic?

4. What should Google do next? Hint: Critically evaluate (pros & cons) all possible lines of businesses Google may enter and provide your opinion based on the analysis.

5. Is Google’s unique organization a strength or liability?

In Stage I (Discussion questions), your analysis will be geared toward responding to several questions related to the assigned case. This will require you to go beyond the rational analysis and provide you with more flexibility and freedom in formulating your answers, where you are not strictly bound by rational choices, as is the case with the SWOT matrix. This is to recognize that an organization is not an entirely rational entity but a dynamic one (e.g., actions are taken based on rational as well as other considerations), that a SWOT is not likely to capture all the nuances of an organization, and that considerations beyond what the data/facts indicate (e.g., organizational politics, wisdom of the strategic manager, factors that are not apparently visible, etc.,), all of which may play an important role in the formulation of a strategy. For example, a SWOT matrix may not touch on or provide a satisfactory answer to the type of questions, such as: How would you describe Steve Job’s leadership philosophy? Or what was the impact of the founder’s philosophy on the corporate culture, and does it help or hurt the corporation? For the exclusive use of i. santiago, 2020.
9-910-036
REV: APRIL 11, 2011
BENJAMIN EDELMAN
THOMAS R. EISENMANN
Go
oogle In
nc.
Gooogle’s mission
n is to organize the world’s inf
nformation andd make it univeersally accessibble and useful.
— Google’s mission stateement
In January 2010
0, Google lau
unched the Neexus One mo
obile device—
—an elegant to
ouch-screen phone
on to reducee dependencee on keyboarrd-style text entry.
that added comprrehensive voiice recognitio
008, Google’s Android opeerating system
m had powerred various mobile phones. But
Since the fall of 20
ded its role with Nexus One: Google designed thee phone and planned to sell it
Google had extend
mers. Was therre any limit to
o Google’s asp
pirations?
directtly to consum
Go
oogle, based in Mountain View, Califorrnia, had grosss revenues of $21.2 billion
n and an operrating
incom
me of $5.5 billion in 2008. As of year-end
d 2008, the co
ompany had 20,164 emplo
oyees and cash
h and
valents of $8.7
7 billion. (Exh
hibit 1 shows Google finan
ncials from 19999–2008.) Founded in 19999, the
equiv
company completeed its IPO in August 20044 at $85 per share. Google’s share pricee exceeded $6600 in
pany a $189 billion markeet value. Meaanwhile, Google.com enjoy
yed a
Januaary 2010, giviing the comp
% share of alll U.S. searchees in Novem
mber 2009; Yaahoo.com, itss closest rivall, had just 177.5%.1
65.6%
(Exhib
bit 2 outliness trends in seearch engine market sharee.) Outside th
he United Staates, Google’ss lead
us countries. (Exhibit 3 reeports
was even larger, exceeding a 90% share of search queriees in numerou
ountry.)
markeet share by co
Sin
nce its IPO, Google had laaunched a flu
urry of produ
ucts that exp
panded its do
omain beyond
d web
h. These inclu
uded Gmail, Google Map
ps, Google Bo
ooks, Google Finance, Goo
ogle Docs, Google
search
ndar, Google Checkout, an
nd more. Accquisitions off YouTube an
nd DoubleClick had expaanded
Calen
deo and display advertisin
ng. These initiiatives fueled
d speculation about
Google’s presence in online vid
g with person
nalization feaatures
Google’s strategic objectives. Products like Gmail and Finance, along
ge, moved th
he company toward portaals like Yahoo
o! and Micro
osoft’s
offereed on Googlee’s home pag
nd Checkoutt suggested that Google was enterin
ng the traditional
MSN.. Book Searcch, Maps, an
gholds of e-commerce giaants like eBay
y and Amazo
on. Finally, Google’s ad-su
upported softtware,
strong
ding e-mail, calendaring, and documeent-managem
ment systems,, threatened Microsoft’s Office
includ
he question: What
and Windows offeerings. Thesee many serviices and diveerse competittors raised th
shoulld Google do next?
______________________
__________________________________________________________________________________________________
Professo
or Thomas R. Eisen
nmann and Smita Bakshi, Sebastien Briens, and Shailen
ndra Singh (MBA 2004) wrote the orriginal version of th
his case,
d Senior Researcheer Kerry
“Googlee Inc.” 804-141. It was replaced by “Google Inc.” 806-1105, prepared by Professor Thomas R. Eisenmann and
Herman
n, Global Research
h Group, which is now being replacced by this version
n prepared by Pro
ofessors Benjamin Edelman and Tho
omas R.
Eisenmaann. This case wass developed from published sources.. HBS cases are deeveloped solely as the basis for classs discussion. Casess are not
intended
d to serve as endorrsements, sources of primary data, or illustrations of effeective or ineffectivee management.
ght © 2010, 2011 Prresident and Fellow
ws of Harvard Colllege. To order copiees or request perm
mission to reproducce materials, call 1-8800-545Copyrig
7685, write Harvard Busiiness School Publishing, Boston, MA
A 02163, or go to http://www.hbsp
p.harvard.edu. Thiis publication may
y not be
d, photocopied, or otherwise reprodu
uced, posted, or tran
nsmitted, without the permission of Harvard Business School.
digitized
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2020 to Aug 2020.
For the exclusive use of i. santiago, 2020.
910-036
Google Inc.
Company History
The need for search services grew with the expansion of the World Wide Web. One of the earliest
search services, Yahoo!, selected and organized sites into categories by human editors. As the web
grew, directory classification became infeasible. AltaVista invented technology that automated
search, relying on software “crawlers” that created a searchable index of page contents, along with
algorithms that ranked page relevance based on keyword frequency. Yahoo! added AltaVista’s
algorithmic search engine, but in 1998 Yahoo! replaced AltaVista with Inktomi, which used parallelprocessing to offer faster processing and a larger index.
As website developers exploited search algorithms by repeating keywords on their pages,
searches increasingly returned irrelevant listings—“spam”—that frustrated users. In 1998, Sergey
Brin and Larry Page tackled this problem as graduate students at Stanford. Their PageRank algorithm
favored pages that were referenced (“linked to”) by other pages. These links signaled that another
page’s designer thought the focal page deserved attention. The focal page’s importance was
determined by counting its inbound links, weighting links more heavily when they were cast by
pages that Google had previously deemed to be important.
In June 1999, Brin and Page announced first-round funding for their start-up, Google, from elite
venture capital firms Sequoia and Kleiner Perkins. A year later, Google’s index of one billion web
pages surpassed all rivals, and Google replaced Inktomi as Yahoo!’s search engine. At the time,
Google was focused solely on algorithmic search; through December 1999, Google’s revenues came
solely from licensing its search technology to Yahoo! and other sites. Meanwhile, Google.com initially
carried no advertising and—eschewing the comprehensiveness of some portals—offered only search
results, without content or communication tools. In contrast, many portals offered numerous add-ons
to encourage users to linger, yielding more page views and greater advertising revenue.
The Rise of Paid Listings
In the meantime, a robust new model emerged to monetize search: paid listings. Pioneered by
Overture (which Yahoo! acquired in 2003), paid listings were concise text ads labeled as “Sponsored
Links” that appeared either adjacent to or interspersed with search results. Advertisers bid for
keywords, and bids determined the top-to-bottom ordering of ads on search-results pages. Paid
listings were typically sold on a “per-click” basis: An advertiser paid only when a user actually
clicked on the advertiser’s listing.
Overture’s success built on several factors. First, from the perspective of marketers, search engine
leads were often more effective than banner ads on other websites because search engine users were
often researching products and services they planned to purchase soon. Analysts estimated that 70%
of e-commerce transactions originated through web search, and 40% of web searches had a
commercial motivation.2
Second, ordering paid listings according to “cost-per-click” (CPC) auctions yielded substantial
revenues to Overture, while meeting many users’ needs. For an advertiser, a high position on a
search-results page would yield greater visibility, more clicks, and more sales. As a result, advertisers
often competed vigorously for top positions, spurring high payments to Overture. Importantly,
advertisers paid for each click whether or not a user ultimately made a purchase. So the auction
structure encouraged advertisers to focus their bidding on keywords that were closely related to their
products so their ads would be relevant to users’ requests.
2
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2020 to Aug 2020.
For the exclusive use of i. santiago, 2020.
Google Inc.
910-036
Overture supplied ads to the three largest portals (Yahoo!, MSN, and AOL), which drew
thousands of advertisers to Overture’s offering. On every resulting click, Overture paid a “revenue
share” commission to the partner, keeping the rest for itself.
Paid Listings at Google
In December 1999, Google introduced its first paid listings, which it sold on a cost-per-impression
basis. (That is, Google charged an advertiser a fixed amount each time a user viewed an ad, whether
or not the user clicked the ad.) In February 2002, Google adopted a variant of Overture’s cost-perclick model: Google weighted CPC bids by the ratio of an ad’s actual click-through rate (CTR) to its
expected CTR (based on Google’s predictions). This weighting helped ensure that relevant ads
received the most prominent positions; an ad with a low CTR would suffer a lower effective bid and
would be shown less prominently, if at all. The method also maximized Google’s revenue, because an
ad with a high CPC bid but a low CTR offered low revenue.
Google soon emerged as a serious threat to Overture. By mid-2001, despite spending nothing on
marketing, Google.com was the ninth-largest U.S. website, with 24.5 million unique monthly
visitors.3 In May 2002, AOL announced it would switch to Google for both algorithmic search results
and paid listings. Google’s market share surpassed Yahoo!’s in 2004, then continued to increase,
reaching 58.4% by 2007 and 65.6% by 2009, while Yahoo!’s share decreased to 17.5%. (Exhibit 2
illustrates changes in search engine market share over time.)
In March 2003, Google expanded beyond search advertising by launching “contextual” paid
listings, a product that Google named AdSense. Contextual listings presented advertisements on web
pages that featured primarily editorial content (e.g., news or blog postings) rather than pages that
showed search results. For example, an iVillage.com page about allergies displayed a sponsored link
offering a hypnosis program—“safe, fast, and guaranteed”—to end allergy symptoms. Google and
other companies with web search technology had advantages in selling such advertising: They could
use their index of web page content to map keywords to appropriate editorial pages, and they could
sell contextual advertising placements to customers who primarily sought search ads.
Google also developed new services that showed still more search advertisements. For example,
in late 2002, Google launched Froogle, a product search service that identified merchants for specific
products, along with their prices. Froogle was monetized through paid listings adjacent to search
results; merchants did not pay to have their products appear in Froogle’s search results, nor did they
pay referral fees when users clicked through Froogle’s results to the merchant’s website. In February
2005, Google launched Google Maps, which offered faster scrolling and browsing than competitors at
the time. Maps launched without ads, but Google soon added paid listings related to the areas that
users browsed.
In competing to buy placements on partner sites, Google prevailed in a series of key deals. Best
known was a 2005 bidding war with Microsoft for the right to show Google’s ads on AOL search
results. Google’s offer included buying a 5% stake in AOL (for $1 billion) and providing AOL with
$300 million of credit toward AOL’s purchase of ads at Google.4
Factors Affecting Paid Listings Revenues
A paid-listing provider’s revenue depended on four factors: its coverage rate, click-through rate,
average cost per click, and revenue split.
3
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Google Inc.

Coverage rates—which referred to the share of queries for which at least one paid listing was
sold—were jointly determined by the type of user searches (commercial versus noncommercial terms) and by the size of the paid-listing provider’s advertiser base.

Click-through rates tended to increase over time as advertisers improved their keyword
targeting techniques.

Average CPC increased with the size of the paid-listing provider’s advertiser base; additional
bidders drove up keyword prices. In late 2003, Overture’s average CPC was estimated to be
$0.40, whereas Google’s average was $0.30.5

Finally, revenue splits—the percentage of ad revenue that listing providers paid to network
affiliates—were determined by the parties’ relative bargaining strengths and by the intensity
of the rivalry among listing providers. For a hard-fought deal such as AOL, the partner might
get as much as 90% of revenue, though estimates suggested that ordinary partners received a
60%–70% revenue share.6
Improving Search and Advertising
In the early era of searches, at least half of users’ requests failed to deliver useful results.7 To
improve performance, Google’s engineers constantly fine-tuned search algorithms. For example, in
January 2004, Google launched Personalized Search, which ordered results by analyzing a user’s
prior searches and clicks. Personalized Search also included Search History, which showed an archive
of a user’s past searches with links to results they had accessed. Other initiatives included local search
and vertical search.
In addition, Google expanded efforts to attract more advertisers, especially local advertisers. With
more than a dozen U.S. sales offices and 30 international offices, Google sought to reach the 10
million small and medium-sized businesses in the U.S. and beyond. Although most of these
businesses focused on local sales, Google’s geographic targeting systems could focus their ads on the
right regions. The opportunity was large: U.S. small businesses spent $22 billion on local advertising,
including $10 billion on printed Yellow Pages listings.
Google improved its advertiser features by offering advertisers free software to optimize paidlisting campaigns. For example, with Google Analytics, advertisers could track which advertising
keywords were most likely to yield sales—and then increase their spending on those keywords and
reduce others. These and other refinements helped Google earn significantly more than competitors.
By late 2005, Google and its partners earned 60% of U.S. paid-listing revenue from 52% of U.S. search
queries, which meant that Google earned 38% more revenue per search than Yahoo! As of December
2005, Google searches yielded paid-listing click-throughs twice as often as Yahoo! searches did (21%
versus 11%).8
Observers cited two reasons for Google’s superior performance: First, Google improved on
Overture’s policy of ranking paid listings solely according to CPC bids; Google also considered
listing relevance. Second, by late 2005, Google’s paid-listings network had attracted two to three
times as many advertisers as Overture’s.9 Advertisers were drawn to Google because its network
offered more search traffic and allowed lower minimum CPC bids (1¢ versus Overture’s 5¢).
In 2007, Google’s $3.1 billion acquisition of DoubleClick positioned Google for increasing strength
in placing display (“banner”) advertisements, which were DoubleClick’s focus. Google expanded
4
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2020 to Aug 2020.
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Google Inc.
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AdSense to show display advertisements as well as text ads. In September 2009, Google announced
plans to build an Ad Exchange to expand Google’s its role in placing display ads.10
Google’s Organization
As Google grew, Brin and Page, with guidance from their venture capitalists, sought a seasoned
senior executive to help lead the company. In March 2001, Eric Schmidt, formerly chief technology
officer of Sun Microsystems and CEO of Novell, joined Google as CEO. Brin and Page took the titles
of president of technology and president of products, respectively.
Despite continued success, Google’s management resisted a public offering.11 However, pressure
mounted to provide liquidity for investors and to reward employees holding options and, in April
2004, the company announced plans for an IPO. The IPO prospectus included an unusual letter from
Page. He wrote: “Google is not a conventional company. We do not intend to become one.”12 The
letter explained several distinctive aspects of Google’s organization, including its governance
structure and corporate values. (See Exhibit 4 for excerpts from Google’s statement of philosophy.)
Governance
Google’s IPO prospectus announced dual-class equity, giving 10 votes per share to holders of
Class B stock versus one vote per Class A share. Assuming that Brin, Page, and Schmidt retained
their Class B shares while VCs and other Class B shareholders (e.g., other Google managers with
stock options) eventually sold theirs, Google’s top management trio would own roughly one-third of
the shares but control over 80% of the votes.13 This immunized Brin, Page, and Schmidt from
replacement by investors second-guessing the company’s strategy.
Some observers argued that the dual-class equity structure would encourage strategic risk-taking,
but others were concerned that it would dilute their influence over the company’s direction.14 Page
defended dual-class stock in his IPO letter:
We are creating a corporate structure that is designed for stability over long time horizons.
By investing in Google, you are placing an unusual long-term bet on the team, especially
Sergey and me, and on our innovative approach. We want Google to become an important and
significant institution. That takes time, stability and independence. We bridge the media and
technology industries, both of which have experienced considerable consolidation and
attempted hostile takeovers.
While this structure is unusual for technology companies, it is common in the media
business and has had a profound importance there [letting] these companies . . . concentrate on
their core, long-term interest in serious news coverage, despite fluctuations in quarterly
results.15
Corporate Values
Early in Google’s history, Page and Brin instilled strong and distinctive corporate values. Exhibit
4 presents excerpts from Google’s statement of philosophy, including (1) don’t be evil; (2) technology
matters; and (3) we make our own rules. The co-founders also stamped Google with a unique
personality. John Battelle, author of a book about Google’s approach, explained: “The company’s
founders are . . . strikingly similar to the persona that Google projected during [its] early years—
aloof, supersmart, dismissive of unsolicited advice. They are . . . first and foremost engineers.
5
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2020 to Aug 2020.
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Google Inc.
And engineers are not the best communicators, nor do they make the best diplomats or business
development executives.”16
Don’t be evil.
A central tenet of “don’t be evil” was Google’s refusal to compromise the
integrity of search results. Its statement of philosophy clarified: “We never manipulate rankings to
put our [advertising or content] partners higher in our search results. No one can buy [a] better
PageRank. Our users trust Google’s objectivity and no short-term gain could ever justify breaching
that trust.”
Brin a…
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