Google Inc

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Google Inc.

Nicole Augustus Tom Bernard Ravi Mishra Deborah Scarpace

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Google Abstract How do two individuals go from graduate students at Stanford University to building a business in 14 years that generates over $37 billion in revenue? They did it by creating technology and products that were so advanced, we did not know we even needed or wanted them. Our society has become a place of instant gratification and we cannot deal with delays in finding out the answers to our questions. Google has done a magnificent job of filling a void and providing us not only with answers to our questions but has revolutionized online advertising. Although Google is now a very large organization, they remain very nimble and agile. They are constantly striving to develop the next big thing and are willing to develop products they believe will be successful but pull the plug on them when they are not. Google does not want to lose track of where they came from as this funds their desire to change the future through innovative products because at Google great just isnt good enough.

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Google has done to internet search, what Xerox and Kleenex have done in their respective industries; theyve brilliantly branded themselves as supported by the thousands who say everyday...just Google it! In 14 years, Google has managed to become one of the most highly valued public companies with 2011 revenues reported at $37.9 billion (2011, Google Annual Report). It all began in 1996, when Larry Page and Sergey Brin did not like the results of their online searches while attending graduate school at Stanford University. Page and Brin decided to dive into the details to determine why, mapping queries to search returns, and soon discovered there was a real opportunity for developing more sophisticated algorithms. They diligently and more formally continued this quest, and a company was born incorporating Google in 1998. By the end of their first year in business, Page and Brin were attracting attention. In December, PC Magazine listed Google.com as one of the Top 100 Web site for 1998. Other companies were focusing less on search and more on providing all-purpose sites. These changes drove people to Googles free, quality search (2012, Sapet, Kerrily). This was important because they raised the bar for relevant searches, and offered this service for free. It would establish what their mission continues to be today and that is To organize the worlds information and make it universally accessible and useful (Googles website: corporate governance). In 1999, they already had a revenue stream from licensing their search technology to Yahoo because they had done what no one else had done to date. In that same year, they got their first round of funding which was also significant because this was the time when many of the dotcom companies were failing and had lost many investors money, yet Google was able to secure $25M in funding from venture capitalists (Google Timeline). Google was focused solely on algorithmic search and by the end of 1999, introduced its first paid listings. By 2001, Google was considered the 9th largest US website with 24.5 million monthly visitors (2001 Industry standard). As more private funding came through the door, so was the requirement that Brin and Page bring in more senior talent. By the end of that same year, Eric Schmidt, formerly with Sun Microsystems and Novell, joined the duo as their CEO. This was a critical move even beyond securing funding, as it provided Google the maturity they needed for their business at this time. The culture that was created at Google was an extension of Brin and Pages personalities. The office was loaded with recreational games and gadgets to fiddle around with to spur creativity. They wanted to make sure their team had a rewarding experience at work, and coined a dont be evil mantra, which established the expected conduct for being a part of the Google team. As well, they provided the conveniences employees need outside of work to support the long hours they endured. Open communication and a flat organization structure were also in place. Their early success can be credited to the algorithms they designed; the development of an effective advertising revenue stream; the creative culture manifested; the recruitment of the right bright and diversified talent; their laser focus on the user; and sticking to search perfection. In 2002, AOL switched to Google for both algorithmic search results and paid listings. This was important because it was the beginning of a relationship that would enable Google to later secure

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a 5% stake in AOL. AOL was using Googles search engine and accounted for 11% of Googles revenues ($291M) in the first half of 2005 (2006 Journalism.org). Googles cash position had grown from $2B in 2004 to $8B in 2005. Net income experienced the largest gain to date, increasing net income as a percent of sales from 12.5% to 23.9%. They had cash, momentum and competition. For these reasons, they could have afforded to pay AOL more than 100% of the revenue generated from AOL searches in a bid against Microsoft. The AOL deal was of strategic importance because it was a defensive play to remain a dominant player in online advertising, it gave them the ability to show ads that had both audio and video content, and AOL was already using Google which generated over $290M in revenue during the first half of 2005 (2006 Journalism.org). AOL keeps about 80 percent of the ad revenue generated by searches conducted by its users using Google, under an agreement that reaped the company about $300 million in revenue last year (2005 money.cnn.com). The AOL deal was important for Microsoft too because they had been last in online search and this would have given them the ability to compete with other portals and have access to instant messaging. For Microsoft, last in the search industry among the major players, adding AOLs sites would have helped it compete with the other portals that were far ahead both in number of searches conducted and search advertising revenue. MSN was also interested in AOLs instant messaging service (http://www.journalism.org/node/1485). But Microsofts maximum affordable bid for AOLs search traffic could not compare to Googles $1B as AOL went with Google because AOL decided that it could not split its advertising-supported portal away from its Internet-access business, which Microsoft did not want. Microsoft decided that it did not want to contribute its e-mail, messenger and, most important, its new Live.com portal to the venture. That left AOL worried that a new version of the joint venture would have to compete with online services owned exclusively by Microsoft (2005 HANSELL). Today, search is dominated by a few big players as shown in these graphs.

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Google captured over 86% of the market share in the US and over 88% globally (www.karmasnack.com) . The other two major players in the US besides Google are Bing and Yahoo. Google executives are concerned about vertical search engines and e-commerce websites, such as Kayak for travel queries; Monster.com for job queries; WebMD for health queries; and Amazon.com and eBay for e-commerce. Some users will navigate directly to such websites rather than go through Google (2011, Google Annual Report). This is an ongoing concern for the big players like Google on how to continue as a market leader in the search engine business, though we expect the search business to become more concentrated and dominated by Google. This is because of Googles commitment to allocate 70% of their engineering resources to their existing business and their heavy dependency on advertisements for their revenue stream. Currently, 96% of their revenue comes from online advertising, with 46% ($17.3B) generated from online advertising in the US; 11% ($4.3B) in the UK; and 43% ($16.3) from the rest of the world (2011,
Google Annual Report).

Source: http://www.superinfographics.com/googles-2011-revenue-breakdown/

Googles revenue in 2011 was $37.9B. Because the advertising market by 2015 is forecasted to be $132.1B globally as shown in the graph below, they cant afford to lose focus on the internet advertising market. This does not suggest however, there is a winner take all play, as there will be on-going competitors in this space. Google should continue with their mission in organizing the worlds information to really own this segment, and create a barrier of entry that minimizes search competitors.

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Google Search Revenue Forecast, 2010-2017E

Googles mobile operating system is growing and has captured approximately 68% of the market share. They developed its own smartphone and tablet called nexus, which is competing directly with Apples iPad. Google bought Motorola mobility for $12.5B in 2011 as a defense play (2011, Wall Street Journal.org). They needed additional patents, and wanted to shield themselves from anticompetitive threats. Theyve developed Google Now which is similar to Apples Siri, but strategically developed it to enhance the functionality that Siri offered. When Google isnt first to market, they follow by exploiting their competitors design flaws to make a better product. This demonstrates a commitment to focusing on the user and driving innovation. Googles R&D budget has doubled in the last two years, exceeding $5B through the 3rd quarter of this year, which is > 13% of their total revenue (2012, Google third Quarter). The size of their R&D budget allows Googles creative engineers the freedom to develop innovative products, ideas and services. (See R&D comparisons in the graph below). Google Glasses, a new mobile device you wear on your face; an unattended mobile vehicle; and mobility in outer space are concepts in development under the Project X umbrella. This demonstrates Googles commitment in mobile devices.

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The growth opportunity for Google is to: 1) concentrate on continuing to expand their search positioning across the globe for world search dominance and create a one stop shop strategy to fend off the specialized sites to secure their advertising revenue stream; 2) focus on its existing mobility business because they have momentum in this space, it supports their leadership position while providing a platform for enhanced mobile device revenue; and gives them a larger slice of the mobility market share pie; 3) not build a full-fledged portal like Yahoo as after introducing Google news, Google Finance, Gmail etc., the portal business is saturated and offers minimal growth in this direction, as is the case with Yahoo; 4) not pursue aggressively an eCommerce business strategy like eBay and Amazon because of the lower profit margins and brick & mortar type capital requirements to support as evident above; and 5) not follow someone like Microsoft in the desktop business where the business is declining. Because the search business may not offer the same growth opportunities over time, it is necessary for Google to diversify. The mobile business is part of this plan, but it is important too to highlight the significance of the data Google collects daily. Selling the cloud data Google houses in its over 55K plus servers to consumer product, health care, and insurance companies, as well as working with governments and firms in cyber security in efforts against terrorism, may not be a part of their business model today, but could be an avenue in the future.
(http://www.cbsnews.com/8301-505263_162-57533989/behind-the-cloud-a-tour-of-googles-secretive-datafacilities). Because of privacy infringement controversial arguments at this time and the FCC

tackling new issues, it is not our recommendation that this data in the cloud be part of their revenue stream strategy at this time, but highlight the value of this data that they have at their fingertips and which is not fully accounted for on their P&L to date (2012 CNN). Googles progression to date and vision for the future is credited to their distinctive governance structure, corporate culture and organizational processes. Googles governance language in their annual report specifically states flexible framework within which the Board may conduct its business (2012 Google Investor Relations). This indicates that beyond looking out for shareholders and ensuring legal and business integrity practices as is the common language among many companies, they strongly value the significance of being agile. In our opinion, this distinctive structure provides a consistent permeating message throughout the entire organization that drives creativity, nimbleness, empowerment, effective resource allocation, and respect for each individual day to day. This distinction is a competitive advantage that would also provide credibility in merger & acquisition transactions. If Googles corporate values are not checked and aligned to the business strategy, the consequences will be costly. They could find themselves in situations where the dont be evil mantra breeds mediocrity; the conveniences afforded to employees breed a sense of entitlement; the flexible framework Google envisions becomes misinterpreted as competitive threats provide mounting pressures; or they could see an aging workforce just becoming complacent. However, our assessment is that Googles foundation is strong, and they have the structure to continue to expand globally, staying focused on the user that now spans across five different generations.

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References 2011, Google Annual Report 2012, Sapet, Kerrily.: Sapet, Kerrily. Business Leaders Google Founders: Larry Page and Sergey Brin. Morgan Reynolds Publishing 2012, pg. 41 Googles website: corporate governance Google Timeline: http://www.google.com/corporate/timeline/#start 2001 Industry standard: Worldwide Web Domination, Industry standard, August 6, 2001 2006 Journalism.org: Online Ownership-2006 Annual Report the Bid for AOL, March 13, 2006 Journalism.org 2005 money.cnn.com: http://money.cnn.com/2005/12/07/technology/aol_microsoft/index.htm 2005 HANSELL: AOL's Choice of Google Leaves Microsoft as the Outsider by SAUL HANSELL/Published: December 19, 2005 www.karmasnack.com: http://www.karmasnack.com/about/search-engine-market-share/ 2011, Wall Street Journal.org: Google-Motorola: It's all about the Patents, August 15, 2011 2012, Google third Quarter: Google third Quarter Report 2012 2012, CBS News.com: http://www.cbsnews.com/8301-505263_162-57533989/behind-the-cloud-a-tour-of-googlessecretive-data-facilities 2012 CNN: Google knows too much about you, By Frida Ghitis, Special to CNN, February 9, 2012 2012 Google Investor Relations: (Google Investor Relations, Last Updated April 11, 2012).