13 December 2007

Thoughts on Google and business strategy

I succumb to the temptation to write about Google from time to time (why? search me... ha ha). This article was prompted by this item by Nicholas Carr and this one by Om Malik. Both of these analyses are focussed on strategy rather than technology.

In his analysis, Malik writes:

By squeezing the supply chain as hard as he could, he turned Dell into a fearsome (and loathsome) competitor. With his help, the supply chain for the PC era came to consist of foundries, ships, U.S. assembly plants and UPS trucks. Google (GOOG), with over $200 billion in market capitalization, is following a similar strategy, fine tuning and adapting it for the Web & broadband.

Instead of trucks and assembly plants, however, Google’s supply chain is made up of fiber networks, data centers, switches, servers and storage devices. From that perspective, its business model is no different than that of Dell’s (DELL): Google has to deliver search results (information, if you want to be generous about their other projects) as fast as possible at as low a cost as possible.

To better understand Google and its business model, one needs to break it down into three data inputs.

  • Relevancy of results.

  • Speed of search.

  • Cost of executing a search query.

Malik goes on to argue that these foci are the driving force behind Google's efforts to build their own switches, data centers, etc. Indeed, Carr refers to this as Google's third innovation: "Google’s third great innovation — and it may well be the one most critical to the firm’s future success — is the design of its parallel-processing computer system." However, Carr notes that:
The way Google makes money is actually straightforward: It brokers and publishes advertisements through digital media. More than 99 percent of its sales have come from the fees it charges advertisers for using its network to get their messages out on the Internet.

This is useful because profit is, in the end, the difference between revenues and costs. I don't think that Google's efforts to build a switch can be explained in terms of cost alone, because the market provides switches at competitive costs. Instead, following Carr, I can only rationalize this effort as one that gives Google a special leverage in the way that it is able to improve its revenues. Going back to Carr:

Any understanding of Google as a business has to begin, I'm convinced, in the idea of complementary goods. In The Google Enigma, an article in the new issue of Strategy & Business, I argue that the wide scope of Google's interest and activity is a natural and inevitable result of the fact that everything that happens on the internet is complementary to the company's core business.

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