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Understanding Google

November 27, 2007

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. When looked at in this light, Google's strategy is revealed to be at once simple and extraordinarily unusual - so unusual that it's probably of limited use as a model for other companies.

Here's a brief excerpt:

Google’s protean appearance is not a reflection of its core business. Rather, it stems from the vast number of complements to its core business. Complements are, to put it simply, any products or services that tend be consumed together. Think hot dogs and mustard, or houses and mortgages. For Google, literally everything that happens on the Internet is a complement to its main business. The more things that people and companies do online, the more ads they see and the more money Google makes. In addition, as Internet activity increases, Google collects more data on consumers’ needs and behavior and can tailor its ads more precisely, strengthening its competitive advantage and further increasing its income. As more and more products and services are delivered digitally over computer networks - entertainment, news, software programs, financial transactions - Google’s range of complements is expanding into ever more industry sectors.

Because the sales of complementary products rise in tandem, a company has a strong strategic interest in reducing the cost and expanding the availability of the complements to its core product. It’s not too much of an exaggeration to say that a company would like all complements to be given away. If hot dogs became freebies, mustard sales would skyrocket. It’s this natural drive to reduce the cost of complements that, more than anything else, explains Google’s strategy. Nearly everything the company does, including building big data centers, buying optical fiber, promoting free Wi-Fi access, fighting copyright restrictions, supporting open source software, and giving away Web services and data, is aimed at reducing the cost and expanding the scope of Internet use. To borrow a well-worn phrase, Google wants information to be free - and that is why Google strikes fear into so many different kinds of companies.

The article goes on to examine, and question, Google's mythical prowess as an innovator.

NOTE: For a more general discussion of complements strategy, see my earlier Strategy & Business piece Complementary Genius.

Comments

Interesting article but basically nothing new. That the cost of failure at Google is next to zero is not true. People are working on projects and get paid for this, so somewhere down the line some revenue has to come and, preferably, profits. Right now G is throwing things at the wall and sees what sticks. That biz approach cannot continue.

Take away some businesses from Berkshire Hathaway and W. Buffet still makes money. Take away ads from G and a couple thousand employees would not have the butter on their toast.

Next, G is increasingly being watched because of its dominance (Doubleclick acquisition). I am absolutely sure that in some years G will be broken up.

Posted by: Hans [TypeKey Profile Page] at November 27, 2007 02:13 AM

@ Hans : "That biz approach cannot continue."

Why not?!

JML

Posted by: Jean-Marie Le Ray [TypeKey Profile Page] at November 27, 2007 06:30 AM

@ Nicholas : "For Google, literally everything that happens on the Internet is a complement to its main business."

I think you should add as well even "everything that happens OFF the Internet...", since with the next to come vast mobile deployment, Internet of things and so forth, almost everything on earth could be "a complement to its main business"!

As you state it so well, Google's strategy (I'd say "mission") is at once so simple and so extraordinarily unusual...

It remembers me a famous scream by Jim Morrison "I want the world and I want it .... noooooooooooooooooooooooow" ;-)

Jean-Marie

Posted by: Jean-Marie Le Ray [TypeKey Profile Page] at November 27, 2007 06:38 AM

Nice article but the logic is flawed.

The assumption is that all ads are created equal. That is not true.

Just because people use services such as Google apps does not mean that they will click Googles ads at the same rate that they would if they searched for "cheap laptops" and saw a relevant ad.

Google is basically a one trick pony. Its search ads work because they are relevant to the keyword.

All other free services do not really work well with ads.

Thanks for the effort in putting up the article though.

Posted by: augustus [TypeKey Profile Page] at November 27, 2007 10:58 AM

Thanks for the effort in putting up the article though.

I try to be useful.

Posted by: Nick Carr [TypeKey Profile Page] at November 27, 2007 12:38 PM

What a great article Nicholas. Your starting question “should innovation-minded managers look at the fast-growing Internet company as a model — or an anomaly” begs for an answer that will only be questioned.

Your description of Google as a complex entity of processes that deviates from the normal or common order or form or rule, that it baffles understanding and cannot be explained very easily surely sits like haggis on a tourist’s plate.

One could apply the same logic to your usefulness; it’s all a question of context!

Warm regards, Alan

Posted by: alan [TypeKey Profile Page] at November 27, 2007 04:10 PM

Great article. I think you're spot on in a number of ways.

I do want to make one perception correction, however. You write: "The company’s innovation system reflects its deep roots in academia. Google operates in much the same way that a science department operates in a big research university. It hires the smartest people it can find, allows them to pursue their interests in small collegial teams, and measures the progress and results of their work with scientific precision."

I have spoken with many Google engineers over the years, as well as with Google's head of research. And from their own mouths, the main difference between Google and a science department at a big research university is that Google has a mantra (almost a doctrine, really) of not spending forever in the research cycle, but instead getting new ideas immediately into the hands of a large number of users, and making advances based on the feedback from those users. They expect to start small, and innovate in the direction that their users point them, i.e. iterative hill climbing.

This is very different from a large, scientific, academic-type institution. At an academic institution, the focus is often on longer-term research, longer term goals. Sometimes an idea has to incubate for years before it is ready to hatch. If you break the shell to early, if it is born too early it comes out undeveloped and is never able to mature properly. Academic research institutions let ideas develop for years (think about writing a scientific journal article!) before they're released, which is not something that Google does.

I'll make an analogy to the large Hadron collider, which is being built at CERN to search for the elusive Higgs boson particle. If Google had developed this collider, with their approach to research, they would have started with a very small collider and smashed a bunch of particles against the wall to see what stuck.. er.. see what appeared. If the Higgs boson did not appear (i.e. if their first attempt did not "stick"), they would abandon colliders and move on to some other exciting project, such as large telescope arrays or something to that effect. They would not, under the current Google innovation model, take the longer term research approach and spend a few years building the really large particle accelerator necessary to detect this type of particle.

So that's the main difference, at least as I've come to understand what Google does. Sometimes, if you're going to make huge leaps and advances, you need to spend a few years building a large Hadron collider before you even begin to throw things against the wall to see what sticks. It takes a longer term investment. But this is not the approach that Google takes.

Posted by: JG [TypeKey Profile Page] at November 27, 2007 06:43 PM

>> it was incorporated by its founders, Stanford
>> University graduate students Larry Page and
>> Sergey Brin, on September 7, 1998
Is the Google, like the Amazon.com, of the dot-com era anything like the companies today? It seems that most of its net worth is based on acquisition of physical assets and investments not it's search engine service. Google looks a lot of Netscape cira 1995: bring your pets to work, catered lunches, and hiring like mad. Now, it’s just a few offices at AOL in New York. Microsoft had essentially become a utility when after the dot-com bust its stock price stabilized and it started paying dividends like the gas and electric utility companies. Could it be that Google’s future lies in the will of its major Wall Street institutional investors based on how they want to share dividends?

Posted by: Linuxguru1968 [TypeKey Profile Page] at November 27, 2007 08:44 PM

An interesting take -- although: wouldn't that be the approach of any ISP too?
Isn't there many more things you could turn free, being between the user and the internet connexion? Are they fools, or not as complementary as it might appear?
What about the other search engines? Has MS Live, Yahoo!, Ask tried to make anything free?
A friend of mine defends the idea that no company can be highly profitable for a long period without shattering the whole business model around it to do so (otherwise, it's too easy to copy): isn't it ambition that make the difference--and this complementarity, an accident?

LinuxGuru:

> Could it be that Google’s future lies in the will of its major Wall Street institutional investors based on how they want to share dividends?

Google made very clear in their IPO fillings that this would not be the case, hence the two share type.

Posted by: Bertil [TypeKey Profile Page] at November 29, 2007 09:42 AM

Bertil:
>> Google made very clear in their IPO fillings...
IMHO, it just looks like Google is way overvalued compared for the revenue generated by its core search engine service and ads alone. Google started as a dot-com survivor, and is now building a massive physical corporate infrastructure behind that front. Eventually could the break up value be so great that the boys on Wall Street will just blow it out and cash in? My guess it that it would not be a 80s Gordon Gecko type of blow out but a discreet cashing out of the previously acquired assets. Could Google, the search engine, end up as just a few offices as the subsidiary of some media company?

Posted by: Linuxguru1968 [TypeKey Profile Page] at November 29, 2007 10:34 AM

Mr. Carr,

I read your article with great interest and agree that Google being interpreted as an innovator to be taken with a grain of salt, but after reading an article about the economist Joseph Schumpeter (link here - http://chronicle.com/free/v54/i15/15b00801.htm) innovation is defined as, "The innovator shows that a product, a process, or a mode of organization can be efficient and profitable, and that elevates the entire economy. But it also destroys those organizations and people who suddenly find their technologies and routines outmoded and unprofitable."

Do you think Google could be defined as innovative based on this definition?

Thanks,
Jeff

Posted by: Jeff W. [TypeKey Profile Page] at December 6, 2007 11:08 AM

Absolutely.

Posted by: Nick Carr [TypeKey Profile Page] at December 7, 2007 10:10 AM

IMHO, the fundamental problem of applying Schumpeter - or even Karl Marx for that matter, to companies like Google, is that these economists dealt with economies dominated by companies that produced tangible artifacts - widgets like cars. Google does not product any physical product. Comparing Google and General Motors is like comparing apples and oranges. Vannevar Bush predicted if not down right invented the WWW and the search engine. I wish Time or Newsweek would re-publish As We May Think as a cover story. Brin and Page never invented anything. ;)

Posted by: Linuxguru1968 [TypeKey Profile Page] at December 8, 2007 01:57 AM

I agree in that Brin and Page never invented anything, but what they did was change the game and make search better (the public has spoken) and online ads better (the advertisers have spoken, but let the debate begin). Sech is nothing but a comodity now - the business is online ads.

Posted by: Jeff W. [TypeKey Profile Page] at December 9, 2007 01:06 PM

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