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Google case study

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									                                     Google History

       Google is the product of two Stanford University computer science grad students,

Sergy Brin and Larry Page. They met in 1995 while studying methods of searching and

organizing large databases. They discovered the mathematical formula to rank and order

random search results by relevancy, and in 1997 came up with the name Google. Google

takes its name from “googol,” the mathematical term for the value represented by a one

followed by a 100 zeros. In keeping with that theme, the company‟s headquarters is

referred to as “the Googleplex,” a play on googolplex—a one followed by a googol zeros.

       In 1998, Brin and Page presented their mathematical discovery at the World Wide

Web Conference. They successfully impressed many within the industry. By 1999 they

had raised $30 million in funding from private investors and venture capital firms. In

1999, with strong financial backing, they successfully launched their site.

                              Ownership and Organization

       In 2001 Brin and Page hired tech industry veteran Eric Schmidt, a long-time

Novell executive, to become CEO of Google. Brin, previously the company‟s chairman,

became president of technology, and Page, previously CEO, became president of product.

In 2004, Google went public in one of the most highly anticipated IPO in history. The

initial stock price was $85—now two years later the stock raised to over $500 a share.

The 2004 IPO raised over $1.6 billion, and the three founders, Sergy Brin, Larry Page,

and Eric Schmidt all pocketed large sums of money. Today, Sergy Brin and Larry Page

each have nearly 30% voting control of the company.
                                           Unique Industry

        The search engine industry is very unique. Google, Yahoo!, MSN,

and other competitors do not make money directly from their search engine technology.

Anyone with internet access can use Google free of charge. Unlike almost any other

companies that directly sell products or services, the Google search engine does not sell

anything. Google has used second party advertising as their primary means to become

profitable. While search engine technology is Google‟s core competency, advertising is

at the core of their profitability.

                                      Industry description

        In 2001 Google launched their advertising strategy. AdWords and AdSense are

Google search-based advertising service that enables Google to target ads on its own site

as well as third party sites.

        Google offers targeted search results from over 8 billion Web pages. As the

leading Internet search engine, Google uses a proprietary algorithm to rank web pages as

key words are typed in. Google has penetrated every continent, and its search results are

offered in more than 35 languages. By the end of 2006 it is estimated that Google will

reach a worldwide audience of more that 380 million people. The company generates

revenue through ads that are targeted by keywords and Google sells these ads across a

network of more than 200,000 affiliated Web sites.

        Google delivers ads to a publisher‟s Web site that are precisely on target to the

content of the publisher‟s site, and the publisher shares in the revenue generated when the

reader clicks on the ads. Customers of Google AdSense include publishers of third-party
Web sites that comprise the Google AdSense Network. For example, a person searching

for “Luxury cruises” might see ads for travel agencies or special prices on flights to

cruise destinations—the person then can immediately respond to those links. This new

technology has spurred tremendous interest in online ads, both on the buying and selling

sides. These targeted ad services are booming on the leading search engine sites, and

Google, Yahoo, and MSN are able to charge higher advertising prices as demand has


           The business of Internet search has become one of the fastest growing sectors in

the online industry with sales expected to reach over $13 billion in 2006. Although

Google is involved in more core competencies than search engines, the core of it profits

come from its advertising system, comprised of its AdWords and AdSense products.

Customers of Google AdWords consist of advertisers who seek to drive qualified traffic

from Google to their own sites to generate leads and online sales. Advertisers bid on

keywords and have their ads appear as links on the right hand column of Google‟s search


                                           Google Growth

           (Financial statements) do we want to include here or at appendix?

           In 2003 Google purchased several companies that further boosted their online

presence. They first purchased Applied Semantics, a software company that makes

applications for online advertising and managing domain names. They also purchased

Kaltix Corp, a Palo Alto California company that develops personalized and context-
sensitive search technologies. Later in 2003 Google hired 100 additional software

engineers to work in its New York office.

        In 2006 Google made the most expensive purchases in its history by acquiring

YouTube, the online video-sharing site, for $1.65 billion. The purchase, while somewhat

controversial, may enable Google to cement its Internet dominance for many years to


        Google is increasingly moving beyond its core business of search engine services

and advertising. In the past year Google has transformed into a provider of Web portal

services such as Webmail, blogging, photo sharing, and instant messaging. Google now

uses a host of tools to help its users make the most of their online experience. Google has

Froogle (comparison shopping service), Google Images (an online image library), Google

News (general news stories), Google Finance (financial news), Google Maps (interactive

maps), Google Groups (Internet discussion groups), and recently added Google Video

(online video offering) with the purchasing of YouTube.

        Google two main rivals are Yahoo! And MSN, who are have launched their own

search engines and have targeted advertising systems. Google is in a race to develop new

search tools to attract users and to expand its advertising networks. In 2005 Google

agreed to invest $1 billion for a 5% stake in AOL, which enabled them to gain

distribution throughout the content portal‟s network of sites. Under this deal, Google and

AOL have benefited from each other‟s core competencies. AOL uses Google‟s search

technology and the two companies work together to make their instant messaging

software compatible with one another. AOL also gets about $300 million in promotional

advertising for its online properties through Google‟s AdSense Network.
       Google‟s innovative search technologies connect millions of people around the

world with information every day. In the same manner in which cola needs should be

met by either Coke or Pepsi, Search Engine needs are met by Google, MSN or Yahoo.

Google has benefited from being the first search engine to market and has strong brand

recognition. In just a few short years Google has become a key component in

information technology. Google has become part of our culture. When someone says

search engine, the name Google immediately comes to surface.

                              Production Technology

       Google‟s services are run on several server farms, each consisting of thousands of

low-cost commodity computers running stripped-down versions of Linux. While the

company does not give detailed information about its hardware, a 2006 estimate

consisted of over 450,000 servers, clustered in data centers around the world. Google is

recognized for its award-winning advanced search services. It has been the recipient of

the Webby Awards‟ prestigious Best Technical Achievement Award and “Best Search

Engine.” Google led all search engines with 97 percent of its users indicating that they

would recommend Google to a friend.


       Google‟s core business revolves around its Internet search engines. There are

several products that are search-oriented, including Web Search, Image Search and

Google News. Blogging has resonated with the online culture and Google rose to the
occasion with the implementation of Blog Search, which allows the user to search

frequently-indexed feeds, containing news and other features. Google Earth is a

downloadable program that allows a user to zoom into nearly any spot on the earth. It is

interactive and is growing in popularity and power. Gmail is a free web-based email

service and features improved filtering technology. It initially became popular due to its

offering of 1GB of email storage, which put pressure on competitors Yahoo! and

Hotmail. The current offering is 2.78 GB. Google has also moved in targeted

organizations and educational institutions, by bundling several Google products, namely

Gmail, Google Talk, Google Calendar and Google Page Creator. Since the beginning of

Google, they have launched over 70 products, several of which are experimental.


       Google‟s search services help individuals find the information they are looking

for on the Web with unprecedented levels of ease, speed and relevancy. Yahoo! was

founded on the principle of building a directory around subject-based, demographic and

geographic content. Google runs some of the same technologies, but adds additional

search capabilities. Google has also capitalized on the total number of advertisers. It has

more than 400,000 ad clients, which is twice as many as yahoo. It is a fundamental

marketing tactic used by numerous online companies and is a way providing free service

to the consumer. The larger the base of advertisers, the more search engines have to find

and display ads that will generate the most clicks. The clicks will then be tracked by

certain programs to analyze the words searched most frequently. The idea is deceptively

simple: An ad clicks at $1 is more lucrative to showcase than an ad that generates on
click at $2. Google has commanded a reign over knowledge and technology that Yahoo

and MSN cannot match in the software code. Google collects very little demographic

data on users, even when signing up from Gmail. The company strongly focuses on the

long-term prospects of personalized search offering. Google stores and analyzes a

person‟s past queries and gives insights into behaviors and preferences. Google has

added demographic targeting to its contextual ad network. This is a milestone and many

marketers will likely find this new capability adds precision to their site-targeted

campaigns. This will provide lucrative long-term viability and has served as a successful

technology for Google to date.


       Google is actively pitching Google audio ads and is claiming that will be able to

give advertisers access to thousands of stations through Goggle‟s digital, automated

platform. Google says its system talks to radio stations‟ traffic operations “to search for

inventory that fits advertiser criteria,” and will deliver information as ads are broadcast.


       Google‟s innovative search technologies connect missions of people around the

world with information every day. Google has a top web property in all major global

markets. Google has offices throughout the Americas, Europe, and Asia.

       Google is facing its international rivals head on, particularly focusing on China

where is the market leader. By entering the market in China, the world‟s most

populated country with nearly 1.4 billion people, Google will have tremendous
opportunities to gain growth and market share. Currently 62% of the Chinese market use as their search engine—to combat this Google has announced a Chinese-

language brand name and is expanding a Beijing research center to develop new


       Google has also gained recognition in the mobile phone market and has recently

moved into the India market. Google will also launch Google Video in France, Italy, the

Netherlands, Poland, Spain, the United Kingdom and Canada. This has made it easier for

millions more people around the world to search for, upload and share their videos.


       With the success of Google there have come some liabilities. Anytime a large

company has high profits it tends to attract lawsuits. It has found itself entangled in

various lawsuits, which include a wide array of legal questions, including copyright

violation, trademark, infringement and its method of ranking websites. Google has

received some scrutiny over the acquisition of You Tube, which not only has homemade

videos, but also copyrighted clips that users upload without permission. This may

potentially be a problem and there are many observers who say Google may potentially

be exposing itself to a new area of law. David C. Drummond, Google‟s general counsel

and senior vice president of corporate development has pointed to the “safe harbor”

provision of the 1998 Digital Millennium Copyright Act. Numerous courts have held

that under this provision, Web sites are not liable for copyrighted content hosted by users,

as long as they promptly remove it when it is point out to them. Drummond stated that

Google has investigated the whole issue and are familiar with the potential problems.
Government has known to have hands off approach to the Internet and is continually

improving on how to gain control over certain aspects of the Internet.

                                 Industry Environment

       In examining the search engine industry environment, it is important to gain an

understanding of what Google is, what it provides to consumers and how it has played a

role in the online search engine industry amongst its competitors. The six areas we will

be looking at are: Competitors, Entry barriers, substitutes, suppliers, buyers, and


       Google has been able to become the top search engine used around the globe by

positioning itself properly in an industry that has seen many come and go since it first

took off in the late 1990‟s. The coming years will show a major change in information

search engines. This is already evident by what Google is currently doing today to stay

on the forefront of innovation—Google has become a Media outlet as opposed to a

company that only provides information.


       Currently the industry has a few major competitors with names such as Yahoo,

MSN, Baidu (Chinese search engine), AskJeeves, Overture, Accoona, hakia and others.

Yahoo is probably the better known search engine but doesn‟t quite have the same market

share as Google does. Google has about 60% of the market when it comes to searches.

The reason for this is that Google has a better search algorithm than any other search

engine. Baidu focuses mainly on China and searches related to China. Although Baidu
is traded on NASDAQ it doesn‟t pose a major threat to Google‟s United States and

Europe customers. As part of Microsoft, MSN‟s success is largely due to people who use

MSN as a homepage. Many older users have it more as a media platform than they do a

search engine. Google is becoming more of a media platform than a search engine, but is

still mainly viewed as a search engine.

Market Capitalization                                                                  Market Cap

GOOGLE [GOOG]                                                                           $147.2 B
YAHOO INC [YHOO]                                                                         $36.0 B
EXPEDIA, INC. [EXPE]                                                                       $6.1 B
BAIDU.COM, INC. [BIDU]                                                                     $3.7 B
SABRE HLDGS CORP [TSG]                                                                     $3.6 B


                                   GOOG           Pvt1         Pvt2         YHOO       Industry

Market Cap:                          147.20B             N/A          N/A     36.03B      476.27M

Employees:                                5,680          N/A          N/A      9,800              260

Qtrly Rev Growth (yoy):               70.40%             N/A          N/A    18.80%        21.20%

Revenue (ttm):                            9.32B    350.00M1     2.30B2         6.22B       52.11M

Gross Margin (ttm):                   60.18%             N/A          N/A    58.41%        64.77%

EBITDA (ttm):                             4.05B          N/A          N/A      1.94B        7.54M

Oper Margins (ttm):                   34.24%             N/A          N/A    15.46%         7.66%

Net Income (ttm):                         2.42B          N/A          N/A      1.17B        4.36M

EPS (ttm):                                7.875          N/A          N/A      0.789          0.17

P/E (ttm):                                61.05          N/A          N/A      33.57         35.65

PEG (5 yr expected):                       1.43          N/A          N/A       2.30          1.40

P/S (ttm):                                15.93          N/A          N/A       5.90          3.52
                                     Barriers to Entry

       Capital is the main barrier for entry. In order to be a viable search engine you

need a lot of capital for infrastructure. The servers and storage facilities needed to

accommodate the users who use the search engines is immense. Google has invested

billions of dollars into data storage and servers just to accommodate the amount of

information available that users will search for on the web.

       Brand recognition is another huge barrier to entry. Being the first to market is a

huge bonus for Google. Google is part of our language, and saying, “Google it” is

synonymous for searching something online. No other competitor can say lets “Yahoo

it” or lets “Baidu it”. Being a part of our language and culture for doing online searches

is a huge factor in Google‟s success.

       Another barrier to entry is the mathematical and technological competencies to set

up a search engine. Google has the best technology for pulling up data that is exactly

what customers are looking for. Other search engines are not as good at doing this.

Being able to search for exactly what it is you are looking for has become very important

to users—Google has been able to use this core competency to increase online traffic and

marketing interest. Just like advertising billboards along interstates in major cities is

much more expensive than placing a billboard in a rural community, advertising space on

search engines that have a lot of traffic is becoming more and more expensive.


       The substitutes to Google are other search engines that may specialize in certain

areas. There are those who use B2B search engines like Jayde, MasterSeek, Kompass
and others that used specifically for searching for B2B information. The other type of

substitute is search engines that are on other websites like online forums, music sites, and

other media platforms that have search potential. For instance there are many sites that

have searches that are powered by Google or Yahoo! This is a great way for people to

use Google without having to leave the webpage they are on or refresh another one. The

ability for Google to become more convenient for consumers to use will add to its

marketability and growth as a media company as well as a search engine. The only real

threat to Google would be losing market share because it becomes too big or loses it

customer base for becoming too mainstream. The industry life cycle for web based

business and search engines is cut throat—few have been able to stick it out because they

cannot compete with Google, Yahoo, MSN and other major players.


       Information is what is supplied to search engines. The information comes from

billions of websites and Google keeps track of the amount of information it receives,

ranks the best web-sites for key words and sells that traffic to advertisers. The

information available on the web is what is supplied to Google and Google‟s ability to

store this information has made them the dominant player. Google has invested billions

in information storage to better serve the non paying customer which in turn allows them

to charge a premium for advertising space to other companies. The business Google is in

is quite unique—Google doesn‟t charge the user but uses the user as a commodity to sell

to advertisers and with greater traffic flow can charge advertising premiums.

       The „Buyers‟ of the search engine industry are advertisers. Advertisers are

interested in getting their product exposed in the market, and Google, Yahoo!, MSN and

other search engines offer a great media outlet for doing this. Cost of advertising is based

upon user traffic—the more search engine traffic the higher the marketers will pay for

advertising. If a marketer buys advertising space on one search engine they will usually

buy advertising space on all the search engines as to not lose any advertising space.

       Google has recently decided to start selling advertising space in print. This is

completely different than its previous model of selling online advertising space. Google

is vying to become an information provider on all levels of media: print, news media,

television and online. This versatility is a powerful selling point Google will have in the

future. Ironically, Google‟s online sales are what caused print ads to fall in recent years

and now Google is looking to take over that market as well. Google will act as the broker

between the print media and the product advertisers.


       With Google venturing into Print advertising and other advertising selling

platforms this can only compliment Google‟s already dominant presence in online

advertising space. The other areas that ad to value of Google are the use of search

engines „powered by Google‟ and users having the ability to use a Google toolbar on

their web browser. Some of the types of sites that offer this are automotive forums

( uses a search powered by Google—this is one of the largest online
forums—it shows the power of attracting more traffic), or unique user forums. All these

different platforms compliment Google and attract more traffic to their site and products.

This, in turn, increases their ability to remain on top of ad space sales. Google has

allowed users to find information and sell the traffic. They are a company that provides

an information channel and then sells the traffic to product advertisers. They are more of

a media and entertainment business than anything else. Google‟s ability to keep looking

for avenues to gain more complementors will lead to its continued success.


       Google’s mission is to organize the world’s information and to make it

universally accessible and useful.1 By stating this, Google has clearly outlined its

corporate level strategy; they want to compete everywhere. On a business level, they do

this on the internet. The breakthrough came when Google founders Sergey Brin and

Larry Page realized that the chaos of the internet had an implicit mathematical order. By

counting, weighing and calculating the link structures between web pages, Brin and Page

were able to create a system that was able to return search results more relevant than

those of any other search engine. So far, Google has been able to maintain their

superiority and ranks as the number one search engine attracting over 46% of all search

traffic; if you include AOL searches that number jumps to over 50%. The company

Google is so popular that their name has become the verb “Google”.
                                 Business Level Strategy

       Google‟s business level strategy is to be the most used and most relevant search

engine on the internet. They do this by employing literally thousands of the world‟s best

mathematical minds. The combination of their search algorithms with the advertising

algorithms is the motor that drives Google‟s revenue. The way that Google monetizes

their search capabilities is through what is called “pay-per-click” advertising. Google did

not invent the method, however they did perfect it. In traditional media methods, media

companies display impressions on the radio, television, or newspapers and base their

costs on a reach and frequency basis. These ratings are highly controversial and data

gathering methods are highly inaccurate. The “pay-per-click” model democratizes the

advertising process by allowing companies and individuals to bid on key words that

people use to gain information on what they are looking for. Since these keywords can be

used for both gathering information on products to buy or for information on recipes for

cookies, hiking paths in a local mountain range, or driving directions, they give insight

into what people are interested in. This information is used so ads can be targeted based

on the relevancy of that search term.

                                Business Strategy Dilution

       In the few years since Google‟s stock market debut, they have been adding

seemingly different products to their dual engine machine. They own Picasa, a company

that provides photo editing software for display on websites, Writely, a company that lets

people create and store text documents online rather than on their computers and Blogger,

which lets people start an online journal. It also has a slew of other free software for
instant messaging, internet phone calls, for searching on the desktop, for virtually flying

around the world and creating web pages among other things. Sergey Brin says that he

has calculated that Google‟s engineers should spend 70% of their time on core products,

20% on relevant but removed products and 10% on pet products. To some, these pet

projects have diluted what Google has as its core business of search. A rule in Google‟s

philosophy is that “its best to do one thing, really, really well,” and many assert that

Google is now trying to do “100s of different things really, really well.”

                                     Strategic Pitfalls

       Google is beginning to look a lot like Microsoft did in the early 90‟s with one

strength and many mediocre “also ran “ products. It also looks a bit like Microsoft did in

how Google seemingly is stifling innovation by entrepreneurs who stay out of areas

where Google has shown any interest in entering. Google however has a slogan “Don‟t

Be Evil.” Which they contend prevents them culturally from employing such overt

activities as to stifle outside innovations from being developed, after all Google spends

over $1 billion a year acquiring start-ups with promising technology.

       Edward Felten, an expert on computer privacy at Princeton University, says that

“as more and more data piles up on Google‟s server farms, the temptation to be evil only

increases.” Google‟s practice of employing years and years of beta versions of their

applications, some say to let their competition know what they are doing so they don‟t

enter is also frustrating the technology world and investors. But in the end, Google‟s

most challenging strategic obstacle may be its own mathematical genius. They have an

ability to mathematically explain connections to seemingly random events and profit
from those connections. Therefore, they over-analyze and maintain projects that have

dead end written all over them.

                              Google Life Moving Forward

       Search is the most relevant way to dynamically serve ads and information on

products that a consumer may be interested in, but it is probably the most mundane of all

advertising methods. $180 billion a year is spent on advertising in the US, $18 billion

goes to online even after several quarters of 38%+ growth rates. The convergence of

media both broadcast and subscriber based on fixed and mobile connections is happening

at breakneck speeds and Google‟s ability to democratically control the serving of these

messages to consumers is positioned to take advantage of this. Traditional media is

declining in effectiveness due to the proliferation of attention distracting media formats.

Competition is creeping into areas where it was much easier even 10 years ago to know

where you would get eyeballs to view your ads prompting them to buy your product. In

today‟s entertainment rich environment this is increasing less true. Traditional media

points are decreasing even while CPMs are increasing.

       As effectiveness decreases for traditional media advertising and shear masses

leave for newer technology, Google‟s best bet for continued nose bleed growth is to take

advantage of its ability to efficiently match advertisers with desirable media.

These are a few suggestions of how Google can leverage its search technology to increase

   1. Develop, its $1.67 billion acquisition, from a user generated

       content portal to a channalized broadband alternative to cable and broadcast TV.

   2. Integrate Adwords technology to bring efficiencies to TV, radio and print media.

   3. Increase world wide penetration of computer or broadband connected mobile

       devices by developing alliances with or create free or cheap broadband


   4. Initiate a truly ad supported mobile phone service, one that would allow for

       immediate GPS enabled content to populate a persons mobile device when

       keywords are entered or spoken into the device.

   5. Stay out of the governmental regulators line of site by making sure that their

       desire and ability to catalogue the world‟s information as well as preferences are

       kept transparent.

   The ultimate downfall or shortfall of any successful company is not developing

increasingly disruptive technologies that can disrupt the status quo of current product

offerings of their own making or competition. With Google‟s list of top 100 projects, they

are trying to do this. Many outsiders may criticize Google for diversifying their core

competencies outside of search, but Microsoft‟s inability to move beyond its core is their

criticism. Remember: “Today‟s pet project can one day be tomorrow‟s world

transforming technology!”
Company Type                                           Public - NASDAQ (GS): GOOG

Fiscal Year-End                                        December

Financial Filings                                      SEC

2005 Sales (mil.)                                      $6,138.6

1-Year Sales Growth                                    92.5%

2005 Net Income (mil.)                                 $1,465.4

1-Year Net Income Growth                               267.2%

Auditor                                                Ernst & Young Llp

Annual Report                                          Company Web Site

Investor Relations                                     Company Web Site

                        This data is provided as per license from EDGAR Online

                                                                 2005                 2004             2003

Revenue ($ mil.)                                               6,138.6               3,189.2         1,465.9

Gross Profit ($ mil.)                                          3,561.5               1,731.6           840.1

Operating Income ($ mil.)                                      2,017.3                640.2            342.5

Total Net Income ($ mil.)                                      1,465.4                399.1            105.7

Diluted EPS (Net Income)                                          5.02                 1.46             0.41

More Annual Financials:

         Detailed Income Statement, Balance Sheet, Cash Flow


                                 Quarter Ending Sep          Quarter Ending Jun           Quarter Ending Mar
                                                 06                            06                        06

Revenue ($ mil.)                             2,689.7                       2,456.0                   2,253.8

Gross Profit ($ mil.)                        1,640.9                       1,467.0                   1,349.6
Operating Income                              931.3                        815.4                 742.7
($ mil.)

Total Net Income ($ mil.)                     733.4                        721.1                 592.3

Diluted EPS (Net Income)                       2.36                         2.33                  1.95

More Quarterly Financials:

          Detailed Income Statement, Balance Sheet, Cash Flow


12/04/06 15:43:00                  NASDAQ (National) 484.09         3.29     0.68%

                                      Pricing delayed 20 minutes.

Detailed QuoteInteractive Stock Chart

                                                      Company                Industry        Market
                                                                               Median       Median1

Price/Sales Ratio                                         11.53                     2.52          2.18

Price/Earnings Ratio                                      59.36                    26.50         19.00

Price/Book Ratio                                           7.46                     3.12          2.14

Price/Cash Flow Ratio                                     32.27                    17.63         13.28
 Public companies trading on the New York Stock Exchange, the American Stock Exchange, and the
NASDAQ National Market.

Detailed Comparison Data

                                                  IAC Search & Media                 MSN     Yahoo!
Annual Sales ($ mil.)   350.0   2,298.0    5,257.7

Employees                505         --     9,800

Market Cap ($ mil.)        --        --   36,092.1

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