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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, Baidu.com 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 increased. 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 results. 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 come. 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. Services 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. Demographics 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. Advertising 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. International 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 Baidu.com 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 Baidu.com 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 products. 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. Government 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 complementors. 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. Competitors 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 DIRECT COMPETITOR COMPARISON 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. Substitutes 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. Suppliers 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. Buyers 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. Complementors 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 (www.nasioc.com 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. Strategy 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 revenues: 1. Develop YouTube.com, 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 connectivity. 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 Headquarters Fiscal Year-End December Financial Filings SEC 2005 Sales (mil.) $6,138.6 1-Year Sales Growth 92.5% 2005 Net Income (mil.) $1,465.4 1-Year Net Income Growth 267.2% Auditor Ernst & Young Llp Annual Report Company Web Site Investor Relations Company Web Site This data is provided as per license from EDGAR Online ANNUAL INCOME STATEMENTS 2005 2004 2003 Revenue ($ 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 QUARTERLY INCOME STATEMENTS 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 STOCK QUOTE & CHART 12/04/06 15:43:00 NASDAQ (National) 484.09 3.29 0.68% Pricing delayed 20 minutes. Detailed QuoteInteractive Stock Chart COMPARISON TO INDUSTRY & MARKET 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 2 Public companies trading on the New York Stock Exchange, the American Stock Exchange, and the NASDAQ National Market. Detailed Comparison Data TOP COMPETITORS 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
"Google case study"