Google: Online Search & the Battle for Clicks - [email protected]: Home

SLOAN FELLOWS PROGRAM IN INNOVATION & GLOBAL LEADERSHIP

Google: Online Search & the Battle for Clicks

May 1, 2005

Prepared by:

Priya Iyer Brian Courtney

Sloan Fellows ’05

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TABLE OF CONTENTS

1 INTRODUCTION..............................................................................................................................................1

2 SEARCH ENGINE INDUSTRY EVOLUTION .............................................................................................1

2.1 INDEXING – FINDING CONTENT...................................................................................................................22.2 QUALITY OF RESULTS .................................................................................................................................22.3 MARKET TRENDS ........................................................................................................................................4

3 STRUCTURE OF THE INDUSTRY ...............................................................................................................5

3.1 PORTER’S FIVE FORCES ANALYSIS..............................................................................................................53.2 SYSTEM MODEL ..........................................................................................................................................6

4 VALUE CAPTURE IN THE ONLINE SEARCH INDUSTRY.....................................................................9

4.1 VALUE CREATION VS. VALUE CAPTURE .....................................................................................................94.2 CRITICAL FACTORS OF VALUE CAPTURE ..................................................................................................114.3 VALUE CAPTURE ACROSS FIRMS - UNIQUENESS VS. COMPLEMENTARY ASSETS.......................................11

5 GOOGLE’S COMPETITIVE POSITION ....................................................................................................13

5.1 VALUE CHAIN ...........................................................................................................................................135.2 CREATING VALUE .....................................................................................................................................145.3 CAPTURING VALUE ...................................................................................................................................145.4 DELIVERING VALUE ..................................................................................................................................155.5 COMPETITIVE RESPONSE ...........................................................................................................................155.6 CREATION & CONTROL OF PROPRIETARY INDUSTRY STANDARDS ............................................................16

6 GOOGLE’S FUTURE STRATEGY ..............................................................................................................18

6.1 GROW CURRENT CONSUMER MARKETS....................................................................................................186.2 PROVIDE UBIQUITY ACROSS DEVICES .......................................................................................................196.3 EXPAND GLOBALLY ..................................................................................................................................196.4 PENETRATE ENTERPRISE MARKETS ..........................................................................................................196.5 BUILD NETWORKS & PARTNERSHIPS ........................................................................................................206.6 CONCLUSION.............................................................................................................................................20

7 APPENDIX .......................................................................................................................................................21

7.1 HISTORY OF SEARCH ENGINES AND DIRECTORIES ....................................................................................217.2 VALUE CAPTURE STRATEGY OF FOLLOWERS............................................................................................23

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1 Introduction Since the inception of the internet the user community has longed for complete and efficient

access to the vast array of content on the web. This gave rise to an industry for search engines with

players including Lycos, Yahoo!, Infoseek, AltaVista, Inktomi, Ask Jeeves, Google, and Northern Light.

Competition revolved around relevance of search results and total indexed content. To find and index

more sites, bots and spiders were created to tirelessly search the web. Search engines quickly learned that

the vast majority of searches were for retail products. Google leveraged this to become the dominant

channel for online advertisements. With billions of dollars at stake, search rank and ad placement became

critical and hence highly profitable. Google has evolved from being a best-of-breed search engine to a

destination site for a vast array of activities including eCommerce, email, blogging, maps, and much

more. When Google went public in 2004 they were generating over a billion dollars a year in adverting

revenue.

In the battle for platforms, Microsoft is the unequivocal winner having crushed giants like IBM,

Apple, Lotus, Netscape, etc. In the post-PC era, control of the platform matters only to the extent that it is

one of the means of controlling the on-ramps to the Internet. The emerging battle is about capturing eye

balls and mouse-clicks; where business models are based on on-line advertising revenue, sale of goods,

subscriptions to content, and bundled broadband access1.

This paper looks at how the search engine market evolved and how Google is on its way to

become the dominant player. We will take a look at how value is created and captured within this market

and what the system dynamics are for growth. In looking at the value chain, we will explore how

competitive dynamics will evolve in the “battle for clicks”. Will Google win because its search-engine

technology makes it the Internet portal of choice? Will Yahoo! manage to gain an advantage by being the

most aggressive in acquiring content, e-commerce, and advertising properties on the internet? Or, perhaps

it is impossible to beat Microsoft with its monopoly in the operating system platform. With this we will

explore the future for the search market and discuss key factors for success.

2 Search Engine Industry Evolution The Internet and the World Wide Web (WWW) were radical innovations that sparked new

channels and new forms of businesses. Though the Internet has been around since the 1960’s, Tim

Berners Lee created the WWW in 1990. The WWW consist of two main components, a web server for

publishing content, and web browsers for accessing content. Both internet browsers and web servers have

1 Battle for Clicks, Fuld & Company, 2005

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been freely available since 1991. The evolution of the WWW was truly astonishing. From 26 known web

sites in late 1992 to today where there are millions of web sites and billions of web pages. During this

period of rapid growth many new products have been invented to help make the web easier to navigate

and use; one of the most meaningful of these is the search engine.

2.1 Indexing – Finding Content In the early days of the Internet, users shared files using FTP servers. To help facilitate the ability

to find these files Archie was written by Alan Emtage of McGill University in Montreal in 1990. Archie

provided script based data gathering with query capabilities, creating the first true web search. Based on

the success of Archie, alternative utilities were created, the most popular of which was Gopher. To search

Gopher, Veronica and Jughead were written in 1993. These represent the first S-curve in search evolution.

The problem with these tools was

that the user had to manually maintain the

directory of sites that could be searched.

They were limited in their reach and

quickly became outdated. Around this

time, Matthew Gray of MIT wrote the

World Wide Web Wanderer, the web’s

first robot. Bots were a disruption to the

existing state of search technology

allowing computers to automatically

IndexabilityIndexability

Archie

Hierarchy

Bot Based Search WWW Worm

Spiders

Archie

Hierarchy

Bot Based SearchWWW Worm

Spiders

index and re-index sites. While they 1990 2000 20101990 2000 2010

significantly increased the number of sites Figure 1: Disruptive innovation in index-ability for search

that could be accessed through automation of the indexing, result relevancy became the dominant issue.

However, over a period of time more generalized ‘bots’ emerged which searched different collections of

data. Spiders were another significant incremental innovation to bots - they not only indexed the content,

they followed page links and references to find new sites. In 1993, three search engines emerged that

leveraged spiders: JumpStation, the World Wide Web Worm, and Repository-Based Software

Engineering (RBSE) spider. Bots and Spiders represent the second S-curve in the evolution of search

engines.

2.2 Quality of Results JumpStation and WWW Worm simply listed results in the order they were found on the web.

This algorithm, a FIFO implementation, was not scaleable and these sites soon disappeared. RBSE

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however implemented a ranking system, and though not successful, was a significant contributor to

improving relevancy of search results.

Focusing on result quality, many university projects have led to the launch of new search engine

companies. The Architect project at Stanford used statistical analysis of word relationships to improve

search. A group of six graduate students spun this technology off into a startup called Excite. In early

1994, David Filo and Jerry Yang2 a couple of PhD students at Stanford started creating a directory of their

favorite web sites. As the number grew, they added a search capability to their directory and Yahoo! was

born. Soon after, Brian Pinkerton of the University of Washington launched WebCrawler3 which utilized

the first bot that indexed the entire content of a web page. Also in 1994, Lycos was founded. Michael

Mauldin the CTO was credited with the first use of word proximity in search results relevance. Infoseek

was also founded in 1994. Though they did not initially further search technology they were adopted by

Netscape as their default search engine giving them major traction in the market.

Additional incremental

innovation followed with natural Quality ofQuality of

Archie

Page Rank

Archie

Word Proximity

Natural Language

Page Rank

language queries from AltaVista in Search ResultsSearch Results

1995. Up until this point bots would ClustersClustersMeta-SearchMeta-Search

simply follow links from one

document to another making it very

hard for new websites to gain

visibility. AltaVista began to allow

customers to submit links rather than

just relying on bots. This, coupled

with massive bandwidth, pushed 19901990 20002000 20102010

AltaVista to an industry leading Figure 2: S-Curve for Quality of Search Results

position.

In 1996 Inktomi was founded by two students from Berkeley. Looksmart was also launched in

1996 which became the default search engine for MSN until 2004. This was followed by Ask Jeeves and

19911991 19931993 19941994 19951995 19961996 19971997 19981998 19991999 20012001 20042004ArchieArchie RBSERBSE

WWW WormWWW WormJumpStationJumpStation

LycosLycosYahoo!Yahoo!

WebCrawlerWebCrawler

ExciteExciteAltaVistaAltaVistaInktomiInktomi

LooksmartLooksmartHotBotHotBot

Go ToGo ToAsk JeevesAsk Jeeves

Northern LightNorthern Light

MSN SearchMSN SearchGoogleGoogle

Go NetworkGo NetworkAbout.comAbout.comAllTheWebAllTheWeb

TeomaTeoma SnapSnap

InfoseekInfoseek MegellanMegellan FindWhatFindWhatDeDejjaNewsaNews SnapSnapInfoSeekInfoSeek

Figure 3: Timeline of Search Evolution

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Northern Light in 1997. In 1998, Google was founded by Larry Page and Sergey Brin, graduate students

in Computer Science at Stanford University. Goolge, initially called BackRub,4 gave precedence in search

results to sites that were the most frequently referenced or that were referenced by important sites. By

returning more meaningful search results, Goolge quickly became the number one search engine for the

web. It also became the default search engine for Yahoo! and AOL. The Teoma5 search engine, founded

by research scientist from Rutgers University in 2001, used a similar technique with clusters to organize

web pages into Subject Specific Popularity. Almost immediately after formation, Teoma was acquired by

Ask Jeeves to drive its search.

In 2004 Snap6 was launched by Bill Gross, the founder of Overture. Snap pushed search

technology further, by showing users how many others have searched for similar terms. Snap shows these

in search count order, giving the user ideas for different and related search terms. Search results are

displayed with statistics like number of user clicks (how many times this result was selected), the average

page views, and the cost to advertise for this result and the conversion rate if you do.

2.3 Market Trends Search is moving from a web-based model, accessed by a browser, to the desktop. Tool bars were

created for Internet Explorer by all the major search engines. Google has also released a toolbar for the

Windows task bar. Both Google and MSN have

added Desktop Search that combines web based

search with search on the local machine. In addition

to searching recently visited sites, Desktop Search

also searches past emails, files on the local file

system, and IM messages.

Today, Google is the leading search engine

by more than a 2-to-1 margin over its nearest

competitor. Eighty percent of all online searches are

now controlled by the three largest search companies: Google, Yahoo and MSN. With oligopoly power

these firms are not content with the status quo. Intense rivalry exists to increase market share forcing each

firm to innovate or become marginalized.

Company7

Google

Yahoo

MSN

AOL

Ask

EarthLink

Others

Total

Searches (Millions)

Percent Of All Searches

1,923 47.1%

868 21.2%

523 12.8%

269 6.6%

208 5.1%

37 0.9%

258 6.3%

4,086 100.0%

2 http://soe.stanford.edu/AR95-96/jerry.html 3 WebCrawler was purchased by Excite in 1997 4 http://www.google.com/corporate/history.html 5 http://sp.teoma.com/docs/teoma/about/developmentteamhistory.html 6 http://www.snap.com/about/about.php7 http://searchenginewatch.com/reports/article.php/2156451

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Intensity of Rivalry is High

Threat of New Entrantsis Moderate

Buyer Power isModerate

Availability of Substitutes is Low

Supplier PowerIs Low


3 Structure of the Industry Born in the early 1990’s, the search industry has begun to mature. Market leadership is defined by

the site with the best search results and the highest user satisfaction. Behind the scenes the technology has

evolved beyond just algorithmic competition. Today it takes hundreds of thousands of computers,

working together in a clustered grid to index the billions of pages necessary to return adequate search

results. Google leads the way with over 8 billion indexed pages serviced by an infrastructure of over

250,000 computers.

3.1 Porter’s Five Forces Analysis The search industry is a fast growth market with high spillover effects. The high growth,

especially in the B2B sector, helps firms continuously innovate and grow rapidly. However, the high

spillover allows followers to get into the market and gain market share. In addition, the capital cost for

entry is also low and infrastructure can be scaled as the user base grows. This makes operational costs

largely variable, increasing rivalry. On the other hand, it can be argued that revenue generation is mostly

through online advertising and a large user base is required to attract advertisers. The fixed cost for

generating any advertising revenue requires scaling of infrastructure and building a large loyal user base,

which can be expensive. This has led to significant market consolidation creating an oligopoly in the

industry with a few large players.

i ivalis Hi

SuppliIs Low

Intens ty of R ry gh

Threat of New Entrants is Moderate

Buyer Power is Moderate

Availability of Substitutes is Low

er Power

This trend is expected to

continue when Microsoft releases

Longhorn, the next version of

Windows. In Longhorn, desktop

search will be available from every

window, potentially eliminating the

need to go to a web site to search for

content. In addition, context and

location information are expected to

be available for more accurate and Figure 4: Five-forces Analysis of Search Industry

localized search.

Traditionally search engines have differentiated themselves on comprehensiveness of the search

index, the currency of the index, the relevance of the search results, and usability factors such as

simplicity, advanced search features, etc. As the industry has matured the ability to differentiate through

features and functionality has become increasingly difficult. The switching costs are very low for search

engine users. The development of proprietary APIs, by some players, to allow integration with other

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applications is an attempt at increasing switching costs for users. With no exit costs, market

consolidation, and high technology spillovers, competition in the industry is fierce.

While entry barriers into online search are low, consideration must be given to the entry barriers

to compete for online advertising. The advertising industry is a “two-sided” market (you need an existing

audience to attract advertisers) while the search industry is a regular market (you attract customers just

based on your solution). Barriers to entry for any multi-sided market are higher in general. In fact the

numbers are very compelling for online advertising – only the top 10 players generate any meaningful

revenue in online advertising. However, switching costs are low which makes the threat of new entrants

moderate.

The threat of substitutes for search is low in the online world. Possible substitutes exist in the

offline space to access print and other forms of offline media. Search is a “pull” technology in which the

user makes a conscious effort to locate particular content. Other “push” technologies that bring desired

content can reduce the user’s active search but even push techniques will most likely use search

technology behind the scenes.

Suppliers for search engines are primarily the content providers. Content is plentiful on the web

and (mostly) freely available for search engines to index, hence limiting supplier power.

Buyers can be divided into two categories: consumers and advertisers. Switching costs for both

consumers and advertisers are low which gives them moderate power. Both buyer types are rapidly

becoming more educated. Search spend is a small fraction of costs. Little threat of backward integration

exits.

3.2 System Model Another way to understand the industry structure is to look at the dynamic model, see Error!

Reference source not found.. Here there are a number of reinforcing loops that drive search engine

success. These include innovation, word of mouth, economies of scale and scope, attractiveness to

advertisers, and standardization.

Innovation begins with investment in R&D. Search engines must innovate to drive user satisfaction

through new features and functionality and improved quality of results. Factors that lead to better Quality

of Results include the comprehensiveness of the search index, the currency of the index, and the relevance

of the search results. Additional factors driving User Satisfaction include ease of use, advanced search

features, suggestions for other searches, spell checking, and the availability of a tool bar. By increasing

User Satisfaction search firms retain customer and grow adoption through increased word of mouth.

Word of Mouth is another reinforcing loop that drives customer adoption. An initial core base of

users is required to trigger adoption through word of mouth. Once this is established, the more customers

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that use a search engine

and have a positive

experience, the more new

users become aware of it

and adopt it.

Additionally, marketing

and advertising of the

search engine can assist

in improving awareness

and further reinforce the

word of mouth loop.

Advertisers are

attracted to web sites that

have a large user base.

The more users using a

search engine, the more

revenue can generate

through higher click-

/

R

R

R R

R

Word of Mouth

Quality of Results

Search Engine Users adoption

User Satisfaction

Advertisers

Web API

Ad Relavence

Applications with Search

Affiliates

Revenue

Ad Costs

Number of Views Clicks

R&D Spend

Marketing Spend

Innovation

Innovation

Standards Attractiveness

Economies of Scale & Scope

through rates and banner Figure 5: Reinforcing loops for search engines. ads that pay per thousand

views. In addition to these economies of scale, there are also economies of scope. Some search engines

include web portals and web applications as a way to draw in more adoption. Features like mail, Instant

Messaging, news services, classifieds and the like help make a site ‘sticky’, keeping users on the site

longer. This opens the door to more search advertisements and to alternative forms of advertisements like

rich media. In addition, with better quality search results, ads can be better targeted at the user. With 70%

of all searches focused on consumer goods, it is

critical to be able to place the right ad on the

right page.

Search engines also generate more

adoption through affiliate partnerships - by

enabling third party sites to use their search

engine. APIs can provide programmatic access

to the search engine, generating more clicks.

Open but proprietary standards for search APIs

Figure 6: Advertising and economic growth7


can further drive adoption and hence the ability to sell more advertising.

There is also a direct correlation between advertising spend and GDP, Personal Consumption

Expenditures and corporate profits. Research done by the Bureau of Economic Analysis at the University

of McCann has tracked this since 1971. This trend suggests larger market risk to publishers like Google

that generate all of the revenue from advertising spend compared to more diversified sites, like Yahoo!

and AOL that have other sources of revenue.

Innovation in the search engine space has led to vast improvements in targeting technology and in

measurement technology. This in turn has improved the effectiveness of online advertisers. The more

effective online advertising becomes, the more advertisers will spend as a percentage of their overall

advertising budget. In addition, the more targeted the ad placement and the better the measurement

metrics the more price tolerant advertisers become.

Market consolidation in search engines and

portals has created a premium market for advertising.

Advertisers are willing to pay a premium for the best ad

location on the pages with the most visibility. This

creates relative scarcity for the premium locations. The

top four publishers (Google, AOL, Yahoo! and MSN)

represent 50% of all ad spends online. Figure 7: Ad spend skews to oligopolies In addition, broadband penetration into the home

market has made rich media a reality. With advertisers able to create TV quality advertisements online,

the market for search engines to deliver rich and interactive ads has created more interest by advertisers.

These three combined factors: relative scarcity, ad efficiency and rich media, have driven up the pricing

for online advertisers. The increase in pricing has led to more revenue for search engines which has

increased R&D spend on innovation. The incremental innovations improve the drivers for price increases,

creating a reinforcing loop. Competitors

Technology Technology The main balancing loop in the search engine

market is competition. The technology gap between any Competitors R&D

Relative Search Spend two firms results in decreased search performance. Firm R&D Spend

Results Gap

Decreased performance means less adoption which Competitor

decreases revenue and hence R&D investment. With less Firm Revenue Revenue

Adoption investment a firm is less likely to innovate causing the

results gap to open further. With high spillovers, IP

protection is of marginal value. Competitors quickly copy Figure 8: Balancing loops

each other, avoiding direct IP confrontation. The key to

8

•WWW Wanderer•Gopher•Veronica•Archie

•Google•Yahoo!

•MSN Search

•Ask Jeeves•Alta Vista•Inktomi•Excite•Infoseek•Lycos


minimizing this effect is constant technology innovation.

4 Value Capture in the Online Search Industry Online advertising began in 1994 when HotWired (now wired.com) launched its site with ads

from AT&T, Sprint, MCI, and Volvo. This sparked the interest of Roy and Jay Schwedelson, who started

WebConnect with the idea to sell banner ad placement. Soon after, WebConnect went live with an online

advertising media kit. Once they rolled out accurate measurement tools allowing customers to track click-

through rates and provided banner rotation8 web

advertising was born.

4.1 Value Creation vs. Value Capture HighHigh

Initially the Search industry was all about

value creation with little to none in value capture. ValueValueCapturedCaptured

Early search engines were created as free utilities.

Yahoo! was one of the first companies to monetize

on-line search through advertising. Yahoo! LowLow

allowed advertisers to place banner ads on the

search results page for a fee. Search engines were Low HighLow High

•WWW Wanderer •Gopher •Veronica •Archie

•Google•Yahoo!

•MSN Search

•Ask Jeeves•Alta Vista•Inktomi•Excite•Infoseek•Lycos

able to show different ads based on the surfing Value CreatedValue Created

habits of the individual user. For example, if the Figure 9: Value Created vs. Value Captured by Search Engine

user profile shows that that user frequently visits automobile related web sites, that user may indeed see

an automobile ad on the page. As the search industry matured, several new strategies for value

appropriation emerged. These include ad dollars in flat-fee formats such as those used in traditional

media; e.g. print ads like Yellow Pages or newspapers, and analog media, such as TV or radio. Today's

online advertising allows both flat-fee approaches for static ad placement as well as interactive online

methods that are based on transactional charges. Most of the attention and success has been focused on

the new transactional advertising models, including:

1. Display Advertising: Advertiser pays an online company for space to display a static or hyperlinked

banner or logo on one or more of the online company’s pages.

2. Sponsorship: Advertisers sponsor targeted Web sites or email areas (e.g., entire web site, site area, an

event, parts or all of an email message). Sponsorship usually contains banner elements.

8 Banner ad rotation allows banner ads to rotate between multiple sites for a single ad purchase.

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3. E-mail: Banner ads, links or advertiser sponsorships that appear in e-mail newsletters, e-mail

marketing campaigns and other commercial e-mail communications. Includes all types of electronic

mail (e.g., basic text or HTML-enabled).

4. Search: Fees advertisers pay online companies to list and/or link their company site domain name to a

specific search word or phrase (includes paid search revenues). Search categories include:

• Paid listings: Text links appear at the top or side of search results for specific keywords. The

more a marketer pays, the higher the position it gets. Marketers only pay when a user clicks on

the text link.

Figure 10: Advertising Revenue by Category

• Contextual search: Text links appear in an

article based on the context of the content,

instead of a user-submitted keyword. Payment

only occurs when the link is clicked.

• Paid inclusion: Guarantees that a marketer’s

URL is indexed by a search engine. The listing

is determined by the engine's search

algorithms.

• Site optimization: Modifies a site to make it

easier for search engines to automatically

index the site and hopefully result in better

placement in results.

5. Referrals: Fees advertisers pay to online companies that refer qualified leads or purchase inquiries

(e.g., automobile dealerships which pay a fee in exchange for receiving a qualified purchase inquiry

online, fees paid when users register, or apply for credit card, contest or other service).

6. Classifieds and auctions: Fees advertisers pay online companies to list specific products or services

(e.g., online job boards and employment listings, real estate listings, automotive listings, auction-

based listings, yellow pages).

7. Rich media: Advertisements that integrate some component of streaming video and/or audio and

interactivity, in addition to flash or java script ads, and can allow users to view and interact with

products or services (e.g., a multimedia product description, a “virtual test-drive”). “Interstitials” are

included within the rich media category and represent full-or partial-page text and image server-push

advertisements which appear in the transition between two pages of content. Forms of interstitials can

include splash screens, pop-up windows and superstitials.

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8. Slotting fees: Fees charged to advertisers by online companies to secure premium positioning of an

advertisement on their site, category exclusivity or similar preference positioning (similar to slotting

allowances charged by retailers).

4.2 Critical Factors of Value Capture Some of the core components of a search engine's monetization approach have comprised a

combination of uniqueness and complementary assets including the following:

1. Relevancy before monetization: For some portals, search is their core business. For others, like

Yahoo! or AOL, it is part of a much broader business. To achieve maximum benefit out of any

monetization strategy, a search engine company must keep the priority on relevancy (and diversity) of

results; an updated, user-friendly interface; ever-increasing inventory; and improving the search tool's

understanding of the audience's query type.

2. Provide unique search technologies: A search engine has to consider what differentiates its search

product from others, and whether or not it clearly provides a perceived value to both search users and

advertisers. For example, AskJeeves' differentiates itself by allowing broader type queries.

3. Encourage commercial search: Commercial search accounts for 30% of all search queries9. These

queries are just as complex as their non-commercial counterparts in terms of range of needs and

required quantity of relevant results. For a significant portion of queries, users are expressing needs

that businesses satisfy best.

4. Present a diversity of vendors, partners, products, and sales channels: All search engine companies

have created paid inclusion or paid placement programs to obtain broader reach for more targeted

advertising audiences.

5. Keep operational expenses cost effective: Infrastructure to carry for so much search traffic can be

very costly if not carefully supervised. Search engine companies must regular monitor peak usage

times on their Web servers; improve on their software efficiency with Web servers; and limit the size

and complexity of database sizes and search nodes.

4.3 Value Capture across Firms - Uniqueness vs. Complementary Assets The 3 major search vendors, Google, Yahoo and MSN, have different strategies for competing

online using different combination of uniqueness and complementary assets. Understanding the

differences is important in understating the overall market.

Yahoo! was one of the early search engine companies, developed in 1994. Despite all the

changes in the search space over the years, Yahoo! has remained one of the most popular search

9 Source: Gary Cromwell, Search Engine Watch, December 16th, 2003.

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The Inventor’s Dream The Big Win

Few returns toInnovation?

ComplementaryAssets play

•Yahoo! (expanding portal,brand)•Google (index, portal, brand)•AOL (unique content,broadband, AIM,mapquest)•MSN Search (Windows,Office, IE)

•Alta Vista•Lycos•Ask Jeeves•Infoseek•Inktomi


destinations on the web. Yahoo! stood out from its early competitors by using humans to catalog the web,

thus building uniqueness into its directory system. Crawler-based results from its partners only kicked in

if there were no human-powered matches. That actually made search results by Yahoo! more relevant

than competitors, making uniqueness its primary strategy for value capture for many years. However, as

the industry matured, crawler-based results became both comprehensive and highly relevant. Yahoo!

caught up in October 2002, when it Complementary AssetsComplementary Assetsdropped its human-powered results in Available Tightly HeldAvailable Tightly Held

The Inventor’s Dream The Big Win

Few returns to Innovation?

ComplementaryAssets play

•Yahoo! (expanding portal,brand)•Google (index, portal, brand)•AOL (unique content,broadband, AIM,mapquest)•MSN Search (Windows,Office, IE)

•Alta Vista•Lycos •Ask Jeeves•Infoseek•Inktomi

preference to Google's results. The

Yahoo! Directory still exists and is

leveraged by the company, but today's Easy toEasy toMaintainMaintain

Yahoo! is a far different from what it

was in its early years. Over time, UniquenessUniqueness

Yahoo! had developed several

complementary assets including one of

the most popular customizable portals Hard toHard towith 25 international sites in 13 MaintainMaintain

languages, a widely recognized online

brand, personalized Web pages, e-mail, Figure 11: Uniqueness vs. Complementary Assets

chat rooms, and message boards. While

most of its sales come from advertising, the company also charges fees for additional mailbox space,

personal ads, and other services. Yahoo! also provides Internet access through a deal with SBC

Communications.

MSN was a late entrant into the search industry and has adopted a pure complementary assets

strategy from the very beginning. Until recently, it outsourced its search technology, providing a mixture

of results from LookSmart and Inktomi. MSN announced the first version of web search using its own

technology in 2005. Strong existing complementary assets, such as the MSN portal and the search feature

within its Internet Explorer browser, have made MSN Search one of the most popular search engines on

the web. Over time, it hopes to further integrate with other “tightly held” complementary assets such as

its Windows operating system and Office suite, creating value through “ease-of-use” and significantly

increasing switching-costs – both ultimately facilitating value capture.

Google's ability to analyze links from across the web helped it produce a new generation of

highly relevant, crawler-based results. Its initial success was due to its unique high speed, highly scalable

indexing capability combined with a unique relevancy based ranking of search results and a simple, easy-

to-use interface. While maintaining uniqueness remains hard, Google has continued to continuously

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invest in its search technology, thus building a reputation (i.e. complementary asset) for being ahead of

the curve in technological innovation. Simultaneously, Google has built a portfolio of complementary

assets including text translation and image searching services; tools such as a Google dictionary, a Google

phone book, and Web log publishing tool Blogger; Google Local to help users find maps, locally relevant

Web sites, and listings from businesses in their area; a social networking site called Orkut, and free

search-based e-mail service called Gmail. In 2004 Google announced plans to purchase online photo

sharing company Picasa, as well as Keyhole, a supplier of online satellite maps that allow users to zoom

down to street level to specific locations. Later that year the company unveiled a digital project giving

Web searchers access to millions of books from the libraries of leading universities. By combining

continuous innovation (uniqueness) with an extensive portfolio of “tightly held” complementary assets,

Google is today, the most popular search engine in use and one of the most successful internet based

companies when it comes to value capture.

Several other search engines that initially gained some momentum through uniqueness have since

disappeared due to their inability to build “tightly held” complementary assets during the “take-off” stage

of the industry. Some of the notable ones include Infoseek, Lycos, Inktomi, Ask Jeeves and Alta Vista.

See section 7.2 for a detailed discussion of uniqueness vs. complementary assets strategy for value

capture among these players.

As the search engine market took-off and matured, given the lack of opportunities for iron-clad IP

protection, the players that focused on building “tightly held” complementary assets have succeeded in

capturing value and have continued to survive.

5 Google’s Competitive Position So how does Google stack up? Google’s competitive position and its ability to gain sustainable

competitive advantage can best be described using Porter’s Value Chain to see where Google captures

value and Porter’s Four-Corners Analysis to allow us to predict Goggle’s future strategy.

5.1 Value Chain An understanding of the value chain of the online search and advertising industry and the

positions occupied by the various players helps us better analyze Google’s ability to create, capture, and

Advertiser Ad Agency

Ad Server

Web Property

ISP/Infrastructure

Browser/ OS Consumer

Content Provider

Advertiser AdAgency

AdServer

WebProperty

ISP/Infra-structure

Browser/OS Consumer

ContentProvider

Figure 12: Value Chain of Online Advertising Industry

13


deliver value in this industry.

At one end of the value chain we have the consumer using a browser and operating system (OS)

to access the internet. Microsoft, arguably, has an established monopoly in the browser and OS space

with its Internet Explorer and the Windows operating system. Any request or data has to pass through an

Internet Service Provider (ISP) or infrastructure provider. Several players including AOL and Microsoft

play in this space. The web property includes the search engine or the portal which is the primary

mechanism for delivering value. Google, Yahoo!, Microsoft, AOL Time Warner, etc. all have such web

properties. Various content providers supply content to this web property. Time Warner is an example of

a dominant player in the content creation space. At the other end of the value chain are advertisers

interested in targeting products and services to the appropriate consumers. Ad agencies help identify the

appropriate consumer profile and create ads with the appropriate message. The important task of

matching up the right ads to the right consumers is done by a sophisticated piece of technology - the Ad

Server. Companies such as Doubleclick, Yahoo!, and Google are well positioned in this space.

5.2 Creating Value So how does Google create value? Google is known for its sophisticated search algorithms,

relevancy based ranking of results, an ever increasing index of web pages (Google’s search index is the

largest with over 8 billion pages) and for setting the standard in simplicity, usability, and search features.

Through its technology, Google provides complete and efficient access to the vast array of content on the

web. Google also creates value for retailers by understanding the consumer and their current search

context to create a unique channel for marketing relevant products and services. Finally, their superior

technology attracts a large number of users. The larger the number of users the better Google’s relevancy

ranking which in turn creates additional value to consumers and attracts more users. A large user base

attracts a large partner network which provides a variety of relevant products that creates additional

consumer value. This establishes a powerful, reinforcing web-based consumer marketplace.

5.3 Capturing Value Google has succeeded not only in creating phenomenal value but also finding innovative means of

appropriating value. Three primary vehicles are used today to capture value: context sensitive ads, ad

placement services, and search appliances.

Google has the ability to places context sensitive ads, selected according to the words used in the

search, on search results. Advertisers bid in highly complex auctions for the right to place ads on results

pages for searches that use specific terms like used cars, SUVs, etc.

14


Over half of Google’s revenue and profits come from its external advertising network. Google

manages advertising for a wide network of external websites for which it provides ad placement services

through its AdWord and AdSense products.

Google also sells a search appliance, a Linux server running its indexing and search software, to

organizations wishing to provide search services for their internal Web servers. This business, however, is

currently quite small contributing less than 2% of total revenue to the firm.

5.4 Delivering Value Google has developed a variety of channels for delivering value and continues to expand these. The

key delivery methods include:

• Localization of Google Search Engine to over 100 languages and cultures.

• Focused e-Commerce with Froogle

• Google News with continuously updated content from 4,500 sources and real time stock quotes

• Desktop search for private content

• Vertical searches e.g. mapquest, keyhole, job-search

• Collaboration tools E.g. Google Groups, Gmail, Blogger, IM, Catalogs, Directories, etc.

• Platform play with APIs for web, mobile, many others devices

5.5 Competitive Response Google maintains some uniqueness through IP patents on its algorithms and has built entry

barriers through its massive infrastructure - a farm of 250,000 servers currently indexing 8 billion pages

of content. Google has combined its search engine with sophisticated text-matching and auction systems

to target, price, sell, and evaluate its ads, both those placed on its own site and those on its affiliates. It is

also building platform capabilities with proprietary APIs, leading the evolving search standards, and

supporting an open architecture across multiple hardware and operating system platforms.

15


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Figure 13: Four Corners Analysis of Google Competitive Positioning

While Google’s achievement to date is no small feat, its very success has increased competitive

rivalry and attracted the attention and focus of powerful players like Microsoft and Yahoo!. Microsoft,

specifically, with its extraordinary resources and ability to persist, has a history of coming from behind

and tipping the market in its favor; Word over WordPerfect, Excel over Lotus 123, and Internet Explorer

over Netscape are just a few examples. With very low switching costs, there is little that prevents

consumers from switching to Microsoft search especially if it is seamlessly integrated with other

Microsoft products that they are currently using. A technology strategy based on a clear understanding of

the market dynamics is critical in order for Google to defy the odds and maintain its dominant position.

5.6 Creation & Control of Proprietary Industry Standards With the explosion of digital content, thanks to the web, its organization, search and retrieval for all

types of devices is envisioned to have far reaching impacts over the next decade. As the market extends

well beyond the web into enterprise applications and other consumer devices, a plethora of new search

products and services will emerge to serve these needs. In order to truly create value, interoperability

16

•Yahoo! •Google•Microsoft

•Lucy


between these new products and services as well as their integration with other applications is essential.

Establishing search standards to facilitate this interoperability will be critical to value creation and

retention. However, standards create new competitive

forces in the industry. All customers want to be on the

winning standard to take advantage of interoperability. Value ofValue of

As the percentage of market share (or perceived market standard tostandard tocustomercustomershare) for any one particular standard increases beyond a

“tipping point” the value of that standard to the customer

increases exponentially. The underlying logic of the

search engine, including the hierarchy of how it lists

Increasing returns

Increasingreturns

% market share% market sharewebsites in its results page, is likely to converge into one Figure 14: Future dynamics of the search market standard. People searching on the Web will become used to how results are arranged based on their

searches, switching costs will increase, and increasingly customers will be locked in. At the same time,

designers will optimize their Web pages around the standardized search logic so that their pages are

prioritized in the results based on the keywords entered into the search. Finally, advertisers will pay more

to have ads placed with the leading search engine technology, which will further reinforce the move

toward standardization. Once a standard is set, it becomes very difficult to displace the incumbent - the

customer is locked in to a particular product. This creates a “winner take all” dynamic in the market.

Standards are:Standards are: Google needs to take advantage of its market Closed Open

•Yahoo! •Google•Microsoft

•Lucy

Closed Open leadership to build and establish search standards

and gain market share quickly to tip it in its favor. PrivatePrivate By increasing the number of ways users can search

and the different types of search, Google will Ownership is:Ownership is: increase its presence to support a bid for it

becoming the de-facto standard in search. Google

must tread lightly though for Microsoft is the kingPublicPublic

of winning competitive fights based on standards.

After Google’s attack on the desktop, with toolbars, Figure 15: Access vs. Ownership of Search taskbars and desktop search, Microsoft has

announced its intent on ‘defining’ the standards in the search space. In an industry where strong network

externalities exist, a race to become the standard will quickly take place.

Creating and establishing the dominant standard by itself does not guarantee a successful business.

Google also needs to be able to appropriate value from its market share. Figure 15 shows the dimensions

of access vs. ownership in search standards and the likely positions of the various players. Yahoo!

17


currently has proprietary, closed standards. While this has enabled significant value appropriation in the

past, it will be difficult to tip that market in its favor given the network effects of the future, as described.

Public domain search engines, like Lucy, will adopt an open standard with public ownership. While it

could be argued that public standards are perhaps the fastest way to cause the market to tip to a particular

standard, it is very difficult to appropriate value from public standards. In order to appropriate value in

this market, Google needs to establish open standards that are proprietary Google needs to use its #1

brand position and the current technology gap it has created ahead of its competitors to build proprietary

standards while retaining and increasing adoption.

6 Google’s Future Strategy So how can Google accomplish this? We recommend that following broad strategic thrusts for

Google going forward.

6.1 Grow Current Consumer Markets Google has become synonymous with search. Being the # 1 brand on the web, people often refer to

searching as ‘googling’. With this kind of brand awareness, Google needs to continue to grow its search

presence. Today Google has expanded basic and advanced search to include:

• Topic specific searches – Searching for information specific to Apple, BSD Unix, Linux and

Microsoft. Google also offers search for all US Government sites; hundreds of distinct

Universities like MIT, Stanford, and Brown; and Google Scholar which searches through

scholarly papers.

• Local Search – Searching for consumer goods and services in the context of geography (place).

• Desktop Search – Searches the local desktop for content as well as the web.

• Catalog Search – Search through mail-order catalogs for goods and services.

• Mobile Search – Search from wireless handheld devices.

Google must continue expanding search solutions. To that, Google has recently announced new search

solutions including:

• Search History – Allows a user to review all past search done at Google and gives feedback and

suggestions based on your past searches.

• Ride Finder – Searches for Taxi cabs, limousines and shuttle buses using real time position of the

vehicles.

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• Google Maps – Search for geographic locations along with driving direction and time estimates.

In addition, Google offers two unique features over MapQuest and other rivals. First, after the

user finds a location, they can see a satellite image of the location. Second, when searching for an

address, Google points out what is at the address, by name when it can, and surrounding points of

interests.

• Google Suggest – As you type Google offers key words to help improve search key accuracy

hence improving search results.

• Personalized Search – Users enter profile information regarding interests in arts, business,

computers, health, home, kids, music, recreation, regions, science, society and sports. Google

then uses this information to help improve search results.

6.2 Provide Ubiquity across Devices Today data is stored and retrieved on many different devices. PDA’s and Blackberries are the norm

for business users. A proliferation of new computing devices can be envisioned in the future through

which digital content is searched and accessed. These present a great opportunity for growth. Google

should extend it search capabilities to search not only the desktop, but also the palmtop and every such

consumer device of the future. By adding integrated search support across all these devices, through

standardized API’s, Google can become the ubiquitous platform for information retrieval any time, any

where.

6.3 Expand Globally Currently Google derives 30% of its revenue from international sites. With support for over 100

dialects, Google is well on its way to having a global presence. However, consumer devices other than

the traditional desktop are creating significant expansion of global markets, like India and China. In order

to remain competitive and ensure that large international markets do not “tip” away from it, Google must

continue its expansion in these until all relevant markets are captured. Additionally, Google can partner

with Linux players in these markets (e.g. China, where Linux is widely adopted) to become the “Intel

Inside” for non-Microsoft operating systems, thus building more complementary assets.

6.4 Penetrate Enterprise Markets Another area for expansion beyond the consumer market for Google is the private applications of

enterprises. In order to find its place in the enterprise application value chain Google needs to transform

itself into a platform. Figure 16 shows the value chain of the enterprise software application market and

the likely position of search engines if Google successfully penetrates this space.

19


Operating System Database Search

Engine Middleware Business Application ServicesOperating

System Database SearchEngine Middleware Business

Application Services

Figure 16: Value Chain of the Search Enterprise Market

Note that the search engine can, both, seamlessly integrate with the operating system or search

dynamically generated pages from the database layer above. Such a platform enables significant value

creation and value capture for Google. Today advertisers are attracted to Google because of ad

efficiency. Presenting an ad for a good that a user is searching for on the results page for that search

maximizes the efficiency for each individual ad. The next logical step would be to tie ads with inventory

control so that marketers can align promotions with the level of stock. If Google, for example, could

integrate search ad placement with backend ERP systems, advertisers could vary prices based on

inventory levels. When inventory is high, sale prices could be offered, then as inventory decreases, sale

price flatten out and finally as inventory goes to zero, the ads could stop being displayed. There are other

strategies for pricing but the point is that tying ad placement together with inventory would allow

advertisers to fine tune campaigns an hence create more value appropriation.

6.5 Build Networks & Partnerships Google needs to continue building partnerships, especially in the enterprise markets. Partnerships and

integration with database vendors like Oracle, ERP vendors like SAP, and operating systems like Linux

will enable it to continue adding value to its client base (seamless integration) while simultaneously

increasing switching-costs for its customers.

6.6 Conclusion Winning the search engine game is all about innovation and strategy. If the past is any indication of

the future, simply having the best product will not lead to a winning position. In a market dominated with

major players and where market disruption is only a new entrant away, Google can never rest. To win,

Google must continue to grow its customer base and API adoption and drive the market to standardizing

on its technology. In the first quarter of 2005, Google announced record revenues of $1.26 billion, up

93% year-to-year over 2004. This growth stems from stronger site traffic and increases in the size of the

Google Network. Google is clearly winning the battles - the question remaining is will they win the war?

Will they do what few others have ever done, beat Microsoft? As the future unfolds, we’ll have to google

it to find out…

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7 Appendix 7.1 History of Search Engines and Directories

Below is a table showing a summary of the history of search engines and directories. This table is

updated as historical events occur within the search engine industry and as new information becomes

available about past search engine history.

Historical data last modified: 2005-03-2110

2005 R1

2005 March . . .

IAC/InterActiveCorp acquires AskJeeves . . .

2005 R2

2005 March 2005 March 2005 January 2005 January

Yahoo! Celebrates 10th Anniversary

Overture Renamed Yahoo! SMS

Gigablast Index Size 1,000,000,000+

AOL Search Relaunches

2004 R1

2004 November 2004 November 2004 August 19 2004 September

New MSN Search Google Index Size 8,058,044,651

Google IPO GOOG NASDAQ

Amazon launches A9.com Search

2004 R2

2004 August 2004 June 2004 June 2004 June

Yahoo! launches Local Search Engine

New MSN Search Technology Preview

AOL acquires Advertising.com

Yahoo! launches Yisou.com China

2004 R3

2004 June 2004 June 2004 March 2004 March

Ask Jeeves acquires Tukaroo Search

Google invests in Baidu Search China

AltaVista switches to Yahoo! Search

Google Gmail free email service

2004 R4

2004 March 2004 March 2004 March 2004 March

Yahoo! Toolbar with WebRank

AlltheWeb switches to Yahoo! Search

AskJeeves acquires Excite, iWon, My Way

Yahoo! Site Match™ powered by Overture

2004 R4

2004 February 2004 February 2004 February 2004 January

Yahoo! Web Search powered by Yahoo!

Lycos Search discontinued

Lycos Communities discontinued

New MSN Search BETA

2003 R1

2003 October 2003 October 2003 July 2003 June

Google acquires Sprinks

Yahoo! acquires Overture

Yahoo! to buy Overture Google AdSense

2003 R2

2003 April 2003 April 2003 April 2003 April

FindWhat acquires Espotting

Google acquires Applied Semantics

Overture acquires AltaVista

Overture acquires Fast/AlltheWeb

2003 R3

2003 March . . .

Yahoo! acquires Inktomi . . .

2002 R1

2002 December 2002 July 2002 March 2002 March

Froogle Gigablast Beta

LookSmart acquires WiseNut

Gigablast Pre-Beta

2002 2002 February . . .

10 Source: http://www.seoconsultants.com/search-engines/history/

21


R2 Google AdWords Select . . .

2001 R1

2001 October 2001 September 2001 September 2001 August

GoTo changes name to Overture

AskJeeves acquires Teoma WiseNut LookSmart

integrates Zeal

2001 R2

2001 May 2001 April 2001 February 2001 February

JoeAnt Teoma GoGuides Google acquires Deja Archive

2000 R1

2000 December 2000 October 2000 September 2000 September

Google Toolbar Google AdWords LookSmart acquires Zeal Media Espotting

2000 R2

2000 September 2000 June 2000 June 2000 May

Business.com Vivísimo Yahoo! Web Search powered by Google

Terra acquires Lycos

1999 R1

1999 November 1999 September 1999 August 1999 July

NBCi/Snap FindWhat AlltheWeb Disney acquires Infoseek

1999 R2

1999 June 1999 February 1999 January 1999

CMGI acquires AltaVista GO Network At Home acquires

Excite About.com

1998 R1

1998 October 1998 September 1998 September 1998 June

Lycos acquires Wired/HotBot Google MSN Search ODP/DMOZ

1998 R2

1998 May 1998 April 1998 .

Yahoo! Web Search powered by Inktomi Direct Hit GoTo acquires

WWW Worm .

1997 R1

1997 August 1997 July 1997 April 1997 February

Northern Light FAST Search Ask Jeeves The Mining Company

1997 R2

1997 . . .

GoTo . . .

1996 R1

1996 October 1996 June 1996 May 1996 April

LookSmart Archive.org HotBot Alexa

1996 R2

1996 January 1996 1996 .

BackRub Mamma Dogpile .

1995 R1

1995 December 1995 October 1995 September 1995 August

AltaVista Excite Inktomi Magellan

1995 R2

1995 August 1995 June 1995 May 1995 February

DejaNews MetaCrawler SavvySearch Infoseek

1994 R1

1994 December 1994 July 1994 April 1994 April

First W3C meeting at MIT Lycos Yahoo! WebCrawler

1994 R2

1994 January 1994 . .

Galaxy Open Text . .

1993 1993 December 1993 December 1993 December 1993 November

22


R1 RBSE JumpStation WWW Worm Aliweb

1993 R2

1993 August 1993 June 1993 March 1993 March

Mosaic Web Browser WWW Wanderer Jughead First email message

sent by Bill Clinton

1993 R3

1993 February . . .

Architext . . .

1992 R1

1992 December 1992 July . .

Veronica Lynx Web Browser . .

1991 R1

1991 May 1991 April 1991 April .

WWW Server Production Gopher WAIS publisher

fed search engine .

1990 R1

1990 December 1990 . .

WWW Server Prototype Archie . .

7.2 Value Capture Strategy of Followers In this section, we discuss the uniqueness vs. complementary assets strategy for value capture among

some of the followers in the industry. Specifically, we explore Infoseek, Lycos, Inktomi, Ask Jeeves and

AltaVista.

• Infoseek (1995-2001) originally hoped to capture value through uniqueness – combining a manually

maintained directory with a spidered index – and charge for searching. When that failed, the popular

search engine shifted to depending like others on banner ads. Disney took a large stake in the

company in 1998 and tried building complementary assets by going down the "portal" path that other

leading search engines had followed. The site was also renamed "Go." Its failure to maintain

uniqueness or build strong complementary assets caused Disney to stop Go's own internal search

capabilities abruptly in early 2001. Today, Go remains operating, powered by Yahoo!

• Lycos (1994; reborn 1999) operated one of the web's earliest crawler-based search engines. Lycos

stopped depending on that spider in 1999 and instead now outsources for its search results from Ask

Jeeves.

• Inktomi (1996; acquired 2003) grew based on the uniqueness of its powerful search engine - a

technology called "Concept Induction™" to automatically analyze and categorize millions of

documents incorporating algorithms that model human conceptual understanding of information. Its

failure to build complementary assets resulted in it being acquired by Yahoo! in 2003. Its search

engine lives on as Yahoo! Search.

• Ask Jeeves (1998; reborn 2002; acquired 2005) originally hailed as the "natural language" search

engine didn't really have the ability to understand language. Instead, Ask Jeeves had over 100 editors

monitoring what people searched for, then hand-selecting sites that seemed to best answer the queries.

23


Such an approach is good for the most popular queries but doesn't help when people want unusual

information. Ask purchased Direct Hit in early 2000, to make it more comprehensive. The company

failed to capitalize on that technology, and tried again by purchasing Teoma in 2001. In 2002, it

shifted over to relying on Teoma for nearly all of its matches. It was acquired in 2005 by

InterActiveCorp (IAC), and still lives as Ask.com.

• AltaVista (1995 - 2003) was the Google of its day. AltaVista offered access to a huge index of web

sites, when it launched in December 1995. The search engine quickly grew in popularity, driven by

uniqueness. It was re-launched as a portal (an attempt at building complementary assets) in October

1999, entering an already crowded field and taking its attention away from uniqueness - the quality of

its search results. It paid the price as unsatisfied users flocked to newcomer Google. Throughout

everything, AltaVista's crawler has kept going. It was acquired by Overture in 2003 which is now part

of Yahoo!

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