Google - The Rise of a Digital Conglomerate

The expansion of Google and the economics behind their growth strategy offers interesting avenues for study as part of your A2 micro course. This document asks a simple question “Which industry is Google in?” The answer(s) will reveal much about the nature and ambition of Google as a business and the economics of contestable markets and monopolistic markets.

Defining an industry An industry refers to the production of an economic good within a market. It can also refer to any people or companies involved in the production of a good. In the case of Google, although it my seem that it is competing in the search engine industry, it in fact gets its revenue from advertising, and so it would be more appropriate to identify it as an advertising company.

Which industry is Google in?

1. Web search (this is the core service) - Wired magazine reported in October 2010 that Google remains a web search engine that has grown to command 6.4% of all web traffic (approximately 34000 searches per second). Google commands 97% of searches through Apple's iPhone. It has recently been improving its service by introducing Google instant where it tries to predict what is being keyed in to speed up search times by 2-5 seconds per query. 2. Advertising agency - Google is now the world’s largest advertising agency e.g. through AdSense and Adwords. This strand of the business produces the lions share of revenue (98% of total revenue) and consequently the balance sheet was knocked by the global fall in marketing spending during the 2008 recession. Nevertheless, in 2009, Google’s advertising revenue amounted to US$23 billion from AdWords, its main advertising product. 3. Cloud computing services (apps) such as e-mail, address books, storage, collaboration tools (including Google docs) and business applications. Although Google’s apps account for less than 10% of global document/presentation creation and work flow (81% of people still use Microsoft Office) in terms of online viewing and sharing, Google has cornered the cloud computing market, although this may change after the release of Microsoft’s own online office application in May 2010. 4. Printing business: New integration between Google docs and Chrome will allow Google apps users to print off a document on any internet enabled printer around the world 5. Google finance, in competition with Bloomberg, Reuters and Yahoo finance. Like most non-professional trading platforms the data is delayed by 15 minutes 6. You Tube - video service provider (a challenger brand to TV and film industries). YouTube has famously failed to make a profit thoughout its existence, mainly because the high cost of bandwidth offsets any revenues that might be gained from advertising. Through a large number of lucrative deals with major news and film providers such as Sony and CBS, Google is hoping that 2010 will be the year that advertising revenues exceed bandwidth and licensing fees. 7. Google TV - trying to encourage people to access the web through their TV screens http://www.youtube.com/watch?v=U4Qiz-q0DxM - some background here 8. Google Me - a film starring Jim Killeen. After typing his name into Google, Jim Killeen tries to arrange to meet and interview people from all over the world who share the same name. 9. Web browsers - with Google Chrome (third most widely used Internet browser in Oct 2010) which competes with the likes of Mozilla Firefox and Internet Explorer in the Web browsing industry. 10. Operating system developer - Android, is a direct challenge to in-house operating systems developed by handset manufacturers. It has been prevalent recently on phones by HTC, who hope that the new technology might help to increase competitiveness in the mobile phone market where Apple and RIM are becoming so dominant. 11. Google is also one of the world’s biggest manufacturers of hardware (servers), though in fact the servers are produced by Dell 12. An energy company - Google will be investing around $200 million dollars in the Atlantic Wind Connection as Google looks to expand capacity in wind farms to provide the energy for it’s servers. 13. A Library - Google books has embarked on a project to scan many works of literature into a central database, though this movement has created opposition from authors who are wary about digital rights management 14. Web mapping - Google provides the non-commercialised service Google Map to users through satellite imagery. Google Maps incorporates Google ride finder and Google transit. The site also includes Google Ditu, Google Moon, Google Mars, Google Sky, Google Street View, Google Aerial View, Google Latitude and Google Flu Shot Finder. 15. Satellite Imagery - through a joint venture with NASA, Google Earth was launched in 2005. Google Earth displays a virtual globe, containing real-life images of every corner of the world which can be viewed at all angles, ranging from a bird’s eye view to a view parallel to the ground (in some places). Currently comes in two main versions: Google Earth, a free version with limited functionality, and Google Earth Pro, intended for commercial use at $399 a year (a good example here of the Freemium business-model! ) 16. Translator - introduced in 2007, Google Translate is a statistically-based translation service. With the ability to translate between 35 different languages, this basic service is provided free. They have recently upgraded the service to make translating quicker by installing software which works out the language you want by the words you type in so that users do not have to spend time scrolling through and selecting the different languages. The service also enables users to give feedback on the translation so they can say whether its wrong and can give a better translation; this is used by Google to built a better product and brand. 17. News Agency - launched in 2002, Google News offers a news service that is compiled solely by computer algorithms without human intervention. Instead of employing editors, Google News provide links to news, articles, and photographs from other news organisations all around the world. In 2007, Google News had between 5 to 10 times as much traffic as NY Times, MSNBC, the Guardian and Digg combined. 18. Shopping - Google has a shopping option on it’s home page which uses the innovative ‘google checkout’ technology As google has the unique advantage of having product on the web in it’s database Google Checkout allows quick and easy buying from stores across the web allowing one to track all their orders and delivery information in one place. It also has spam control and fraud protection technology enabling the user to use one login everywhere. 19. Scholar - Google Scholar is a freely accessible web search engine that indexes the full text of scholarly literature across an array of publishing formats and disciplines. Released in beta in November 2004, the Google Scholar index includes most peer- reviewed online journals of Europe and America's largest scholarly publishers. 20. Social Networking - With Gmail already a popular choice of email amongst many consumers Google has been looking at entering the social networking space with Buzz 21. Dictionary - Google dictionary was created to compete with dictionary.com and has done rather well since its release in 2009. 22. Another Google Failure - Knol was Google’s attempt to provide competition to Wikipedia’s dominance over the ‘online encyclopedia industry,’ however it ultimately led to failure and it has not really threatened Wikipedia at all. http://knol.google.com/k 23. Photography - Google introduced Picasa which can be used for photo organisation and editing software. It has become widely used by people who find it a useful way of organizing their photographs in different folders as well as using it to edit them. It is also a photo-sharing website 24. Telecommunications - Google phone is a relatively new product which enables users to call others, either for free, or at extremely reasonable prices. With a model which is very similar to that or Skype, google phone users can call other users for free, and can call and landlines or mobiles for less than 1p per minute. Another product, witch's industry itself is hard to define that google has created is called ‘google chat’. The instant messaging services that also comes with a google mail account allows any users to communicate with others who are online at the same time.

Google’s core aim Google was set up by Lary Page and Sergey Brin whilst they were studying at Stanford University in the US in 1998. Google’s initial business objective of "to organize the world's information and make it universally accessible and useful" would suggest that Google’s industry goes beyond the profit maximisation of ads. Google aims to develop high quality internet-based services for its users as well as generate revenue to fund its investment.

Contestability Although the advertising and search engine industries are highly contestable due to low start up costs, the homogeneity of the product and readily-available information, Google’s commitment to developing its brand name creates high product differentiation and brand loyalty, giving Google monopoly power over its competitors. The brand name and internal economies of scale that Google has developed both act as significant barriers to entry to other firms wanting to enter the market. Google has 65% of the search engine market in the USA.

Profit maximisation? Google does have the aim of maximising profit but in a form that may often go unnoticed. They do this via the process of Double Marginalization and involves, for Google at least, giving things away for free. To access the information that google can provide you have to first buy a computer, then acquire Internet before you can get on to Google. Even though Google only receives payment for the last stage the consumer considers the cost of the entire process.

When thinking about the issue like this it is easy to realise that higher costs to the consumer up the process (in computer etc) would mean less demand throughout the chain and lower profits for Google. This then implies the opposite is true as well: if profits are reduced by complementary goods increase in price then any decrease in the price of the complementary good will serve to increase profits for Google.

How then does google force the price of ‘upstream’ industry down? It increases competition to take away from monopolistic power such as that held by Microsoft, for instance by producing Google docs. Google docs, as well as any other Google product, don’t need to be profitable or even have a large market share; they just need to increase competition and so lower prices to allow the main information provision part of the business to flourish. When viewed like this it is hardly surprising that Google now exists in most industries. It has become a digital conglomerate.

Google and behavioural economics Behavioural economics also helps to explain Google’s dominance. Consumers demonstrate strong default or habitual behaviour when choosing a search engine. “Just Google It” has become a staple phrase for millions! Google’s dominance can been seen in it’s market share of the search engine market. It holds 85% with it’s next biggest competitor, being Yahoo, on 6.33% followed by Badiu on just 3%. This shows that google is one impressive company- indeed to stand up to China and tell them indirectly that they had ‘ cyber attacked Google’ shows it’s significance as a world player.

Google is a worldwide phenomenon transversing culture, continents and in the processes being repeatedly creative, due to the large acquisition spree embarked upon by Eric Schmidt google is now prevalent in many facets of internet services

Although regarded as the most prevalent search engine Google does in fact perform many more tasks than simply searching the web. Its finance service is a simple, sophisticated resource providing information about financial markets across the world. Its maps service shows how it doesn’t simply provide as a search tool for the web allowing users to simply locate their position and act as satellite navigation on many mobiles. Their shopping branch is another genius addition; by comparing all the web prices for a product and displaying them so you can choose the cheapest website for your chosen good. So there really are many examples of how Google doesn’t just act as a search engine or a tool for advertising but instead provides a simple to use resource for many by amalgamating information together into a simple to view format.

Google has essentially become a brand with its core business model being a search engine. Therefore to improve its search engine utility and thereby receiving more ‘clicks’ on the site, is another way of promoting itself to attract further advertising from other firms and also launch into new products with a brand name already established and trusted. This it has done in the past few years - and successfully. Indeed, Google’s annual revenues have increased by 23% to $7.29 billion because of it. Google’s new mobile and display products (such as Android) is one sign of entering a new market.

Basically anything that gets more people searching the web - on a laptop, mobile or tablet device will strengthen Google’s hand. Little wonder that they are prepared to invest in new applications that can boost net traffic.

Google has had to retain this loyalty and has of course had to become innovative. One could say that a section of the Google industry is merely an innovator. This has been induced through certain initiatives such as “20% time” - where employees are encouraged for one day out of the working week to think of a product they would like to improve, or indeed create. Google mail came out of this, as have many other creative ideas, and for this reason Google is the efficient and up to date firm that we all know.

An information distributor or educator: As a site with over 2 billion searches each day, one may argue that the easiest way to get information to as many people as possible is to put that information on Google. Although it is mainly focused on the collection and organisation of other sources of information, one might go as far as to say that it is Google’s responsibility to distribute to the masses “healthy” or correct information. Whether it’s a student researching for an assignment or trying to view the newest viral video from YouTube, Google’s versatility means it can be used as an excellent form of education. The advantages of personal experience and human interaction notwithstanding, you can find almost everything you could need to know about by using Google.

The Google Culture Google’s management are focused on creating the optimum working environment that gives the best results from employees and keeps Google at the head of the market. It does this in a number of ways:

● Maintaining a small-company feel. Almost all employers eat in the office café, and are encouraged to engage with members of different teams within the company. ● Weekly all-hands (“TGIF”) meetings. These allow employees to pose questions directly to Larry Page or Sergey Brin, and share innovative ideas. ● Offices around the world and dozens of languages are spoken by Google staff, creating a team that reflects the global audience that Google serves.

The Google Offices Corporate HQ is in Mountain View, California. All Google office share some “essential elements”: ● Bicycles or scooters - for efficient travel between meetings. ● Cubes, yurts and huddles - all communal rooms designed to generate a creative atmosphere. Very few solo offices. ● Dogs, lava lamps, massage chairs, large inflatable balls - to add to the creative atmosphere. ● Laptops everywhere - standard issue for mobile coding, emails on the go and note- taking. ● Many leisure facilities - such as pool tables, volleyball courts, assorted video games, pianos, gyms etc. ● “Grassroots employee groups” - such as meditation, film and wine tasting.

Suggested Study resources

The economics of Google (Tutor2u blog) Google profits lifted by advertising revenues (BBC news) Google’s acquisitions (Wikipedia) - a case study in external growth! Video interview with Eric Schmidt (BBC news)

Google has a great sense of humour - Check out these posts that were produced on April Fool’s Day:

Google Wave notifications: Google has announced a new notification service for its Google Wave account – a man who comes up and physically waves at you whenever you have a new message.

Google Docs: Google has taken its cloud computing service to another level, offering to store everything from keys to train tickets in Google Docs so "you'll never have to worry about finding them again".

Google Translate: Ever wanted to talk to the animals? Google Translate makes the dream a reality, with an Android app that translates "words and phrases that are common to a species".