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 i SLOAN FELLOWS PROGRAM IN INNOVATION & GLOBAL LEADERSHIP TABLE OF CONTENTS 1 INTRODUCTION..............................................................................................................................................1 2 SEARCH ENGINE INDUSTRY EVOLUTION .............................................................................................1 2.1 INDEXING – FINDING CONTENT...................................................................................................................2 2.2 QUALITY OF RESULTS .................................................................................................................................2 2.3 MARKET TRENDS ........................................................................................................................................4 3 STRUCTURE OF THE INDUSTRY ...............................................................................................................5 3.1 PORTER’S FIVE FORCES ANALYSIS..............................................................................................................5 3.2 SYSTEM MODEL ..........................................................................................................................................6 4 VALUE CAPTURE IN THE ONLINE SEARCH INDUSTRY.....................................................................9 4.1 VALUE CREATION VS. VALUE CAPTURE .....................................................................................................9 4.2 CRITICAL FACTORS OF VALUE CAPTURE ..................................................................................................11 4.3 VALUE CAPTURE ACROSS FIRMS -UNIQUENESS VS. COMPLEMENTARY ASSETS.......................................11 5 GOOGLE’S COMPETITIVE POSITION ....................................................................................................13 5.1 VALUE CHAIN ...........................................................................................................................................13 5.2 CREATING VALUE .....................................................................................................................................14 5.3 CAPTURING VALUE ...................................................................................................................................14 5.4 DELIVERING VALUE ..................................................................................................................................15 5.5 COMPETITIVE RESPONSE ...........................................................................................................................15 5.6 CREATION & CONTROL OF PROPRIETARY INDUSTRY STANDARDS ............................................................16 6 GOOGLE’S FUTURE STRATEGY ..............................................................................................................18 6.1 GROW CURRENT CONSUMER MARKETS....................................................................................................18 6.2 PROVIDE UBIQUITY ACROSS DEVICES .......................................................................................................19 6.3 EXPAND GLOBALLY ..................................................................................................................................19 6.4 PENETRATE ENTERPRISE MARKETS ..........................................................................................................19 6.5 BUILD NETWORKS & PARTNERSHIPS ........................................................................................................20 6.6 CONCLUSION.............................................................................................................................................20 7 APPENDIX .......................................................................................................................................................21 7.1 HISTORY OF SEARCH ENGINES AND DIRECTORIES ....................................................................................21 7.2 VALUE CAPTURE STRATEGY OF FOLLOWERS............................................................................................23 ii SLOAN FELLOWS PROGRAM IN INNOVATION & GLOBAL LEADERSHIP 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 1 SLOAN FELLOWS PROGRAM IN INNOVATION & GLOBAL LEADERSHIP 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. Indexability 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 Spiders first robot. Bots were a disruption to the Hierarchy existing state of search technology Bot Based Search WWW Worm allowing computers to automatically Archie index and re-index sites. While they 1990 2000 2010 Figure 1: Disruptive innovation in index-ability for search significantly increased the number of sites 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