While a business model does create a long-term competitive advantage, being able to innovate it over time is critical. If Google itself doesn’t want to be disrupted, it will need to evolve its business model.
This might imply a complete change in a few years on a few things that comprise its business model according to the business model canvas like key partners, distribution channels and customer relationships.
- Google key partners
- Google key activities
- Google’s value proposition
- Google customer relationships
- Google customer segments
- Google key resources
- Google distribution channel
- Google cost structure
- Google revenue streams
- Other business models examples
Google key partners
Each day billions of people get online, and they “google things up.” For many of those people, Google is de facto the web. Yet it hasn’t always been this way. There was a time, back in the late 1990s when the web was called AOL.
Indeed, probably more than half of the traffic on the internet went through this portal. When Google launched, while it had figured a great product and search engine, it didn’t have a business model yet.
For instance, by reviewing some of the thoughts of Google founders Page and Brin, it seems clear that they thought advertising wasn’t well suited for a search engine:
In the paper, they pointed out their “mixed feelings” about the advertising business model. As they believed any search engine based on the premise of advertising in a way went against its primary mission.
However, over time Google figured a way to show advertising in a way that would not affect user experience.
Since the beginning traffic going through Google‘s digital properties (its search pages) has been a critical ingredient for its long term success.
That is also why initially Google made a deal with AOL to be featured as a primary search engine on its portal, which gave it massive visibility.
AOL on its hand was offered such a good deal, and it also saw search as a secondary feature, that it couldn’t say no to Google. Therefore, while we give for granted the billions of queries – that each day – go through Google.
We miss the fact that Google had to build up a vast distribution network that each day guarantees it this traffic. This isn’t a simple network, but rather a massive infrastructure worth billions of dollars each year.
How does this infrastructure look like? There are a few elements:
One example is the multi-billion dollar deal with Apple to have Google featured as a default search engine on Safari. Traffic doesn’t come from thin air; it comes from physical devices.
However, a vast array of devices (take iPhones or iPads) are operated by Apple IOS operating system and its internet browser (Safari). To be featured on those devices Google pays a substantial amount of money.
Open handset alliance
As pointed out above mobile users have grown massively in the last decade. This implies that whoever takes hold of the mobile content consumption can build a sustainable business model for years to come.
With other 84 technology and mobile companies, Google forged the Open Handset Alliance. In fact, in 2005, Google acquired Android (what would become the prevailing operating system for mobile).
Just after a few months from the launch of the iPhone by Steve Jobs, Google announced its Open Handset Alliance. The aim was to build “the first truly open and comprehensive platform for mobile devices.”
The business model behind the Open Handset Alliance is a simple one. Google provides its free of charge, the operating system for mobile devices, Android, and in exchange for many apps, like Google Play and Google Chrome come pre-installed.
It wasn’t just traffic the critical ingredient for Google success. It could offer relevant and high-quality content compared to any other portal, or search engine.
On the one hand, Google had figured out how to offer relevant ads by introducing AdWords with its quality score. On the other hand, it needed to balance that with high-quality organic content from the web.
While Google did offer that by indexing the entire visible web, it managed to improve quite a lot when it offered to any publishers (independently from their brand) the possibility to monetize their content via the AdSense network.
Comprising millions of websites around the world; those websites allow Google to tap into their sites to place banners from businesses that want to advertise their services. Google shares the advertising revenues generated from those banners with these publishers.
A great payoff of Google is its ability to send qualified traffic to any site, based on searches people perform. For instance, if I search for “car insurance” on Google, I will find a few text-based ads on top of its search results.
At the same time, I’ll also find may other organic results, that didn’t pay a dime to be featured there. This is possible because Google has a massive index of the web, and if that content is relevant, it will be featured on Google‘s first page.
Being on Google‘s first page might turn in substantial income for those sites able to rank through it. In particular, web owners can submit their website via Google Search Console (a platform to monitor the indexing of a site) to control how Google sees the site.
This allows publishers – independently from being part of Google AdSense – to “control” their rankings vis Google organic search engine. Millions of webmasters each day help Google index their content, and make it easier for the search engine to keep a qualified index of the web!
Google key activities
Google mission is to “organize the world’s information and make it universally accessible and useful.”
This bold vision requires Google keeps innovating in the search industry, while it also looks forward to new ways the web is developing. From voice search, visual search, machine learning and more.
Google needs to invest first of all in a robust and secure infrastructure that makes it possible for the company to handle each day billions of queries. This implies a few key activities:
- At a basic level, Google has to keep innovating its search algorithms. This alone requires substantial investments.
- As voice search is growing it is critical that Google keeps innovating by also offering new products. For instance, Google launched its new voice devices, such as Google Home, which compete against other tech giants, like Amazon‘s Alexa and Cortana.
- Google still generated most of its revenues from advertising. A business model based on a single source of revenue might not be sustainable in the long run. That is also why Google is investing resources in betting in other areas that might lead to the next innovation.
Google’s value proposition
Instead, several value propositions will serve the purpose of keeping key partnerships that allowed Google to scale up and let it today to maintain its market dominance. Thus, if I had to summarize the fundamental value propositions those would be:
The value proposition for billion of users
Free search engine for billions of users around the world. This is how Google managed to grow quickly. A great, reliable and free service that allowed users anywhere in the world to find the information they needed, fast.
Tools and productivity apps
Besides its free search engine, Google also offers a set of free tools and apps (to mention a few: Gmail, Google Analytics, Blogger, Google Books, Google Chrome and many others). Those free tools are among the most used in the business world.
Google advertising business
The core of the Google business model is advertising, focused on targeted text-based ads for businesses offered via the AdSense network.
Before Google existed,d there was no way for marketers to know in detail all the conversion metrics of their ads. While Overture was the first in offering CPC advertising, Google managed to scale it up at massive levels.
Before Google disrupted the advertising world and took over the digital advertising market, a few established publishers could make money via advertising.
With its AdSense network, Google also allowed small publishers to monetize their content.
In a way, it was a democratization of the digital advertising market, where anyone with the content that got the most eyeballs and attention could monetize on it, independently from its brand.
Google AdSense is still an essential element of Google value proposition.
Google customer relationships
First, Google needs to keep offering targeted ads that allow those businesses to generate leads. Second, Google is as worth as much as the qualified traffic it can generate.
This implies that Google needs to keep focusing on making sure that users go back to its search results pages. Indeed, even if users do not pay for Google search results, they are the products.
As any attention merchant, Google is selling back their attention. That means Google will need:
Salesforce able to support AdWords (now Google Ads) businesses
Offer the proper support to businesses part of the AdWords network requires a substantial investment in business development people able to expand the list of companies that join Google’s advertising network. This implies local initiatives, training, and support to those businesses.
Companies like DuckDuckGo have built their business on Google weakness in terms of privacy. If those concerns are not addressed Google might be losing an increasing chunk of users, willing to switch because of privacy concerns
Google customer segments
In terms of value creation, with its massive business model, Google has several “customers” not intended only to businesses paying Google for service but also those people or organization that contribute to Google financial success. In that respect we have:
Free internet users
Internet users around the globe. Even though Google is a free service, Google’s users are among the most important “customers.” If Google lost them, there would be no business at all.
Agencies, marketers, and businesses
Those who are bringing big bucks to Google are agencies, marketers and businesses part of its Ad Network. They are driven by the fact that Google is an incredible source of targeted, and qualified traffic.
AdSense Network Members allow Google to offer targeted ads on its web properties.
It is important that Google keeps offering those publishers enough incentives to keep monetizing their content via the AdSense platform.
I treat them here as “customers” because Google still needs to “convince” them to use the AdSense platform to monetize their content.
Google key resources
Even though Google is a digital business, that might make you think the company has no real assets. This is far from the truth.
As of 2017, Google had $7.2 billion of contractual obligations, primarily related to data center operations, digital media content licensing, and purchases of inventory.
This implies a few key resources:
- The most basic thing of any site with a large number of traffic needs is a massive server infrastructure. Back in the late 1990s when Google was still in the very initial stage at Stanford, it brought down its internet connection several times, by causing several outages. That allowed its founders to understand they needed to build up a solid infrastructure on top of their search tool. Today Google has a massive IT infrastructure made of various data centers around the world.
- Another element to allow Google to stay on top of his game is to keep innovating in the search industry. Maintaining, updating and innovating Google’s algorithms isn’t inexpensive. Indeed, in 2017 Google spent over $16.6 billion in R&D, which represented 15% of its total revenues.
Google distribution channel
- global sales team which uses business development to keep growing Google operations
- Google deals and partnerships that bring it on billions of devices in the world
- The Deal That Made Google The Tech Giant We Know Today
- Why Google Success Was The Fruit Of Its Business Distribution Strategy
Google cost structure
With its over $110 billion in revenues in 2017, Google reported a $12.6 billion in net profits. This implies a few critical items in its income statements:
- traffic acquisition costs is a crucial metric to assess Google ability to generate value over the years:
- As we’ve seen R&D costs represented 15% of its total revenues, or $16.6 billion
- Sales and marketing represented 11.6% of its revenues or almost $13 billion
- Datacenters costs also represent another good chunk of Google cost of revenues
Google revenue streams
Google business model can be broken down into three main lines:
- Google advertising network
- Google other revenues (consisting of Apps, in-app purchases, and digital content in the Google Play Store; Google Cloud offerings and Hardware)
- Google other bets