history-of-google

The History Of Google Business Model From Its First Billion

We’re in an era of great inspiration and possibility, but with this opportunity comes the need for tremendous thoughtfulness and responsibility as technology is deeply and irrevocably interwoven into our societies.

This is what Sergey Brin said in the 2017 Alphabet founders’ letter.

When search seemed to be a solved problem PageRank showed they had just scratched the surface

When Page and Brin managed to create a search engine that was 10x better than competing engines, it made clear that search was all but a solved issue. At the end of 1990s Page came out with its algorithm, PageRank, which managed to rank the entire web based on relevance and authoritativeness of the web pages it indexed.

It took off right away! It was at that point that many of Google’s competitors understood that search was just at the embryonic stage. It was by then that Google had already taken over the search market, yet revenue was still far away.

When Page and Brin saw advertising as the worst business model for search

the-future-of-google

Bacn in the days, Brin and Page didn’t hide their resentment toward the advertising business model, which was the prevalent model for search. Indeed, in a paper “The Anatomy of a Large-Scale Hypertextual Web Search Engine” where Page and Brin presented their first prototype of Google. With a full text and hyperlink database of at least 24 million pages, in a paragraph dedicated to advertising, they explained: “We expect that advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers.

The main issue they had toward advertising was the fact that it was biased and it caused a lot of spam in search results. Indeed, when they met Bill Gross, founder of GoTo, which would later become Overture, the encounter might not have been among the most cordial. That’s because Bill Gross had figured the market for advertising had massive potential, as he introduced an auction-based system for bidding businesses, based on performance and clicks. 

However, this was still back when Page and Brin were two academics completing their Ph.D. at Stanford University. The transition to becoming businessmen would take soon to arrive. Indeed, as venture money was soon to be over a plan B was needed. 

In addition, as Google managed to rank advertising based on relevance (for instance, by ranking higher those ads that got more clicks) advertising became a possible option. As Larry Page pointed out in the first Google letter to shareholders:

Advertising is our principal source of revenue, and the ads we provide are relevant and useful rather than intrusive and annoying.

Google revenues start to take off, yet the company would take a few years to become a “unicorn”

By 2000 Google was already a key player in the search industry. However, it wasn’t yet in the safe zone at a financial level. Indeed, in 2000 Google made $20 million in revenues. Even though it had launched its AdWords network, which would allow it to speed up growth Google business model was still transitioning.

Some pieces of the puzzle were still missing. However, the first massive deal came into the door.

Google deal with AOL as the first traction phase

By 2002, Overture was still a valid competitor for Google, yet, it was losing ground. Overture had managed to grow thanks to a series of deals. One of the leading deals was with – at the time – one of the most successful portals, AOL. However, in May 2002 the agreement between AOL and Overture was to expire.

It was time for a battle, which would finally allow Google to have its chance for the second stage of massive growth, both regarding users acquisitions, then revenues. As reported in the book “Googled: The End of the World As We Know It” Page escorted his head of business development and sales, Mr. Kordestani,  “I want us to bid to win.” Whether or not this story is apocryphal, there is no doubt that the AOL deal played a crucial role in Google‘s future growth.

The missing piece for Google business model: the launch of AdSense (Google network websites)

Back in 2003, Google acquired Applied Semantics, which as reported at the time on Google blog:

Applied Semantics’ products are based on its patented CIRCA technology, which understands, organizes, and extracts knowledge from websites and information repositories in a way that mimics human thought and enables more effective information retrieval. A key application of the CIRCA technology is Applied Semantics’ AdSense product that enables web publishers to understand the key themes on web pages to deliver highly relevant and targeted advertisements.

Google was primarily targeting technology from Applied Semantics called AdSense. It was the missing piece of the puzzle. In fact, with AdSense, Google could finally offer targeted ads within websites of partners that joined the program. In short, Google would provide businesses with the chance to show their banners on the estate of those blogs which had become the heart of the web back in the 2000s. It would also allow those blogs to jump from being amateurs to make some money via advertising. It was all tracked and based on the context of the page.

The AdSense value proposition was quite compelling. As pointed out on a 2004 financial report Google would “generate revenue by delivering relevant, cost-effective online advertising. Businesses use AdWords program to promote their products and services with targeted advertising. Also, the thousands of third-party websites that comprise our Google Network use our Google AdSense program to deliver relevant ads that generate revenue and enhance the user experience.

AdSense would become a critical part of the business.

Google embraced the whole web with its business model

At that stage, Google was ready to take off. I pointed out time and time again that when all the pieces of a business model are in place, that’s when the company is ready to take off for years to come. Back in 2003 when Google had finally fine-tuned its business model, it had three primary constituencies:

  • Users: Google provided users with products and services that enabled them to find any information, quickly
  • Advertisers: Google AdWords program, the auction-based advertising program allowed businesses to deliver ads both to customers on Google sites (for instance, the search page) and through the Google Network (any blog or site part of the AdSense program)
  • Websites: Google free products, Google AdWords and Google AdSense embraced the whole web. While users get information for free and quickly. Businesses could make money by sponsoring their products on Google and via Google network. Publishers could also quickly monetize their content

Google gains traction, and it goes from less than a billion to over ten billion in revenues in three years

Once the business model had all the pieces, needed growth became the norm. If at all, Page and Brin had to make sure not to have Google implode for hypergrowth. Thus, the hardest challenge might have been managing hypergrowth that would continue for over two decades.

Google has become Alphabet

In 2014 Google restructured the company as Alphabet, with Google as a subsidiary. Beyond Search, today Alphabet offers services like YouTube, Maps, Play, Gmail, Android, and Chrome to billion of people worldwide.

Where does Google stand today?

The Google business model is way more diversified today than it was back in 2000. In 2017 Advertising still represented 86% of its revenues. Google – now Alphabet – also devoted part of its revenues in investing in bets which might become its next cash cow. Today those bets only represent over 1% of the total Google turnover.

Google and the rise of AI

As reported in the 2017 founders’ letter Google now uses AI for several aspects comprised of its products:

  • understand images in Google Photos;
  • enable Waymo cars to recognize and distinguish objects safely;
  • significantly improve sound and camera quality in hardware;
  • understand and produce speech for Google Home;
  • translate over 100 languages in Google Translate;
  • caption over a billion videos in 10 languages on YouTube;
  • improve the efficiency of data centers;
  • suggest short replies to emails;
  • help doctors diagnose diseases, such as diabetic retinopathy;
  • discover new planetary systems;
  • create better neural networks (AutoML);
    … and much more.

The rise of voice search and the battle ahead

The next major battle for Google will be in voice search. As Google has become smarter, it has also managed to understand more and more users intent. Will Google manage to be the dominant player in this rising industry?

Read next: How Does Google Make Money? It’s Not Just Advertising!

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Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

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