Economics of Strategy

Google Inc.

Group 2

Milind Roy: PGP/21/155

Murali Siva: PGP/21/158

Arijit Goswami: PGP/21/259

Deepak Doguparti: PGP/21/267

Suresh Gutti: PGP/21/299

1. What were the key factors behind Google's early success?
Google, as a company, witnessed a meteoric rise in its growth and in market share. The following
factors resulted in its early success.
Mono-homing by advertisers
1. Differentiated platform
The advertisers preferred Google because of the low cost of advertising through Google. The
case mentions that in late 2003, Overture’s average CPC was $0.40, while Google’s average
was $0.30. Moreover, the technological advancements that Google made helped it to fine tune
its search algorithms and to roll out Google Analytics and mechanisms for calculating listing
relevance. This made it attract 2-3 times more advertisers than Overture.
2. Network effects
The advertiser side (the money side) valued the ability to interact with a large base of users
(subsidy side) and therefore, network effects were positive.
The differentiated platform functionality along with strength of network effects helped it to gain a
natural monopoly in the market.
Multi-homing by users
1. The users had options to choose amongst Yahoo!, AOL, eBay, Amazon, Microsoft etc. for the
services provided by Google. However, Google addressed this by rolling out services which
were of comparable or better quality than its counterparts. Gmail gave a huge storage space
which no other company could rival so soon.
2. Moreover, G-Chat and Google Voice were revolutionary that time. These factors made the
switching costs quite high for customers, especially when they had a lot to lose in terms of
features and services, even if not money.
Automation of search
While Yahoo! Had annual labor to categorize the websites, Google came up with an algorithmic search
engine, which led to easier, faster and more efficient directory classification. The search engine that
Yahoo! Purchased was not error-free.
Innovation for users
Google always aimed at making the work of the user simpler and lesser. This drove it to create G-Chat
and Google Voice for integrating websites with VOIP. Moreover, the company kept rolling out
surprises for users to result in customer delight. It created products that were pioneers in their field
and this gave Google a first-mover advantage (pioneer advantage) and also made it gain a huge
market share by getting people get used to these services for free.
Acquisitions
Google was always on look-out of companies that were making their mark in disruptive innovation
and this made it acquire YouTube and DoubleClick. These wise investments helped Google emerge
victorious when it came to leverage disruptive innovation.
Cost structure
Google never charged users for anything in particular. The revenue was generated on the supplier
side. Furthermore, even for advertisers, the average cost per click (CPC) was lesser than that of
Overture.
Values
The company’s values have been like 10 commandments. The 10 Golden Rules and the 10 statements
of philosophy (as given in Exhibit 5 and 4 respectively) gave the company its direction and prevented
it from deviating, especially when an engineer called a plan as “evil”.
Governance
Google had a very strong corporate governance structure and the trio held 33% shares and yet 80%
of the votes. This gave them a free hand to put their bets in futuristic innovations, without fear of
shareholders’ wrath.

Parameter Google Yahoo! (closest rival)

Possible first mover advantage
Timely automation of search
Making advertisers mono-home
Innovation
Cost structure
Acquisition of disruptive technology companies
Network effects
Total score 6 3

Legend
Favorable parameter
Unfavorable parameter

2. Do you expect the search business to become more concentrated (i.e., dominated by fewer
firms)? Is search a winner-take-all business?
Based on the current scenario it seems like search business is going to be more concentrate with few
firms dominating. Even if new firms come into the market with newer ways of searching, they will
either be acquired by the big firms or the technology being copied by the dominant firms. There might
be some local search engines which might be more popular in the localized market but the lions share
in the global market will be with few firms. This scenario could change if popular sites like Facebook
come up with newer ways for the search engines to work or a new disruptive technology comes up.
It is not likely to become a winner take all business although currently the highest market share is
with Google. The next dominant players will continue to be in the market and if a new search engine
or the current other search engine come with a good idea it would be hard to beat Google. There has
to be disruptive technology which can provide users with an experience which Google has not been
able to provide to compete with Google.
3. In addition to enhancing its core search businesses, should Google also branch out into new
arenas?
A