Posted on | December 19, 2008 | 2 Comments
I am not an expert strategist, but I’ve picked up a few tidbits over time. In school I learned that strategy leaves a trail – You can divine a company’s strategy by the products it launches, partnerships it forms, and companies it acquires. When I moved on to Booz-Allen, I learned that when you are the market share leader, grow the market – The NBA spends its marketing dollars growing the basketball market, not persuading you to skip baseball games. Finally, as a strategy executive, I’ve learned that the P&L is king – No framework beats the pro forma for isolating drivers, providing insight.
Ad Network Trinity
Network advertising has three basic cost drivers: ad acquisition costs, delivery platform costs and media acquisition costs (ex: P&G hires Razorfish to build a display campaign placing it on Platform-A who serves to Yahoo’s main page). Gross margin is distributed between the three levels in roughly equal proportions. That is, the advertiser acquirer, platform provider and publisher acquirer seek to make 25+% gross margins. Each also seeks to move up or down the value chain. Why? Because each piece of the value chain you capture increases your gross margin by 50-100%. For example, a network that either acquires its own advertisers or serves ads over proprietary properties can double its gross margins.
Google has a lot of initiatives including: search, iGoogle, Reader, Blogger, YouTube, Docs, Apps, OpenSocial, Android, Picasa, DoubleClick, Adwords, Adsense,… Clearly, they spend a lot of money “seeing what sticks”. Like 3M and Xerox before them, Google has learned that product innovation comes from enabling “skunk works”. But, looking beyond their dabbling, is there is method in their madness? Yes, and it’s based on two basic principles. First, Google has the pole position in the most rapidly growing segment of the ad market. So, if you’re the market share leader, grow the market. Second, per the Ad Network Trinity, Google focuses investment to maximize eyeballs and ad inventory on proprietary platforms. How?
- Build and acquire consumer utilities aggregating eyeballs.
- Over 75% of Google’s revenue comes from its search utility. Billions are invested in continuous software and hardware upgrades ensuring the most relevant, timely search results. The result, Google.com is consistently ranked the #2 most trafficked website reaching an astounding 29% of all internet users each day. What do these people do? They search, an average of three times each using Google as a roadmap to the internet. That’s important, because when Google sees traffic to a particular destination on that roadmap scaling, they buy it or subvert it.
- Few services grow exponentially. Google, Ebay, Napster and Skype are among the few properties to achieve this distinction. So, when a property came along that was scaling impressions exponentially, was positioned in an important new market (video) and had ad revenue potential, Google jumped. That was the $1.7B acquisition of YouTube, the #3 most trafficked internet site with a 16% daily reach. While Google has struggled to monetize YouTube thus far, it has successfully leveraged its platform pushing video widgets to sites across the internet acquiring traffic cheaply and subverting closed rich media properties.
- Blogger sites reach 7% of internet users each day (Alexa rank: #9). However, whether it’s the Blogger acquisition, the introduction of GMail or utilities such as iGoogle or Reader, Google invests heavily in functional aggregation utilities. While each is an extension of its core utility strategy, each also aggregates traffic for Google’s ad servers AND refers users to other members of the family enabling Google to avoid traffic acquisition expense.
- Build and acquire ad inventory aggregating ad spend.
- Adwords was Google’s first and greatest traffic monetization program achieving the Ad Network Trinity. Using Google tools, advertisers bid for placement on Google results pages rendered in response to user keyword searches. As ad placement is near natural search results, advertisers compete with the algorithm for clicks. They also compete against each other. Ineffective advertisers quickly run out of money. In search of greater revenue, Google eventually pushed its search box out to affiliates serving natural and paid results from AskJeeves to the smallest local site, paying out a portion of the resulting revenue.
- With Adwords advertisers, bidding platform and affiliates in place, Google then introduced a new ad unit, the contextual link. No longer were users required to search, Google’s algorithm was applied to page content to infer a set of keywords. The results were formatted as a links widget and syndicated to sites across the internet. Again, Google shared a portion of the revenue with the acquirer. Adsense now serves 26% of all online-ad-server calls (Attributor). Not satisfied with placing text ads on websites, Adsense was eventually extended to new ad types (e.g., display, audio, video) and outlets including newspapers, radio, TV.
- Its largest acquisition to date, the $3.1B DoubleClick buy was a declaration of Google’s strategic intent. It wanted the DART ad server, a utility that stands between advertiser and publisher serving display (graphical) and rich media (video) ads. Doubleclick serves 31% of all online-ad-server calls (Attributor). It also wanted access to display-heavy brand advertisers. With DART, Google ad sales teams effectively doubled their inventory on offer. However, what is often omitted in the DoubleClick analysis is that, when advertisers acquired through DART use the platform to serve impressions on proprietary Google properites, Google achieves the Ad Network Trinity.
- Subvert closed systems growing internet usage.
- Google, like Microsoft before it, learned that value accrues with utility. Since that time it has invested in a number of ways to enhance the utility of its core search product and to build new utilities to meet emerging needs. But, the corollary to this strategy is equally important. That is, when threatened by other rapidly scaling utilities, counter with an open source solution. That is, create the Unix to their Windows, the Firefox to their Explorer. OpenSocial is an example. As Facebook, a closed environment that uses Microsoft search, scales users it moves valuable traffic “offline”. OpenSocial attempts to open that network by: 1. breaking Facebook’s hold on the consumer’s identity data, and 2. turning its “status update” and other community features into commodities available on all platforms. The intended result: get people roaming, searching the internet again.
- In the early-2000′s consumer time began to shift to mobile devices. Mobile impression and search growth threatened Google with a loss of share. But, how to penetrate closed mobile devices? When 3G enabled mobile IP connectivity, it effectively expanded the internet to mobile devices. Apple “got it” first launching its iPhone, but Google followed quickly. Keeping with its core, software utility focus, Google launched a multi-prong effort to open up the most vulnerable piece of the architecture, the closed operating system… and Android was born.
- Chrome is Google’s multi-threaded browser. It has an a 6% share in early-adopter tech circles. The rationale behind Chrome is to make internet-based applications accessible by the browser more powerful. Why? Because of Windows, Microsoft’s closed system on the desktop. The more applications and functionality Google can move to the internet the more time consumers spend in a domain where it has an expanding inventory of utilities and a dominant share of the ad market.
- Have you heard of Gaudi? During Campaign ’08, Google began indexing political speeches. It plans to index all audio files over time. Why? Indexing the recorded word makes all video and audio files searchable. That drastically expands the content over which Google it can place search ads. Further, because they are the first mover with 100% share of this new segment, it also grows their share of total searches. Finally, the majority of these searches will be conducted on Google’s proprietary platform…doubling its gross margins.
I hope you find this description inadequate. So inadequate that you shoot holes in it here, on your blog or on Twitter. One other thing I’ve learned about strategy: Criticism improves it.
faberNovel, of Paris, has developed a thoughtful, thorough piece on Google. While I disagree with some of their support and conclusions, “Everything you always wanted to know about Google, but were afraid to ask” provides a good overview of Google’s major initiatives and attempts to provide a rationale for each.