Beyond the Search Engine: The Case

of Google 8

Google has become the epitome of online search. The popularity and success of
websites often depends on their page rank on Google, which shows the search
giant’s influence and market power. The search engine evolved into an innovative
money-spinning machine, which consistently outperforms its peers. In time, it also
extended its activities beyond pure web search, disrupting industries as diverse as
advertising, broadcast and cable TV, or mobile telephony—and the list goes
on. However, these additional business segments were made possible through the
stunning success of its advertising business model. Google’s online advertising
business was initiated two years after the company’s incorporation in 1998,
representing the cornerstone of its market success. Although the company brought
further business model innovations to the market, the present section solely
discusses its advertising business, as advertisements have been, up to now, the
source of over 90 % of its total yearly revenues.
At the time of Google’s web domain launch, in 1997, one year before the official
company founding, the search engine industry was split between a few early
entrants: Infoseek, Yahoo, Lycos, Excite, AltaVista and GoTo.com. All these
search platforms were launched between 1994 and 1995, already having several
years of market experience before Google. Yahoo enjoyed a leadership position,
offering a better-than-average service through its team of editors, who individually
selected and indexed websites. GoTo.com was another noteworthy competitor, with
a well-functioning revenue mechanism, yet unexceptional search results. In turn,
Google took the search result quality to a new level, by making use of its own,
patented PageRank algorithm.
By applying PageRank, Google succeeded in perfecting and later brilliantly
monetizing its search capabilities, although it did not itself pioneer the concept of
search engines. The PageRank algorithm allowed users to find the most relevant
results for their searches, uncompromised by results that were heavily advertised
and for that reason well-ranked, as in the case of its competitor GoTo.com. Unlike
GoTo, which ranked search results based on the amount of money paid by
advertisers, Google showed unbiased results based on PageRank. In comparison

# Springer International Publishing Switzerland 2017 81

K.-I. Voigt et al., Business Model Pioneers, Management for Professionals,
DOI 10.1007/978-3-319-38845-8_8
82 8 Beyond the Search Engine: The Case of Google

to GoTo, Google focused on first serving search customers themselves, and not the
advertisers. This in turn led to the development of a pioneering business model
among search engines, by reconsidering the value proposition and value capture
logic. Moreover, the number of search customers grew, and so did the number of
advertisers, which brought Google its remarkable market success.

8.1 Founders

Google was founded by Lawrence (Larry) Page and Sergey Brin in 1998, in
Stanford, California. Page, the son of two computer science professors, enjoyed
early access to technology in his family home, using his first computer at the age of
six. Later on, he graduated in computer science at the Stanford University, where he
first got in contact with Sergey Brin. Brin was born in Moscow, and moved with his
family to the U.S. His father worked as a mathematics professor at the University of
Maryland, where Brin studied mathematics and computer science. After complet-
ing his undergraduate degree, he went on to study on a Ph.D. level at Stanford,
focusing on data patterns and methods for data analysis.
There are numerous examples of Stanford alumni, who founded hugely success-
ful internet companies during their studies or after graduation. However, Larry
Page was neither primarily interested in founding a company, nor in creating a
search engine. He was essentially driven by the mathematical principles of the
internet and by the task of structuring the information available on the internet. His
Ph.D. research showed that it was much more challenging to perform a backward
analysis of website links, than to simply follow links from one website to another.
However, this backward analysis was a good reference point for assessing the
importance of websites. For a better understanding, one can compare websites to
academic papers—the quality of a paper can be partially deduced from the number
and quality of the articles it cites. In the same manner, the quality of a website can
be deduced from the number and quality of the websites to which it is linked. Due to
the increasing complexity of the research, Page asked Brin to join the project and,
as a result, the two not only began to work together, but subsequently abandoned
their Ph.D. degrees altogether. They had the drive to complete the backward
analysis method, despite its high risk of failure and its merely hypothetical practical
applications. Finally deciding to launch an own internet venture, Brin and Page
settled for the name Google. As the aim of the company was to structure the rapidly
growing set of information on the internet, a modification of the mathematical term
googol, which describes the number ten raised to the power of 100, seemed fit.

8.2 Market Demand

The major IT trend before the turn of the millennium was undoubtedly the swift
internet expansion, characterized by both exponential domain growth and increased
business and private internet access. One of the reasons for growing domain
8.3 Pioneer Business Model 83

numbers at the end of the 1990s was the trend of personalized websites. This was
facilitated by companies such as Geocities, which were specialized in providing
web space and web addresses for individual purposes. In 1999, Geocities was the
third most visited website worldwide, leading to a snowball of personal and
corporate blogs. Another trend could be noticed in the first attempts at
e-commerce, with companies gradually using the internet as a marketing and
communication channel.
Almost a decade earlier, during the early stage of commercial internet at the
beginning of the 1990s, new websites became known through advertising and word
of mouth. After the internet started to experience high growth rates, this became
increasingly inefficient, leading to the introduction of server listing websites. The
advent of search engines mid-1990s made it possible to search websites for distinc-
tive keywords. The primary purpose of search engines was to check website content
for specific information requested by the user.
To ensure appropriate results, search engines were supposed to cover a high
amount of the available web content. However, at the time when Google was
introduced, existing search engines largely had uneven coverage rates, which
created a market demand for a more performant search mechanism. Another issue
faced by the first search engines lied in the frequent updates of website content,
requiring search engine databases to be accordingly refreshed. However, conti-
nuous refreshing was inefficient, costly and unsatisfactory. With both offer and
demand for internet-based content soaring, search engines were struggling to keep
pace. This created the need for an improved search engine logic—one, which was
subsequently provided by Google. Then as now, the main market demand was not
merely fast access to information, but rather fast access to relevant information.

8.3 Pioneer Business Model

The following section analyzes Google’s business model in 2000, following the
introduction of its advertising revenue stream, AdWords. Besides PageRank,
AdWords represented another highly significant element for a functioning business
model, allowing the company to monetize the value created for its search
customers. Figure 8.1 gives an overview of this initial advertising-based business
model.

Value Proposition In 2000, Google’s value proposition for its search engine
visitors was simple, namely a fast search process with comprehensive results and
free of cost. Yet the company relied on an additional value proposition, without
which the main one would not have been possible: the company offered advertisers
marketing space for a targeted audience. The logic of many web-based portals
offering free services lies in this additional value proposition for a second customer
group, the advertisers. These could employ Google AdWords for placing own ads
next to relevant search results. Yet to keep the search results relevant, Page and Brin
strove to keep these free of commercial considerations. The entrepreneurs managed
84 8 Beyond the Search Engine: The Case of Google

Leading web Applying and Relevant search Search customers

portals such as op mizing the results (for search Self-service (for
Yahoo PageRank customers) both search Adver sers
algorithm and the customers and
AdWords Targeted online adver sers)
mone za on text adver sing (for
model adver sers) Customer binding
through
undistorted search
results

PageRank and Search pla orm

addi onal (for search
algorithms customers)

Pla orm and IT AdWords pla orm

infrastructure (for adver sers)

Search-related research and development AdWords: Adver sing fee based on a cost-per-
thousand impressions model
Maintenance and improvement of IT infrastructure
and pla orm

Fig. 8.1 Overview of Google’s business model at the time of the company’s launch. Source: own
illustration, based on Osterwalder and Pigneur (2010)

this by combining the advertising business model with their relevance-based search
mechanism PageRank. Although GoTo was the first search engine to attempt a pay-
per-click model, Google had the clear goal to offer relevant and unbiased results for
customers, leading to an outstanding market recognition. As Google was ranking
search results based on relevance and not on the amount of money an advertiser had
paid (as GoTo did), it became the first search engine to focus on its search
customers.

Key Activities To become attractive to advertisers, Google had to ensure that its
search engine was frequently used for a high amount of searches. The company
accomplished this by continuously optimizing its PageRank algorithm, which
effectively measured the human interest devoted to a certain website, and ranked
search results accordingly and objectively. To the same extent, developing and
optimizing the auction-based advertising service AdWords represented a key activ-
ity. In result, AdWords became the interface between search customers and
advertisers.

Key Resources PageRank was Google’s underlying key resource for its search
engine and for its associated AdWords service. Not just search results, but also ads
were ranked through PageRank. Users had the power to define the relevance of an
ad, resulting from the number of clicks on it. This implied that in a list of
8.3 Pioneer Business Model 85

advertisements associated to a search result, popular ads would rise to the top of the
page, while less popular ones would fall.

Key Partners Initially, Google partnered with web portals such as Yahoo or AOL
and provided its search services to these websites. For instance, Google powered
the search engine for Yahoo, at a time when Yahoo was the leading internet portal
(Olsen 2002). More interestingly, Google chose not to partner with GoTo, although
GoTo had a functioning revenue model at a time when Google was still unsure how
to make money. Brin and Page decided that it made no sense for their start-up to
share revenues with GoTo, which had a less performant search algorithm and a
different approach in terms of who the most important customers are. GoTo
believed it was the advertisers, whereas Google believed that a functioning business
model in its field could only be successful when focusing on the search customers.

Customer Segments As noted above, Google’s primary customer segment were

information-seeking internet users. By the end of the year 2000, Google was
already the largest search engine on the web (Hill and Jones 2010), tremendously
surpassing its rival GoTo in outreach. By experimenting with text-based advertising
and introducing AdWords, Google gained access to its second customer segment,
the profit-yielding advertisers.

Customer Relationships From early on, Google understood that it has the poten-
tial to become and remain the search engine of choice for an unmatched number of
customers. In an industry with a high frequency of innovation and low switching
costs, gaining customer trust is essential. For this reason, behind one of Google’s
declared guiding principles, “Don’t be evil”, was the company’s goal of providing
uncompromised, fair search results to its customers.

Channels Google solely employed direct online channels to reach both its cus-
tomer segments. While search customers used the company’s main website,
advertisers were approached via the AdWords platform. The latter was designed
as a self-service advertising solution, following the same principles of simplicity as
google.com.

Revenue Streams Until the burst of the dot.com bubble at the turn of the century,
Google mainly relied on venture capital funding. The changes in the market
environment put pressure on the company to act quickly towards creating a
functioning revenue logic. This is how AdWods came about. Google began to
experiment with ads as a source of revenue in 1999, selling text-based advertising
space, and gaining revenue from advertisers on a cost-per-thousand views model. In
2000, when AdWords was launched, it was initially also relying on this cost-per-
thousand impressions model. Revenue was generated resulting from the estimated
number of people having viewed a particular ad. Yet this cost-per-thousand
impressions model alone did not fully convince advertisers that their money was
well spent, and required improvement. The answer came two years later, through
86 8 Beyond the Search Engine: The Case of Google

AdWords Select, which allowed a thoroughly enhanced pay-per-click revenue

generation mechanism. AdWords Select is discussed in the following section,
as one of the developments to the initial business model.

Cost Structure Resulting from Google’s key resources and activities, the main
costs in the year 2000 were mostly fixed costs, largely created by the IT infrastruc-
ture and its associated data center, alongside with the payroll for around
60 employees.

8.4 Current Business Model

Figure 8.2 depicts the main changes in Google’s advertising business model since
the launch of the company’s domain in 1997, as discusses below. Figure 8.3
summarizes the present advertising business model of the company.

VP & RS:
Launch of AdWords based on a VP & CS & RS:
the domain cost-per-thousand AdSense with pay- VP & CH:
google.com 1999 impressions model 2002 per-click model 2006 AdSense Mobile

1997 VP & RS: 2000 VP & RS: 2003 CH: 2007

Ads sales on a cost- AdWords Select Acquisi on of
per-thousand based on a pay- YouTube
impressions model per-click model

VP:
Interest-based ads
CH & VP:
Launch of the VP:
marketplace CS: AdWords update
DoubleClick Ad AdWords Express for compa bility
2008 2010 for SMEs 2012 on several displays
Exchange

VP: 2009 VP: 2011 CH & VP: 2013

Acquisi on of Introduc on of Launch of the
DoubleClick TrueView ads digital marke ng
pla orm
DoubleClick
Key

CS: Customer segments; CH: Channels; RS: Revenue streams; VP: Value proposi on

Fig. 8.2 Main changes in Google’s advertising business model across time. Source: own
illustration
8.4 Current Business Model 87

Google Network Management, Relevant search Self-service Search customers

Members: maintenance, and results and a
- search partners improvement of mul tude of Customer binding Adver sers
- publishers pla orm and addi onal services through excellent
search results Website publishers
related know-how (e.g., Google
Google Partners: Finance, Gmail and
online marke ng Analyzing user- Personal assistance for
Youtube) corporate key accounts
firms generated data
Targeted online Reliance on user
Extending the reach adver sing
of its pla orms feedback
solu ons (for both
adver sers and
publishers)
PageRank and - content related Direct channel model:
addi onal - interest related own websites/
algorithms - placement pla orms
targe ng
IT infrastructure Third-party websites
and mul ple Adver sing
pla orms marketplaces (for Mobile devices
both adver sers
World-class and publishers): Ad marketplaces:
employees DoubleClick Ad DoubleClick Ad
Exchange Exchange
Brand value

Traffic acquisi on costs Adver sing fees: cost-per-click model and cost-per-
thousand impressions model, from own websites and
Fixed costs: data center, pla orm, IT infrastructure, partner websites (Google Network Members)
R&D, marke ng and sales

Fig. 8.3 Overview of Google’s current advertising business model (the aspects highlighted in
grey did not undergo major changes across time). Source: own illustration, based on Osterwalder
and Pigneur (2010)

Value Proposition In 2002, Google launched AdWords Select, its pay-per-click

version of AdWords, which consistently improved the value for advertisers and led
to a substantial increase in their numbers. In 2003, AdSense was included in the
portfolio, providing third-party publishers with access to Google’s network of
advertisers. Google began to act as a facilitator between website publishers and
advertisers. Publisher websites are scanned by AdSense, which then places fitting
advertisements. Since 2009, the company has been going one step further and began
interest-based advertising on YouTube. This was enhanced through the service
TrueView, which enables users to skip an irrelevant ad after five seconds, if it does
not fit their interests. Further, Google employs target placement for providing ads.
Here, ads are correlated with the demographic characteristics and geographic
location of the search customers. With the acquisition of the digital marketing
company DoubleClick in 2008, banners as advertising options are also part of
Google’s portfolio. Around the same time, publishers were provided access to the
service Ad Manger, which enables them to define advertising spaces on their
websites and to easily manage the ads. Since 2009, Google has been operating its
88 8 Beyond the Search Engine: The Case of Google

real-time marketplace DoubleClick Ad Exchange, which supports publishers and

advertiser networks in buying and selling advertising space.

Key Activities To be able to match the most suitable ads with website content and
visitor interests, Google’s key activities are platform management and acquisition
of extensive customer information. Maintaining and continuously improving its
platforms’ functionality and usability are derived activities. To further optimize its
offer portfolio, Google constantly analyzes user data, gaining a clear profile of its
users and an insight into competitive advertising networks. An associated activity is
the expansion of its reach. For instance, by providing free access to Ad Manager,
Google sustainably acquires new customers for its charged service AdSense.

Key Resources Google’s services rely on several platforms, for instance the
search platform itself, the company’s platform for advertisers AdWords or the
marketplace DoubleClick Ad Exchange. In this regard, globally located data
centers are the underlying resource. Google’s success relies on its immense
know-how, diverse areas of competence and skill sets. As well, the company’s
success has been attributed to the bi-generational leadership of Eric Schmidt
alongside with the founders Brin and Page. Schmidt, who joined the company in
2001, had decades more experience in U.S. tech industry than the young
entrepreneurs did, bringing a rather more mature standpoint to the company, as
some analysts suggest. Moreover, the company makes sure not only to hire people
who are excellent in their particular field of expertise, but who also make an
excellent fit to its culture. In 2014, 53,600 full-time employees worked for Google,
about 21,000 of whom worked in the field of R&D and over 17,000 in the field of
sales and marketing. Google is known for allowing employees to use 20 % of their
working time for work-independent, innovative projects. In turn, the company gets
the rights for all innovations and creative ideas, which result from this creative
time-out. All of this contributed to creating a further key resource: brand value and
company reputation. Proof of this is the fact that Google ranks second as the most
valuable brand worldwide, after Apple (Interbrand 2014).

Key Partners The core business model of Google would not function without its
advertising partners. The company has established strong partnerships in this area
and, for better management, divided its network twofold: a search network, com-
prising partners such as AOL, and a display network, comprising two million
publisher websites, such as nytimes.com or weather.com. Within the service
Google Partners, the company is working with online marketing firms, which
provide customized services and tools for online marketing.

Customer Segments To summarize the above, the company extended its initial
two customer segments, search customers and advertisers, with a third segment,
independent website publishers. The latter are approached through the service
AdSense.
8.4 Current Business Model 89

Channels While Google initially only sold advertising space on its own website, it
now has a multitude of channels, both own ones and ones resulting from
collaborations with third-party publishers via AdSense. Own channels are for
instance the websites Google Finance, Gmail or Youtube, the latter being acquired
in 2006. The launch of AdSense Mobile in 2007 additionally expanded Google’s
multi-channel reach.

Customer Relationships Regarding customer relationship management,

Google’s approach has not essentially changed over the years, neither for search
customers, nor for advertisers or publishers. Customer relations remain mainly self-
service. For instance, AdWords Select is designed as a self-service platform, and
the company still provides automated web-based services, such as the AdWords
Help Center. Over the years, phone support was reduced and shifted primarily to
e-mail and help desks in text form. Nonetheless, sales teams provide personal
support to key customers. As regards ad choice and placement, Google heavily
relies on user feedback. For instance, the expected click-through rate is based on
user voting and helps Google decide which ads best fit each search query.

Revenue Streams The company maintains both a cost-per-click and a cost-per-

impression revenue model. Both generate fees, but on different bases: within the
cost-per-click model, an advertiser only pays a fee when a user clicks on one of its
ads. Within the cost-per-impression model however, the advertiser pays the fee
depending on the number of times the ad is displayed on Google websites or on
Google’s partner network websites. The cost-per-impression model is more suitable
for advertisers striving to increase general brand awareness. For advertisers trying
to boost sales numbers and website hits, the cost-per-click-model is a better fit.

Google employs different keyword-based price levels for the displayed

advertisements. For example, a 2011 survey reported the most expensive keywords
in AdWords: advertisers paid 54.91 US $ pay-per-click fee for the keyword
“insurance”. The ad with the highest ranking receives the top placement on a
website, and advertisers only have to pay the minimum amount to keep their ad
placement and format. For instance, advertiser on position one only has to pay a
fraction as much to beat the ad on position two and maintain its upper placement. In
order to ensure the relevance of the ads, beside advertiser bids three quality factors
are important: expected click-through rate, landing page experience, and ad rele-
vance. The expected click-through rate shows to which ads users really respond,
and is based on “votes” through clicks. Highly significant landing pages, namely
those on which users find best fitting results to their search queries, also attain a
higher score. The quality of a landing page depends on the relevance and originality
of its content, ease of navigation and transparency. The third quality factor is ad
relevance, which is determined by analyzing the language in the ad and how it
relates to the search query. The more information about the business is provided on
the website, such as telephone number or website domain, the more likely users will
click on the ad, and thus the higher its impact. By combining the bidding system
90 8 Beyond the Search Engine: The Case of Google

with the three quality factors, Google was able to steeply increase advertising
revenues. Within just a decade, the advertising revenue soared from 3 billion US
$ in 2004 to 59 billion US $ in 2014. Google’s current ad revenues are twice as
much the amount of ad revenues of all U.S. newspapers combined. The amount of
ad revenues generated on Google’s own websites account for 68 % of the
company’s total revenues, while the partner websites in the Google Network
bring in 21 % of total revenues. Google thus earns around 90 % of its total revenues
though the advertising business model.

Cost Structure By operating a network of partner websites (Google Network

Members) and co-working with partners, which direct search queries to Google,
the company has so-called traffic acquisition costs. These accounted for about 23 %
of advertising revenues in 2014, representing the business model’s highest cost
block. As the company strives to constantly improve its services and to offer
innovative solutions, it heavily invests in R&D, as much as 13.3 % of revenues in
2014. In comparison, Microsoft invested 13.4 % of revenues into R&D the same
year, Amazon 8.8 % and Facebook as much as 21.4 %. Sales and marketing
expenses represent another pool of fixed costs, which accounted for 12.3 % of
sales in 2014.

8.5 Industry Outline and Future Perspectives

In 2014, as much as 40 % of the global advertising expenditures were spent on TV

as an advertising channel, 15 % on newspapers and 19 % on desktop internet
devices. The market shares of these established advertising channels are, however,
constantly dwindling, as the share of advertising expenditures on mobile internet is
likely to increase globally from 5 % in 2014 to 13 % by 2017. Conversely, the share
of TV ad expenditures will decrease to 37 %, whereas the share of expenditures for
desktop internet ads will likely remain stable in the same period.
The total global online advertising revenue in 2014 amounted in 133 billion US
$. Google alone reported revenues of 59 billion US $, making the company the
current undisputed market leader within the industry. In the U.S., Google’s digital
ad market share amounted to 41.6 % in 2014, leaving Facebook (10.6 %), Microsoft
(5.9 %), Yahoo! (5.1 %), or Amazon (1.5 %) far behind. However, it is predicted
that Google’s market share will lose about 5 % by 2017, whereas Facebook’s
market share is expected to increase to 16 % in the same time frame. Although
currently Google still faces little serious competition in the internet advertising
industry, the company should not underestimate the power of social media rivals
such as Facebook. Amazon Products Ads also represents an attractive choice for
e-commerce firms considering alternatives to Google’s AdWords. Amazon displays
search-related ads next to the query results, in a similar manner as Google does.
However, Amazon provides a platform, on which customers are already involved in
the buying process, which dramatically increases purchase likelihood.
References 91

Being the undisputed market leader among web browsers brings Google a
virtuous cycle of increasing search user numbers, which lead to increasing adver-
tiser numbers. The company managed to design an ecosystem, in which users and
advertisers perfectly interact and complement each other. The success of this
ecosystem allowed Google to massively expand its business divisions with
programs as diverse as self-driving automobiles, internet provision to remote
areas and high-tech medicine research. What fuels all these endeavors is the
company’s effort to remain significant in a business landscape in which, perhaps
in ten years’ time, the search engine itself will be an antiquated reminder of the
dot-com boom, in the meantime already replaced by a more performant search
mechanism.

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