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STRA 6201 Stra. Management Gordon Walker Synopsis of Google Google is an iconic example of a multi-sided platform (searchers, advertisers, affiliates) with an impressive dynamic growth cycle based on innovations in products and processes. The business is based on a search algorithm developed by Brin and Page at Stanford in the late 1990s. The algorithm is an innovative approach to estimating the most “central” node in an enormous network, composed in Google’s case of websites indexed by keywords. The benefit of this approach, called Page Rank, is that it produces an ranking of sites determined by user behavior as opposed to by payments to the Google by advertisers. In theory, user determined rankings would be more useful and so was a critical selling point. The platform depends on the two-sided network externality between searchers and advertisers: the more companies that advertise, the more useful searching on Google will be; in turn, the more searchers on Google, the more companies will advertise. In addition, Google offered a lower cost per click (CPC) to advertisers than Overture (its main competitor), drawing more business. The combination of Page Rank, the lower CPC, and the two-sided externality was sufficient to launch the business. Then, Google developed two innovations that grew its advertiser base. First, it created a pricing model that adjusted the CPC by the predicted productivity of the ad based on its click- through-rate (CTR). More productive ads (whose actual to predicted CTRs were higher) cost the advertiser more, but that was only fair since they yielded more revenue. Google was able to develop this methodology because it had carefully built a sufficiently large data base of search behavior by keyword and had the statistical skills to analyze these data in a way that had legitimacy to advertisers. Consequently, the size of the advertiser base grew more. Second, the company then introduced a range of software applications and services, called Google Analytics, to help advertisers improve their choice of keywords. This suite of products helped both to improve search productivity, benefiting users and advertisers, and to lock advertisers into Google as a provider of online search services. Google attracted more affiliates (e.g., SMU) by offering them a higher percentage of revenues than Overture. This kind of strategic pricing was eminently reasonable given the very strong scale economies in search. Google was thus outcompeting Overture on every dimension. One needs therefore to split Google’s business into two interacting parts: each with its own set of value drivers. Users benefit from Google’s superior search technology (speed, quality), the externality of which they are a part, the free ancillary software that Google provides (a kind of line breadth), and perhaps Google’s brand. Advertisers benefit from the externality and from Google’s productivity services. Google’s cost drivers are, very importantly, economies
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  • Winter '15
  • Gordon Walker, Stra. Management

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