Few days ago I read the news of Microsoft trying to align with Yahoo to face Google. I was not only surprised but also amazed by the immaturity of the industry being reflected through the action of the most successful and largest player in the Industry. Not being a mature industry is the exact reason Google should not think it is shielded from the booms and more specifically busts of the industry. Here I would like to draw a framework of how, even, Google with all its growth and earnings momentum can be Googolplexed (Googolplex is 10 to the power of 1000).
Two computer scientists think about the best algorithm to search for the relevant content and create Google. Google’s creation was also driven by the increasingly chaotic internet content. Well known players in the arena were busy with their own priorities like desktop solutions and universal portals with instant messaging, ignoring the ability to create a faster way of searching the increasingly large and fat world of internet content. It was same time when Microsoft was already facing criticism of trying to monopolize the desktop. This was a perfect time for Google creators to launch a search engine that was going to change the way people think about internet. Open source enthusiasts supported the search engine with all might and the information about this new search engine spread like a virus.
As a Linux enthusiast I got introduced to Google in 1999 and before 2001 Google was already a huge force in the internet space. The growth was powered by not only the superior algorithm, Google creators invented, but also by the perfect storm created by open source enthusiasts and the overall increase in rate of internet penetration and usage across the world. Google too realizes that common man’s viewpoint is important for its continued growth. This has kept all the Google offerings free to everyone. Google has intelligently created its own space in the internet advertisements and advertising brokering business to become a $100+B company. Google ads are today displayed on billions of web pages making Google a perpetual money generating mechanism.
Let’s analyze Google’s revenue a bit closely by doing a back of the envelope calculation.
World population:6.5B
World population using internet: 1.14 B
Assume 75% of world population using internet accesses internet every day = 75% of 1.14B = 0.855B
Assume every person accessing internet accesses 20 pages on an average with Google ads everyday. Therefore number of pages accessed = 17.1 B
Suppose Google’s conversion rate is 1% :
Clicks leading to revenue = 1% of 17.1 B = 171Million clicks per day
Assuming the average pay Google gets per click as $0.2, revenue per day = 171 * .2 = $34.2 Million
Yearly Revenue = 34.2 * 365 = $12B approx.
This is really a perfect example of the old saying that every drop makes an ocean. Now imagine the growth prospects. Suppose internet usage increases by 10% and penetration increases by 2%, this itself guarantees Google a revenue increase potential of 12% continuing doing what it is doing now. Google already has many things in pipeline apart from Google labs. Also the engine is becoming more intelligent increasing the potential to charge more per click. Google revenue is bound to increase more than 20% given most conservative numbers.
What can slow this enormous growth?
There are different ways to compete in this space:
Create an engine superior to that of Google with faster crawlers gathering information of billions of web pages (Use Google itself to create such list). Are thee any brains remaining in this space that think of challenging the Google algorithm (at least for intellectual curiosity)?
Now a more disruptive alternative, make web search extinct. Now this is a project that Google needs to start to work on for its own long term survival. If one comes with a model where search is no longer required this can make Google unhappy, unless Google diversifies its revenue stream by then. It might sound a dumb idea, but I am sure it wont be long that cyberspace will become virtual again.
Until then a big lesson for the Google competitors: “Every Click Matters”.
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5 comments:
very informative and breakthrough thinking..keep writing Bripa
great article brij
I think goggle is no more search engine only. It is full fledged media business. reason is more than 50% of google revenue comes from affiliates and google owned sites like blogger,youtube etc. Google is in media distributor business raher than media creator. In my opinion google is more of a wallmart for online industry.
Google's genious lies less in it's other owned websites or search than how each website is interlinked with each other. e.g by single login you can access gmail,blogger,google docs....and itjust traps anybody.
So google is banking on network effect of it's all web properties. It's every web property is benifiting from this network effect. And it is always more difficult to beat network effect than beating single entity.
To beat google any business has to break this food chain of websites .
In my opinion Myspace is at right position to beat google as
1.it is backed by media house
2.It has large loyal user base which can be moved and trapped in many ways.
2.it has shown some initial steps to create some network effect see recently they launched news.myspace.com
At it's core internet is a media buisness , like media business internet by itself will not deliever anything physically. Only it can point to physical location which ultimately delievers. So positioning internet business as a media business will benifit longtem and i guess that's what Google is started to position himself.
Uday,
I think it is very good perspective of looking at Google as an internet media company. I need to chew that idea for a while to build my thoughts around it.
The concept of food chain of websites is good one but I still believe that Wall Street realizes that, that is not the core competency of the business model. I think that is one way to create future earning potential. The real backbone currently is the search engine and the adwords application. Search engine is what makes Google "Google" and myspace "myspace". With all the other free applications Google is just showing the world of the things it can do. If Google can build alternate free spreadsheet they can also build SAP like ERP. But would that Google SAP be free, only time will tell and so will its continued revenue from the search and ads brokerage business.
It is also the support of the general public that is very important at least in this case. Market in form of people has a huge potential of humbling the biggest of businesses and Google is no exception. Google realizes this very well. That is one reason it keeps the continued flow of free applications and keeps integrating those application with it’s add business. Google is also moving to content creation business as well, with all its new applications as Maps, Earth, GOOG411, Google transit etc.
I particularly like the comment about media business, I will certainly think about it.
i agree brijesh food chain of websites should not be the core competency, but it is just a enabler for gogle's mission or any other player.
I think continued flow of applications has more flesh than just for the showing world. Otherwise google might not spend so much on youtube which is as such far away from it's core search business.
I think the google's takeover puzzle on youtube lies in it's mission of "organizing world's information"
So google at last wants to control and organize every information in the world. I feel search is part of this large puzzle.
I think google will surely create onlie sap,crm only if it gives them opprtunity to organize company's information or customer information (in case of CRM).
Take example of Gmail , the reason of gmail popularity inspite entering market late lies in it's capacity to organize emails effieiently.
Google understoods that it can differentiate any online or offline application on the basis of information organization because that's what he knows better and more imporently it is aligned with it's core mission.
And i think online applications will be free always because
1.Bandwidth/storagecosts are redusing.
2.Internet advertising is expanding.
so requires google small money than what it gets from advertising.
One may argue even though all worlds advertising is shifted to online it is still small market.
But i think internet advertising is not only replacing any offline advertising e.g TV,radio,news.
But it more importently replacing the 'selling process' which is done by any offline seller,door to door seller and it is by itself is huge market.
Nice blog. Very good analysis, Brijesh.
Very curious to see what do you think about future of Yahoo or Microsoft in light of the great Google prospectus.
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