Google Inc

GOOGLE INC.

DEGIE JONES; WALTER KORNEGAY

MBA 664: Satisfying Shareholders

03/26/2014

In 2005, Google Incorporated (Google), who was in direct competition with Yahoo! (Yahoo) and Microsoft MSN (Microsoft) in the “Paid Listing” advertising market, emerged as the leader.  As part of pointent efforts to become the leader in their market, Google launched an “ad” driven search engine portal that they had developed which gave them the ability to generate revenue based on ad popups.   To further secure their lead, Google bought 5% of Time Warner's America online (AOL) for $1 billion in hopes of building a business advertising partnership, which was aimed at boosting not only AOL's financial prospects, but also their own.  This partnership deal was projected to earn about $600 million in gross advertising revenue for Google.  These strategic moves threatened Google’s competitors both in market share and revenue.  Microsoft’s interest in the Goggle’s situation was a little different.  Microsoft’s interest was not necessarily about money at all.  Their interest was more about market share and more importantly power.  There was a long standing feud between the two companies.  In 2003, Bill Gates offered to buy Google and they declined his offer and since Microsoft’s company was notorious for maintaining a company culture of “if we can’t own them, we’ll beat them”, they went into overdrive and went to Plan B, which was developing their own search technology and using it to bid against Google at every possible opportunity to include to include AOL.

GOOGLE INCORPORATED

Google Incorporated, which is headquartered in Mountain View CA, was born from an introduction of two students, Larry Page and Sergey Brin, at Stanford in 1995. In 1996, they built a search engine called BackRub.  This search engine used links to determine the importance of individual webpage.  After BackRub had been operating on Stanford servers for a little more than a year, it was discovered that it was taking up too much bandwidth on the local servers which meant that they may be on to something in regards to the endless capabilities of this invention.  At that time they started to look for ways to expand, which would definitely include funding.  

In 1998, they received funding from Andy Bechtolsheim, cofounder of Sun Microsystems, Inc.  Ultimately, they raised around $1 million from investors, family, and friends and set up shop in Menlo Park, California, under the name Google.  The name Google, originally spelled Googol, is a mathematical term for the number one (1) followed by 100 zeroes.  In 1999, Google received a $25 million round of venture capital funding, at that time it was processing up to 500,000 queries per day. Their activity began to explode in 2000, when they became the client search engine Yahoo.   By 2004, when Yahoo and Google dissolved their business relationship, users were using Google’s search engine on an average of 200 million times a day. The growth continued, and by the end of 2011 Google was handling some 3 billion searches per day. In order to accommodate the unprecedented mass of data, Google had to build 11 data centers strategically placed around the world, each of which containing several hundred thousand servers.

With growth comes growing pains, and Goggle definitely experienced their share.  There were internal management problems, from the beginning, investors felt that neither Brin nor

Page had enough experience to manage the exploding company, and in 2001 they agreed to hire Eric Schmidt as chairman and Chief Executive Officer (CEO) of the company. Schmidt, who previously served in the same role at software company Novell Inc., had a doctorate in computer science and meshed well with the founders. During his tenure, both founders were kept on with Page serving as president of products, and Brin as president of technology. The three of them ran the company as a “triumvirate” until Page took on the CEO role in 2011, at that time, Schmidt became executive chairman, and Brin adopted the title of director of special projects.

The company went public in 2004 raising $1.66 billion, and making both Brin and Page instant billionaires. In 2012 Google’s market capitalization made it one of the largest American companies not in the Dow Jones Industrial Average, where it still holds this standing today.  

ANALYSIS OF PROBLEMS

In the beginning, the World Wide Web was growing too large for a directory based search engine like Yahoo which was the earliest search engine available to users. (Herman & Eisenmann 2006).  The directory based method needed the information organized into categories by human editors, which led to slow generation of searchable results for users. So, Alta Vista invented an automated search engine technology that relied on software called spiders”. (Herman & Eisenmann 2006). The software created opportunities for users to search page contents on algorithms based on the frequency of keyword references.  Yahoo added the AltaVista search engine, but later got rid of it and replaced it with Inktomi.  Inktomi provided faster processing and a larger index for Yahoo.  

As developers continued their search in exploiting algorithms by using keywords on their pages, the searches increasingly returned irrelevant listings called “Spam” (Herman & Eisenmann 2006).  So in 1998, a couple of frustrated graduate students at Stanford University, Sergey Brin and Larry Page, began to tackle this problem which was impeding on users’ abilities to search the web. They created a PageRank algorithm that delivered more relevant results based on the ”linked to” by other pages called “Votes”.(Herman & Eisenmann, 2006) The votes signaled PageRank to the focal page on another page’s webmaster.

In June 2000, Google had developed a web index of 1 billion pages. This surpassed its rival Yahoo and then Google replaced Inktomi as Yahoo search engine. In December of 1999, the company would earn revenue by licensing the search technology to Yahoo and third party sites.

The search technology kept the company away from a portal position, in which they operated on search results only. Google had no personal communication or productivity tools to offer. Google initially did not carry advertising on their website like its competitors Yahoo, Microsoft’s MSN, and AOL. The competition operated as portals, which meant that income for them was based on revenue generated from ads. The competitors’ already offered personal productivity tools that encouraged users to linger instead of linking to third party destination searches.

The competition used a robust new model called paid listings. This service was engineered by Overture. Essentially paid listings were short text ads that were identified as “Sponsored Links” that appeared adjacent to web search results for specific keywords. Paid listings operated on two premises. First, leads generated by a search engine were more effective than banner ads on other websites. (Herman & Eisenmann, 2006) Second, ordering paid listings on a cost per click (CPC) auction produced results that met the users’ needs.(Herman & Eisenmann, 2006) The fact that 70% of all e-commerce transactions were derived from web search engines made paid listings a viable option for marketers to use. Spending on paid listings grew rapidly with the market being dominated by Overture, which supplied listings to three large portals Yahoo, MSN, and AOL.

However in December 1999, Google introduced their first paid listing, which was based on cost-per-impression. Google could ensure that users saw the most relevant ads first. This method maximized Google’s revenue, because paid listing providers received little revenue from ads with high CPC bid but low CTRs (Herman & Eisenmann 2006).  This option made Google a serious competitor in the paid listing market.

Although, Google posed a serious threat to its competitor Overture. By the middle of 2001, Google was the ninth largest U.S website with 24.5 million visitors monthly. Google partnered with AOL in May of 2002 to provided algorithmic search results and paid listings to AOL users. By 2003 the paid listing market had become a duopoly, with Google and Overture controlling 90% of the Global market (Herman & Eisenmann 2006).  Unlike Overture Google spent very little money on marketing its services. Overture invested 300 full time employee years to develop  software that supported self-provisioning and rapid, reliable paid listings through April of 2002. Google creation of this type of software was developed in February of 2002. So Overture was already falling behind in their ability to compete with Google. In 2003 as well, Google and its affiliates had access to provide advertisers 55% of internet search volume, compared to Overture’s 45%. Google had attracted more advertisers totaling 150,000 to Overture’s 100,000. Despite all of the efforts made by Google to control the paid listings market, Overture still captured 55% of global paid listings market compared to Google’s 35 %.( Herman & Eisenmann, 2006) So, Google’s threat from Microsoft came when they developed the ad supported software, Google Desktop and a rumored web-based products such as Google Talk, Gmail, Google maps, a calendar program and personalization features that were offered on their homepage (Herman & Eisenmann 2006).