Can Google Remain On Top?

This is an essay I wrote for my Comm 454 media economics course during the first semester of my junior year.  The assignment was to choose an economic issue in the media industry that was interesting to me and write a research paper about it.  I chose to write about Google and whether or not the media giant will be able to sustain its place as the industry structure continues to change rapidly.  I structured the paper as a research paper but with an argumentative and persuasive edge.  I included literature reviews of previous research and a lot of my own research on the subject, however, I also included my own personal opinions and took a position on the subject to argue.  Based on my research, I was able to use my own knowledge to speculate on the subject and attempt to convince my reader that I was correct.  I believe that I did a good job striking a balance between academic and personal in this paper.  Whereas in previous research papers I had struggled with this balance, here I finally seem to have found a way to combine my personal writing voice and opinions with facts and research into one cohesive piece.  My personality and voice is much more present in this paper than it was in previous research papers, and I am still able to present all of the information necessary to make my argument. This paper is a good example of how my writing voice has evolved over time and is now much more equipped to adapt to different styles of writing and still remain strong.

Can Google Remain on Top?

As Jeff Jarvis says in his novel, What Would Google Do?, “Once upon a time, all roads led to Rome.  Today, all roads lead from Google (Jarvis, 2009).  Although this is obviously an exaggeration, it is not that far from the truth.  It is hard for most of us today to even to imagine what the world was like before Google.  How would we even begin to tackle the most basic life tasks without it?  Want to find the cheapest airline tickets? Google it.  Want to find out how tall the Empire State Building is? Google it.  Want to learn how to make French toast? Google it.  There doesn’t seem to be any problem that Google can’t solve.  Even now, as I begin to write this paper, I already have used Google to find some piece of information over ten times.

Google was first incorporated as a privately held company (by its founders Larry Page and Sergey Brin) on September 4, 1998, and its initial public offering followed on August 19, 2004 (Wikipedia, 2012).  Since then, the company has continued to grow at a rapid pace and completely revolutionized the modern web.  In fact, the Times of London dubbed Google “the fastest growing company in the history of the world” (Jarvis, 2009).  Google owns the world’s largest online display advertising network, and according to its benchmarks and insights data Google display campaigns reach 80% of global Internet users (Gabbert, 2012).  Unlike Yahoo or Bing, Google is more that just a portal: Google is a network.  As Jarvis puts it, “there are bits of Google all over the web”(Jarvis, 2009).  By offering their many services to consumers online for “free”, they have been able to become the majority of consumers’ search engine of choice.  In turn, that makes them advertisers’ number one choice as well.  By creating seemingly ingenious algorithms and through their Google Adwords system, they have truly become the king of search.  However, as new technologies continue to develop and competitors begin to emerge, Google’s title may potentially be threatened.  Google has developed a network externality by becoming the largest search engine on the Internet, but does this give them a sustainable competitive advantage as companies such as Facebook and Apple continue to develop new, innovative technologies that have the potential to compete?

As the largest search engine on the Internet, Google is a very profitable business.  But how exactly is it making this money if most of its products are given away to consumers for free? The answer is simple: Advertising.  According to ComScore, the Google Display Network serves 180 billion impressions each month (about 6 billion a day!)” (Gabbert, 2012).  Since Google’s network externality is the largest global search engine, it makes sense that every company wants to get their ads on this network.  In fact, approximately 97% of Google’s total revenues come from advertising (Wikipedia, 2012).  And in 2011, Google was making $3 billion per month in advertising revenue.

However, Google does not offer traditional advertising.  While the traditional advertising industry has been build on a CPM model based on the cost per thousand impressions (or number of times an ad is seen), Google has developed their own unique method for selling advertisements called Google Adwords.  This model incorporates a CPA (cost-per-action) or cost-per-click mechanism.  This transition signifies the movement from a push advertising model to a pull model.  Throughout the history of advertising, the industry has been based on a one-way push model in which the media and its advertisements were pushed to the consumer.  With the introduction of Google Adwords, however, the entire psychology and economics behind advertising changes.  Adwords enables a pull model in which the advertisements seen by consumers are based on their own individual activity on the web.  “I make Google smarter,” Jarvis says, “with our clicks and links, we all do”(Jarvis, 2009).  The company is clever enough to analyze every single Google search to determine which advertisers should get the set of “sponsored links” on each results page.  “It’s an empire built on tiny grains of keyword searchable sand”(Baker, 2009).  Advertisers can bid on search terms or key words, but instead of bidding on price per impression (CPM), they bid on a price they are willing to pay each time a user clicks on the ad.  “It’s the world’s biggest, fastest auction, a never-ending, automated, self-service version of Tokyo’s boisterous Tsukiji fish market, and it takes place, every time you search”(Levy, 2009).

Not only does the genius behind Google Adwords generate profits for the company, but it also generates data.  The true heart and soul of what has come to be known as “Googlenomics” is Google’s system of constant self-analysis.  The Adwords system generates a massive amount of data about consumer tastes and habits.  Google can then process this data to predict future consumer behavior, find ways to improve its products, and ultimately sell more ads.  “It is a data-fueled feedback loop that defines not only Google’s future, but the future of anyone who does business online” (Levy, 2009).  Advertisers’ main challenge has consistently been figuring out how to target and reach the right segment of consumers who will actually want to purchase their product.  Now, Google can use their data about user interests and behaviors to target advertisements so they are relevant to both the context of their search and to the user who is viewing them.  As more and more data is collected, Google can constantly improve its system and algorithms to make this targeting even more accurate.  The strategic use of this data is a revolutionizing concept for advertisers and for all online business.

There is a reason that Google spends so much time and resources re-designing and refining their algorithms to make sure the first listings you see for a search phrase are the listings you want to see.  Before the digital era, there was limited access to and a scarcity of information simply due to the limitations and cost of physical space in brick and mortar world.  Today, digitization has created an information-rich environment with an abundance of information instantly available at our fingertips.  However, this abundance of information has created new forms of scarcity.  As Herbert Simon said, “A wealth of information creates a poverty of attention.”  Google has billions of web pages, so it is not feasible for any one individual person to see all of them.  In fact, most people probably will never even see a significant percentage of them.  Google recognizes that we have shifted from an economy based on scarcity to one based on data abundance and works to deliver a suite of products that can analyze all of this information and deliver it in targeted ways.  They recognize that we are individuals who live in a seemingly infinite universe of small communities of interest, information, and geography.  “Google understands that the economy is made up of a mass of niches – that small is the new big”(Jarvis, 2009).

The billions of webpages on Google can actually be seen as an example of Chris Anderson’s long tail.  There are a few major websites that get extremely high volumes of traffic, and then there are billions of other small, niche sites and blogs that get significantly fewer page views.  Google uses its algorithms and Adwords system to identify each of these specific niches and attempts to show each individual consumer the search results and the advertisements that are relevant to them.  Google has embraced the world of niches and somehow found a way to extract the correct portion from the abundance of information on the web in order to provide each individual user with exactly what they want to see.

Google’s Adword platform is remarkably powerful, giving consumers highly detailed search results and advertisers a very valuable marketing tool.  Even more remarkable is the fact that Google manages to do this by giving away most of their products for “free.”  While it might seem crazy that Google gives away almost all of its product offerings (browser, apps, Android operating system for mobile phones, etc.), it this very strategy that has played a large role in facilitating Google’s widespread adoption and growth resulting in its dominance as the largest search engine on the internet.  Google is not a product.  It is a service, a platform, and most importantly, a network.  “The most successful enterprises today are networks – which extract as little value as possible so they can grow as big as possible”(Jarvis, 2009).  This is precisely what has given Google its network externality in the market.  By giving all of its products away for “free” to consumers and selling advertisements to subsidize its costs, it was able to acquire an overwhelmingly large share of the market.  “The benefit to free is that you get 100 percent of the market,” says Eric Schmidt, Google’s former chief executive (Baker, 2009).  In addition, Google gives its products and services away in order to increase Internet use in general thereby helping to create and expand new markets. “Since using the Web without using Google is like dining at In-N-Out without ordering a hamburger, more eyeballs on the Web lead inexorably to more ad sales for Google”(Levy, 2009).  By offering its services for free and ultimately increasing Internet use overall, Google has been able to reinforce and maintain its network externality and central role as the largest search engine on the web.

Google has clearly established itself as the market dominant player in search and leveraged its ubiquitous platform into an enormously profitable advertising machine.  Given Google’s massive footprint and exponential growth over the past few years, some question whether or not Google can continue to grow and maintain its position in the marketplace. “Google could fail.  It could grow so big that it becomes hard to grow bigger; that’s already becoming the case”(Jarvis, 2009).  One measure of Google’s prospects for future growth is the company’s price to earnings ratio, a measure of the stock market’s estimation of the growth potential of a firm.  According to NASDAQ, Google’s price to earnings ratio is predicted to decrease in future years.  The actual P/E ratio for Google in 2011 was 23.22, and by 2014 it is predicted to drop to 15.36 (NASDAQ, 2012).  Many economists believe that Google has extracted all of the value that it can from its market dominant position.  So while the company may continue its dramatic earnings and make billions of dollars each year, it may no longer have the potential for dramatic, exponential growth.  “Once you get to a certain size, you have to figure out new ways of growing”(Baker, 2009).  While Google has continued to show signs of being able to create and innovate and continue to grow, its sheer size has become an issue. As new technologies continue to develop and emerge,  competitors will have the potential opportunity to threaten Google’s current position, and it will be increasingly difficult for Google to find new ways to grow and remain dominant.

One company that currently has the potential to threaten Google’s current position is Facebook.  Although Facebook is a social media network and not a search engine, there have been rumors of the company moving into the search space.  Facebook already has most of the necessary ingredients to move into “social search” and pose a serious challenge to the search giant that Google has become.  “While Google has amassed an incredible database consisting of the fossilized linkages between most web pages on the planet, Facebook possesses an asset that’s far more valuable – the real time linkages between real people and the Web”(Elowitz, 2011).  Facebook is essentially sitting on a gold mine of social data that, if utilized for search, has the potential to put Google out of business.  Facebook has the ability to do more than just use Google-like algorithms to guess what its customers might be interested in, they may be able to use social data they have collected to know with much greater certainty what their customers are actually saying they are truly interested in.  “Facebook already knows, for the most part, which pages appeal to whom – specifically and directly”(Elowitz, 2011).  This key difference between Facebook and Google has the potential to give Facebook an enormous advantage if it eventually decides to move into search.  Even more powerfully, because of the social and interactive nature of its offerings, Facebook has the ability to identify us and our behaviors dynamically as individuals and to predict what we will like based on our profiles and network connections.  “Facebook knows each of our individual and collective behavior patterns well enough to predict what we’ll like even without us expressing our intent”(Elowitz, 2011).  Facebook has the ability to create an even more valuable predictive database of information as it can tap into the intimate patterns of each individual and their friends as they socially interact in real time over the web..

Google has also started to recognize that search is moving from a focus on keywords and links to providing answers for specific personal questions from users such as “Where should I eat?” Google has created an unbeatable algorithm for identifying keywords and phrases and using them to sell advertisements and target specific consumers.  However, the shift to answering specific questions in search is something that the already socially oriented platform, Facebook, will excel in doing well.  “Search engines are really evolving towards giving you a set of answers,” says Mark Zuckerberg, CEO of Facebook. “And when you think about it from that perspective, Facbeook is pretty uniquely positioned to answer a lot of those questions”(Elowitz, 2011).  For example, if someone asked, “What sushi restaurants have my friends gone to in New York, and liked?”  Google would currently not be very good at providing an answer.  While Google is capable of showing you sushi restaurants near your current location or showing you reviews on Yelp or Zagat, it can’t yet tell you which restaurants your friends liked (Elowitz, 2011).  Facebook, on the other hand, which creates virtual groups that share such social information on a daily basis, is potentially much better positioned to add this type of social search capability.

In order to prepare for this shift, Google has been spending a lot of time and effort adding expert information from places such as Wikipedia and Zagat so they will be better equipped to answer these types of specific questions (Ingram, 2012).  It has also been dedicating a lot of time to Google+.  Google+ is the company’s attempt to compete with Facebook and add social elements into search results.  Similar to Facebook, but with many unique features, Google+ is attempting to create a large community of users where individuals can post profiles, add friends and interests, video chat and more.  Google’s ultimate goal is to generate and mine the social data the site generates so that it can more effectively sell targeted advertising with social elements (Ingram, 2012).  However, Google is clearly playing catch-up in this area and there are not yet nearly enough people using Google+ for them to compete with the social network and social data that Facebook has to offer.  And if Facebook makes the transition into the social search arena, it plans to introduce a completely different aspect of search.  Facebook search would be “oriented around a user’s social graph, connections, and interests”(Ingram, 2012).  It is unclear at this point whether or not Facebook will be able to execute this plan while also trying to advance their mobile strategy, reinvent advertising, and everything else they have on their plate at the moment.  But, if any company has the resources necessary to reinvent search in the social age, it is most likely going to be Facebook.

Another company that may also have the potential to threaten Google’s current dominant position is Apple.  While Facebook has a competitive advantage over Google with its social elements, Apple has a competitive advantage in another key area that is experiencing exponential growth:  mobile Internet services.  “Google, for all of its ancillary businesses, lives and dies with search.  Apple is doing everything it can with iOS to de-emphasize the importance of search, and the web, in its mobile devices” (Yarow, 2012).  No company really owns the Internet, but if one company came close, it’s Google.  Search is the starting point for basically every use of the Web.  Rather than compete head on with Google on the Internet, Apple is shifting the landscape and, through the introduction of unique product offerings such as the iPhone, vastly increasing the amount of web traffic delivered via mobile platforms.  As the market dominant player in mobile technology, Apple enjoys a competitive advantage in controlling how content, particularly advertising, is delivered to consumers.  This shift towards mobile is another potential challenge to Google’s dominance in search and advertising because advertising on mobile platforms is much more challenging and complicated. The smaller screen sizes and nature of how consumers use mobile technology make it much harder to deliver (and sell) advertising.

As the market leader in mobile services and technologies, Apple is transforming the way consumers access the web.  For example, Apple is facilitating the rapid growth of “apps” and is pushing consumers to use these mobile programs to access the web, rather than simply “surfing” on the net.   For example, if you visit Fandango.com on mobile Safari, you will see see a banner ad notifying you that Fandango has an iPhone app.  The goal here is to push consumers to use the app instead of the mobile web.  Apple is the dominant player in the mobile App market and wants to control the entire user experience from beginning to end, keeping consumers in the Apple environment and not out in the “open” market.  “The less you use the mobile web, the less you use Google”(Yarow, 2012).  Apple is going to do everything in its power to try to make the web, and Google, irrelevant.

Another threat to Google that Apple has introduced is its own version of a mobile friendly search engine called, “Siri.”  Aside from the fact that Siri is fun for consumers to use on their phones as she frequently comes up with amusing answers to commonly asked questions, there is a much more serious side to this technological innovation and one that poses a serious threat to Google.  Again, taking advantage of its strength in mobile hardware and platforms, Apple has created a voice recognition search engine that is meant to make traditional Google searches irrelevant.  Simply ask your phone a question and wait for the answer. iPhone users can now find a restaurant and make a reservation directly through Siri.  “This is a commercial activity that used to flow through Google and the mobile web”(Yarow, 2012).  By eliminating the very need to even look at your phone (or tablet) Apple is attempting to make Google and the web irrelevant.  Siri has the potential to become the new “middleman” for any consumer task and cut out the need for the web almost entirely.  Google recognizes the major importance of mobile technology and huge impact it is having on consumer behavior.  It is trying to compete with Apple and has successfully developed the Android mobile operating system and many other mobile product offerings to compete with Apple for control of the mobile user experience.  But Apple is an enormous threat and has a dominant position in mobile that continues to gain in popularity.  If Apple can successfully drive the majority of consumer traffic to Siri and to other Apple controlled mobile apps, it might be enough to make Google an unnecessary part of the mobile experience.

Although Google still currently holds the dominant market position in search on the Web, companies such as Facebook and Apple have the potential to challenge Google’s supremacy.   It may be inevitable that Google’s future growth slows down, and that smaller, and potentially more nimble, competitors chip away at its market power.   However, Google has consistently shown its ability to rise to the challenge, adapt and create unique products and systems.  Even though Google is so enormous (it has a market capitalization larger than Microsoft), it is still a very young company.  It generally takes many decades to create a company of this size, especially one that is so dominant in its marketplace. Google is still a vibrant corporation with a new and dynamic corporate culture.  This bodes well for Google’s prospects and may be an indication that Google will be better at adapting, growing, and competing in the future than many of its competitors.  But as technology becomes more socially integrated and migrates towards increasingly mobile platforms, Facebook, Apple and many others will do their best to threaten the Google empire and challenge them for market supremacy.

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