Why GOOGLE Thrive and Others Cant Make it ?

Everything you always wanted to know
about Google…But were afraid to ask
Paris, December 2008

December 2008 • Everything you always wanted to know about Google… •
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Google key success factors : Web specific ?
Scalability
• Ability to easily grow at
marginal costs
• Applied to infrastructures :
ability to adapt its size to
high load & volumes
• Applied to business
models : ability to
monetize millions of users
Network effects Data mining
Openness Cocreation Business model
• The traditional walled
garden1 media strategy
becomes irrelevant
• Content and services must
be open and interoperable
to favor audience
circulation
• The utility of a good or a
service varies with the
number of users
• The reach of a critical
mass of users constitutes
a significant barrier to the
entry
• The web offers the
opportunity to exploit and
analyze a very large
amount of data
• Users’ behavior can be
analyzed to create
monetizing value
• Non-traditional actors
become part of the value
chain
• Users, content creators
and external developers
are given the tools to
create new markets and
enrich services
• Advertising is not a market
but a business model
• Any market that attract
advertising is a target for
Google
1 Network or portal which offers only its own content or services to users

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Why won’t Google be affected by the crisis ?
Why is Google trying to change the mobile world ?
Why isn’t YouTube a content portal ?
Why does Microsoft fear Google ?
How Google wants to compete with Facebook ?
Why is Google buying satellites ?
How does Google buy traffic ?
Why did Google acquire DoubleClick ?
Why doesn’t Google monetize all its services ?
How does Google capitalize on Open Source developers work ?
How did Google capture the offline advertising market ?
Why is Google stealing our voices ?
Is PageRank a really competitive advantage ?
How does Google turn advertising into information and performance ?
Annex: Network effect, two-sided market, glossary, financial , contact
1
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4
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11
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13
14
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Why won’t Google be affected by the crisis ?
During a crisis,
performance
advertising gains
market shares
+ 3% 2007-2008 1
YouTube
monetization
increases
Estimates 2008 :
Revenues = 200 M $
1
Monetisation of
the Internet
Mobile audience
260 millions mobile
subscribers
worlwide oct 2008 1
Explosion of the
non advertising
revenues
+450% 2007-2008
Performance
advertising
On line
video
Internet
Mobile
Licenses and
other
revenues
Google is in a situation in which it can resist the economic crisis and find
new revenue sources, both advertising and non-advertising
1 : faberNovel
estimates
4 levers will allow Google to increase its revenues amidst the economic crisis
Revenues 2008 Revenues 2012
Bn$ 201
Bn$ 35 1
1

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Why is Google trying to change the
mobile world ? (1/2)
Mobile industry is based on a “ traditional” locked values chain.
Entry barriers stop Google from applying its models to the mobile industry:
Terminal
Operating
System
Portal Operator Web Contents
Examples:
Limited Network Access
Access restricted to services/contents
and to their improvement
• Terminals assigned to a unique operator
• Difficulty of interconnecting networks
• Operator portals favored over other portals
• Services offered by terminal manufacturers
favored over other services
• Closed operating systems
2
The mobile industry is not suited for the Google development model
based on openness, interoperability and network effects.

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Why is Google trying to change the
mobile world ? (1/2)
In order to duplicate its open model, Google designed a three fold strategy :
1 Operating System
Location-based
services
Cab4me FreeFamilywatch
Games
Golfplay JOYit
Social
Networks
Jaiku 3Wertago
Collaborative
Tools
ShareYour
Board
Grand central 3
2 Federal Communications Commission
Google breaks open the mobile industry value chain to create an environment
that will be fit to the distribution of its products and monetization model.
3 Acquisitions
Android : Open Source
O.S.1 Lobbying Telco partnerships
• Android Developer Challenge:
Contest for developers to create
new applications for Android
• Open Handset Alliance:
Common initiative of 34 mobile
phone industry players
(manufacturers, suppliers and
distributors) aiming at spreading
Android
• Google candidacy for mobile
license attribution aims to force the
FCC2 to impose an openness
clause to the winner
• A success : clause partially
imposed on the winning bidder,
Verizon.
• Pressure from Google to force
operators to offer its applications
as default options
• Sharing of advertising
revenues between Google and
operators
2
In addition, Google developed and acquired mobile devices applications :

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Why isn’t YouTube a content portal ? (1/2)
YouTube acquisition is part of a strategy to monitor key content and audience hubs.
YouTube has already won the audience battle …
…
1 NewYork Times
2 Hitwise 2008
75%
60%
9%
16%
4%8% 2%3% 1% 1%
May 2008
May 2007
Organise information
Give access to
information
Monetise contents
through various
sources of audience
•A new information silo: video
search
•Next : Speech to text
technology : information
searches within video
contents
• YouTube bandwidth
spending estimated to reach
1M$/day1
• Broadcasting of contents
through Google websites as
well as other sites
• Revenue sharing logic
Market shares of 5 leading video websites,
United States (may 2008 vs.may 2007)
[%]2
3

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• YouTube Program Partner :
Payed providers of semi-
professional content
• Broadcasting contracts
with major content providers
Encourage content
providers to use the service
Attract as many viewers as
possible
Monetize through relevant
advertising tools
Unlike its competition, YouTube follows an open logic and focuses primarily on
developing content distribution tools :
YouTube acts as the platform of a two sided3 market composed of content
providers and video seeking users.
Why isn’t YouTube a content portal ? (2/2)
2 Clickable text advertising displayed on a video 3 See Annex
• Broadcasting videos on
YouTube website and other
Google sites (ex :
Google.com, GoogleNews)
• Exporting videos (blogs,
social networks) and
developing API1 for
advanced broadcasting on
third party websites
• Broadcasting on all video
devices : television, mobiles,
multimedia players, video
consoles
• Traditional advertising:
AdSense and banners
• In-video advertising :
Pre-roll, post-roll, overlay2
• Brand advertising:
broadcasting video ads
within an environment
coherent with the brand’s
image
• E-Commerce: Affiliation of
partner websites (Amazon,
Itunes, video games)
1 Application Programming Interface. Standardized programming protocol allowing applications to communicate
3

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Why does Microsoft fear Google ?
Google’s ambition isn’t limited to “in browser” Web services, but extends to
any online or offline application market.
Google sets out to enter the online application market, MSFT’s cash cow :
Google partly « destroys » Microsoft’s market when shifting value
from offline to online
• Launching of the Office Google
software pack: a word-processor,
a spreadsheet program, a
presentation tool and a calendar
• Free alternative to Microsoft
Office pack
• Acquisition of SketchUp, a 3D
modeling software with a free
version made available
Disruption of offline application
market segments
• Launching of Google Gears:
Open Source project allowing an
offline use of online applications
• Claimed ambition of becoming
a standard and encouraging
online languages as opposed to
offline programming languages
Consolidation of the online
environment
4

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In 2007, Google launched Opensocial : a series of multi platform API allowing
developers to create compatible applications with partnering social networks,
Ex : Slideshare application available on Linkedin and hi5
OpenSocial is not a Facebook competitor but a «meta-social network ».
Google wants to become the « social data search engine » and to monetize
this data, leveraging network effects.
Network effects
How Google wants to compete with Facebook ?
Facebook’s platform is limited, Google’s is the whole Web
5
Network
effects
Network
effects

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Why is Google buying satellites ? (1/2)
Since 2005, Google has been multiplying investments in all kinds of
infrastructures:
Wifi
Gratuit
Wimax
Backbone1Baloon
Wifi
Satellite
• 60 M$ Investment
• Internet access in
developing countries
• Partnership
• A mobile high-speed
internet access
technology
• A 100 M users
market by the end of
2008
• 100 M$ investment
• Expansion of high-
speed networks
• Partnership
announcement
• Internet access
technology superior to
satellites for isolated
areas
• Free Wifi in Mountain View
• Investment in Fon: shared Wifi
access
1 Long distance high-speed networks, core of the Internet network
6

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Internet infrastructures is actually Google’s business
infrastructure:
Traffic on Google websites depends on internet infrastructure development and
availability (Backbone, Wifi, Satellite,…)
Google has three objectives when investing in the upstream part of its value
chain:
Strengthen and secure existing
infrastructure
Favor high-speed Internet access
Prioritize Internet access for
unconnected countries or populations
• Strengthening and securing existing infrastructure
lightens Google’s dependancy on its providers
• Favouring high-speed Internet access means more
time spent and usage volumes, thus increases
Google services usage
• Future web users are Google services’ next
users
Why is Google buying satellites ? (2/2)
Through infrastructures investments, Google reinforces its traffic providers
and increases access to its services.
6

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How does Google buy traffic ?
Google asserts its ability to attract users on the sole basis of its services quality and without
turning to advertising… Truth is Google largely buys traffic from providers
•Firefox: 60 million daily
users in 2008
•Google finances 85% of
Firefox in exchange for
having its search engine
embedded in the browser
Browsers
• In 2006, partnership
deal with Dell to have the
Google search engine
appear by default on Dell
computers
• In 2008, partnership
deal with Apple to have the
Google search engine
appear by default on
Iphones (13 million devices
sold by october 2008)
• Partnerships with
manufacturers allow the
search engine to be
guaranteed to in a prime
position.
Manufacturers
Google has the financial power to buy traffic from partners, accessing to
massive audiences.
• The Google Toolbar is
part of the web navigator,
which makes Google the
default search engine
• Adobe installs it as part
of a package with
Shockwave(2006)
• Sun has been installing
it as part of a package with
Java since 2005 (20 million
uploads/month)
Toolbar
• In 2005, Google bought
a 5% stake in AOL for 1
billion$ (20 million
subscribers at time of deal)
• Google became AOL’s
white label search engine
• Google expands its
advertising network reach
Portals
7

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Why did Google acquire DoubleClick ?
• In 2007, Google acquired DoubleClick, one of the world leaders in display
advertising :
1 www.attributor.com/blog/2008/03/
Advertising
houses
< 100k
UV2
100k-
1M UV2
>1Mon
UV2
Adbrite 4,1% 4,9% 0,5%
AOL 1,9% 6,5% 5,7%
DoubleClick 9,1% 29,9% 48,0%
Google 71,4% 41,6% 15,8%
MSN 6,6% 6,3% 12,8%
Yahoo 4,7% 7,3% 16,5%
Market shares of main online
advertisers in relation to website
traffic 1
Number of advertisers
Traditional
advertising
market
Banner Market
Text ad market
Ad budget per
advertiser
Google acquired DoubleClick to gain an expertise (display) and global market
shares (highly popular websites)
2 Unique Visitors
Google « moves up » the long tail
of advertisers
8
To position itself on the banner
market
To reach for highly popular
websites

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Why doesn’t Google monetize all of its
services?
Some Google services are free of charge and monetized through advertising :
Blogger: blog creating tool
Google Health: service for managing and storing personal medical information
GoogleNews: personalized mash-up of news articles and summary
Picasa: photo sharing service
Google SketchUp: 3D model creating tool
Goog-411: phone information service
…
Google global strategy allows strong indirect monetization of its products
Tools designed to
generate audience are
made available
Products specifically
developed to improve
other Google products
Attract new customers
through loss leaders
Monetization of blogs created on
Blogger through AdSense or
FeedBurner
Google 411 created to better the
video indexing on YouTube
Picasa devised as a loss leader
towards other Google products
These services are actually indirectly monetized :
9

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How does Google capitalize on Open
Source developers work ?
Google encourages development of open source applications:
Through support of Open Source community, Google pursues 4 objectives:
Increase of total
Internet traffic
•New applications
create new uses,
leading to increased
total traffic
Promotion of a more
« open » Web
•Increasing the
interoperability
multiplies network
effects1
•Opensource is
becoming an
advantage to attack
proprietary code
strategies
Assembling a free
public relations team
•Developers’ chats are
a very effective public
relation tool
Development of Open
Source langages used
by Google
•The number of
available Open Source
codes encourages the
emerging of new
products
•Feedback of Open
Source developers
helps creating new
products
Google supports the Open Source community in a spirit of collaborative
creation, one of Google’s strategic pillars
• Google code: platform designed for Open Source developers
Supplied with guides, tutorials, code extracts of Google products
• Google Search Code: code search engine
Automatic referencing of all code sections that can be found on the Internet
• Events created for the Open Source community:
Google Summer of Code: grants awarded to Open Source student projects
Google Developer Days: seminars dedicated to Google products
1 See Annex
10

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How did Google capture the offline
advertising market ?
Online advertising market accounts for only 8% of the US market1:
Google is exploring the offline ad market!
1 TNS Media Intelligence, US advertising market
Most offline media (television,
radio, press,…) begin to be IP-
ready with online versions
• Ad transfer from online to offline
(YouTube on television)
• Entry on traditional offline markets
(radio, billboards,…)
• Integration of offline techniques
(traditional fixed pricing)
• Partial adaptation of AdWords onto
radio and television
Google’s entry on this market anticipates new uses and broadens its offer.
Not specifically successful for now…
11
3% 7% 8%
17%
21%
44%
Billboards Radio
Internet DailyPress
News Press Television

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Why is Google stealing our voices?
In 2007, Google launched Google Voice Local Search in the United States, a
free and automated phone directory service :
Google is creating a database of phonemes, recorded during calls in order to
better its speech to text1 technologies:
What is the business model of this
free and ad-free service ?
Creation of a
phoneme
database
Development
of « speech to
text »
technologies
Indexing of
YouTube
audio tracks
Indexing of all
audio/voice
sources
Externalizing tasks onto users (« crowdsourcing 3») is a commonly used
process by Google to improve its products.
1 Converting oral information into text
2 First experiments with political videos posted during the presidential campaign of 2008.
3 Neologism created in 2006 by Jeff Howe and Mark Robinson, Wired magazine editors
2
Bla bla
bla
12

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Is PageRank a really competitive
advantage ? (1/2)
PageRank is Google’s link analysis algorithm that measures the probability
that a page will be relevant to user’s query :
Based on the correlation between the amount of links towards a page and their
relevance
It accounts for the notoriety of the sites that link to the page in question
PageRank’s simplified formula is :
(A page’s (u) PR is the sum of all PRs of pages linking to u (v), divided by the respective number of
outbound links contained in pages v)
Google1 claims that PageRank is one of its search engine’s main competitive
advantage :
1 http://www.google.fr/why_use.html
A « champion of
democracy »
The search engine’s
« cornerstone »
A tool unlikely to be
tampered with
13

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Is PageRank a really competitive advantage ?
(2/2)
A tool that can’t be tampered with?
Sale or exchange of famous website links
(webringing)
Search Engine Optimization1 techniques
PageRank is only one of many Google’s search competitive advantages. It
is certainly not the main entry barrier to competitors on the search market.
1 Set of techniques aiming at improving a site’s referencing on a search engine.
Scalable architecture Quick/simple queries
Relevance guaranteed
by 200 other criteria
• Capacity of increasing/
growing according to the
volume of indexed pages
and number of queries
• 2 millions servers by 2008
• Clear query interface
• Simple and quick
presentation of results
• The search engine’s
algorithm was subjected to
450 modifications in 2007
An outdated technology?
Launch of search engines that
don’t use tools such as
PageRank (Cuil, Powerset)
Google’s search engine success relies on other factors :
13

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22
How does Google turn advertising into
information and performance?(1/2)
« Advertising income often provides an incentive to deliver poor quality search results»
Sergey Brin & Larry Page
• Influence results by
making paid for clients
appear first
• Example: Opentext/Kelkoo
• Little or non-existent
targeting
• Large size adverts
• Slows down results
display from a search
engine query
Weak relevance
• Impossible to reward
efficient advertising
• Example : television ads
• No direct measure of real
performance
• Example : invoicing
according to the number of
displays (CPM)
Most advertising models present strong weaknesses
Strong intrusion
Undefined
performance
14

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14
How does Google turn advertising into
information and performance?(2/2)
Displays advertising
Most relevant ad
defines
Quality Score
Direct impact on advertising value
Qualityscore measures the relevance of the ad and
is determined by the click throug rate on the ad. It
impacts the display rank and Cost per Click:
• Rank: relevant ads are pushed up,
non relevant ads do not appear
• Cost per click of the ad : performant
ads are charged less
Relevance
For the user
Total cost of the advertising
campaign is determined by the
number of clicks on the ads and
not by the number of displays.
Google’s advertising model benefits the user (improved relevance) as well as
the publisher (performance based billing & rebates)
Less relevant ad
Performance
For the advertiser

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Google : the network circulation value
creation model
Traditional value creation
Eg : Microsoft
Network value creation
Eg : Google
Customer
products
$
Server
Products
$
The global value of the company relies
on independent lines of
products/business units
Gmail
Youtube
Partners
The global value of the company relies
on traffic between network parts
(proprietary or partners)
Business
Products
$
Entertain
ment
$
Search
engine
Apps
Apps
$
$
$
$
$
$
$$
$
$

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Going further : are Google’s key success
factors limited to Google
• Our conviction : Every company innovating in the digital industry must
address and capitalize on the 6 identified key success factors to perform
on digital markets.
• Our proposition : faberNovel proposes to align companies strategy,
development projects and existing products with these factors to ensure
success optimization and market performance.
Download our comprehensive White Paper
« Google’s key success factors »
http://www.fabernovel.com

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Annex
• Definition : network effects
• Definition : two-sided market
• Pricing of a two-sided market
• Glossary
• Financial datas
• Acknowledgement
• Contacts

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27
What is a network effect?
• A network effect describes how a service becomes more valuable to its
users as more people use that same service
Phone’s utility is limited if
the network is composed
of 2 users
The utility for a user
raises if the network
broadens
According to Metcalfe’s
law, the utility(U) of a
network is proportional to
the square of the number
(n) of its users
U ≈ k*n2
Network effects creates critical masses of users.
They represent significant barriers to entry for competitors.

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What is a two-sided market?
• A two sided market consists of a platform allowing 2 groups of
clients/providers to interact and which optimizes the revenue distribution
among these groups with the objective of maximizing market sizes.
Exemple of the video game market
Network effects in action
Side A
Developers
Side B
Consumers
Price A Price B
• Utility to a new developer
increases as the community of
developers grows (shared
knowledge)
• Utility to a new consumer
increases as the community of
consumers grows
(secondhand market)
• A potential market for a
developer gets bigger as more
consumers enter the said market
• The number of games available
to the consumer increases with
the number of developers
working on the platform
Internal effects Crossed effects
Internal
network
effects
Crossed network effects

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Pricing of a two-sided market
Side A
Price A > 0
Platform1
• The platform may charge a side
• Example 1 : Apple Appstore charges
developers by taking a revenue share
on sold applications
• Example 2 : Microsoft makes
consumers pay for video games
• … or subsidize a side
• Example 3 : Google Android finances
developers through a contest
• Example 4 : Youtube finances video
content providers
Face A
Price A < 0
Platform1
1 Provided the sum of price A + price B is a fixed figure, a platform financing a group automatically charges the other group
and vice versa
Who should you be charging?
Who should be subsidized?
The platform must subsidize the groupe that is most price-sensitive and charge the
group that is most sensitive to the other group’s size.

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30
Financial data (1/2)
Revenues and Net margin (M$)
2002 2003 2004 2005 2006 2007
100 106 399
1465
3077
4203
439 1466 3189 6139 10604 16594
Revenues
Net
margin
CAGR Net margin 02-07 : 112%
Revenue distribution/activity (B$)
CA 2007
65%
34%
1%
10,6
5,8
0,2
Licences and other
revenus
Partner websites
(AdSense)
Google web sites
16,6Total
Source: Google financial tables 2007 2 : calculated as Traffic Acquisition Cost/Google Network web sites revenues
CAGR Revenues 02-07 : 107%
Net margin’s growth outperform
revenues’ growth
Most of Google’s revenues still
come from its own websites
Advertising revenue share to partner
web sites is increasing2
and is the highest of the market
78%
2005 2006 2007
79% 85%

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31
Financial data (2/2)
2005 2006 2007
6,1
10,5
16,4
Traffic acquisition costs
Advertising revenues
2,1 3,3 4,9
34,9% 31,5%
30,1%
2005 2006
2005 2006 2007
6139
599
9,0%
10604
1229
11,0%
16594
2120
12,0%
Turnover
R&D
investments
High R&D investments
+88%/year between 2005 and 2007
Data center costs are under control
In Billion $ : +26% 2006/2007 (vs +72% revenues)
Controlled traffic acquisition costs
34,9% of advertising revenus in 2005 vs 30,1% in 2007
Source: rapport annuel Google 2007
+ 26%
1,9 2,4

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32
Glossary
• API : application programming interface. Standardized programming protocol
allowing applications to communicate
• Internet Backbone : main trunk connections of the Internet, made up of a large
collection of interconnected high-capacity data routes and core routers that carry
data across the countries and continents
• Crowd sourcing : act of outsourcing a task to users
• Data center : facility used to house computer systems and associated components
• O.S. : operating system
• Overlay ad : clickable text advertising displayed on a video
• Scalability: property of a process, which indicates its ability to handle growing
amounts of work easily
• Search Engine Optimization : process of improving the volume and quality of
traffic to a web site from search engines via natural search results (as opposed to
paid search results)
• Speech To Text : technology converting spoken words to machine-readable input
such as text
• Walled Garden : closed or exclusive set of information services provided for users
by a network or portal

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33
Acknowledgements
To faberNovel contributors :
• Amaury de Buchet, VP Consulting
• Cyril Vart, VP Strategy & Development
• Alexis Arquié, Junior Project Analyst
• Mounir Fassouane, Junior Project Analyst
To the bloggers :
• Olivier Ertzscheid from affordance.typepad.com/
• Google Operating System : googlesystem.blogspot.com/
• Richard MacManus from readwriteweb.com/
• Techcrunch.com & Mobilecrunch.com/
• Frédéric Cavazza from fredcavazza.net/

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34
Stéphane Distinguin
Founder and CEO
stephane.distinguin@fabernovel.com
Cyril Vart
VP Strategy & Development
cyril.vart@fabernovel.com
Pierre Fremaux
Project Analyst
pierre.fremaux@fabernovel.com
Matthieu Lecomte
Junior Project Analyst
matthieu.lecomte@fabernovel.com
Tél. : +33142722004

Why GOOGLE Thrive and Others Cant Make it ?

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