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Hypothesis: Google as a System

Hypothesis: Google as a System. Useful?. Web users provide traffic to websites. $CPC $CPI (CPA). Web Users. Google Websites. Advertisers. Targeting Technology. Access to huge audience. Audience?. Websites continue to provide value to customers (i.e. relevant search).

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Hypothesis: Google as a System

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  1. Hypothesis: Google as a System Useful? Web users provide traffic to websites $CPC $CPI (CPA) Web Users Google Websites Advertisers Targeting Technology Access to hugeaudience Audience? Websites continue to provide value to customers (i.e. relevant search)

  2. Hypothesis: Google making money Web users provide traffic to websites $CPC $CPI (CPA) Web Users Google Websites Advertisers Targeting Technology Access to hugeaudience Websites continue to provide value to customers (i.e. relevant search) Money Side

  3. Hypothesis: Google making money Web users provide traffic to websites $CPC $CPI (CPA) Web Users Google Websites Google Network Advertisers Targeting Technology Access to hugeaudience Google Network Members Websites continue to provide value to customers (i.e. relevant search) Money Side

  4. Google AdWords through Google sites

  5. Google AdWords through AdSense http://www.nationalpost.com/

  6. Hypothesis: Google making money Web users provide traffic to websites $CPC $CPI (CPA) Web Users Google Websites Google Network Advertisers Targeting Technology Access to hugeaudience Google Network Members Websites continue to provide value to customers (i.e. relevant search) Subsidy Side

  7. Hypothesis: Google as a two-sided System Web users provide traffic to websites $CPC $CPI (CPA) Web Users Google Websites Google Network Advertisers Targeting Technology Access to hugeaudience Google Network Members Websites continue to provide value to customers (i.e. relevant search) Money Side Subsidy Side

  8. Strategy • Objective • Goal: To have people leave their homepage as quickly as possible • Implicit objective: To remain the dominant search engine of choice and continue to grow Source: As found in the Corporate section of the Google website: http://www.google.com/intl/en/corporate/

  9. Scope • Offerings • Search • Advertising – 97% of Revenues • Google Website • Google Network • Operating Systems & Platforms • Android, Chrome O/S & Browser • Enterprise – 3% of Revenues • familiar, easy-to-use Google technology for business settings Source: Google 2009 Annual Report

  10. Scope • Geographic Location • United States 47% • United Kingdom 13% • Rest of the World 40% • Market • Advertising - Two Sided Market • Businesses wanting to advertise • Web searchers • Enterprise • Businesses Source: Google 2009 Annual Report

  11. Core Activities • Operating search engine • Research and Development • Sales and Support – incl. Google Network • BrandMarketing

  12. Value Proposition Map – Advertiser

  13. Value Proposition Map– Web Searcher

  14. Strategy Statement Advertisers • To remain the prominent web searcher of choice by offering a large platform of targeted web searchers and the Google Network of partner sites to advertisers through extensive research and design and partnership initiatives. Web Searcher • To remain the prominent web searcher of choice by building tools that simplify the search process, having a wide reach of relevant websites, and maintaining a “cool”, trusted brand image for web searchers through extensive brand marketing, research and design initiatives, and the operation of search engine.

  15. PEST Analysis

  16. Business Model

  17. Target Customer • Online search engine users • Users looking for information easily and conveniently • Businesses looking to advertise • Offers cost effective advertising

  18. Job • Users – to easily and conveniently locate vast amounts of information to meet their needs • Advertisers – to obtain a means of getting affordable advertising directed at the ‘right audience’

  19. Customer Value Proposition Users

  20. Customer Value Proposition Advertisers

  21. Key Resources • Google engineers • Build the apps and IT infrastructure • Brand • Critical to expanding user and advertiser base • Patents and IP • Protection of intellectual property • Servers and data centers • Over one million • Partnerships • Google Network Members • Sun Microsystems

  22. Profit Model Revenue • Usage Model • Web searchers can use service for free as it is subsidized • Advertising Model • Cost-per Click (CPC) – based on auction • Cost-per-Impression – pay per appearance • Cost-per-Acquisition – advertiser only pays if someone buys or signs up Costs – largely fixed costs • Costs of Revenue • Traffic acquisition costs, data center operations costs • R&D Costs • Personnel compensation • Sales and Marketing Costs • Customer services, sales and support functions, advertising and promotion • General and Admin Costs • Personnel and facilities, finance, HR, IT, legal, professional services fees

  23. Profit Model Cont’d Margin Model • High Margins • Operating margin reasonably high at 35.2% Resource Velocity • Needed high capital investment initially when establishing itself, but now resource velocity is high (Rev/IC = 3.04)

  24. Key Processes • Operating search engine • Indexes millions of pages and returns searches for users queries • Research and Development • R&D centers all over world • Aim to launch innovative products early and often • Sales and Support • Sales teams foster relationships with advertisers and internet companies • Marketing • Targets small businesses • Advertising • Various methods – search, web, YouTube

  25. Google Business Model Users Target Customer Job Value Proposition Advertisers Vast reach of searches -> Variety/Relevance Easily locate different forms of information Obtain affordable advertising directed at the right audience Online search engine users Large/Diverse Audience -> Relevance Adsense& Google Network -> Reach/Relevance Prioritized/Relevant Results -> Saves time/Relevance Businesses looking to advertise AdWords delivers ads alongside relevant searches -> Customization Everyone uses it -> Fun & Image Price - Free Price – Cost per click, impression, acquisition Profit Model Key Resources R&D Costs Traffic Acquisition Costs Usage Revenue Google Engineers High Margins High Velocity Sales and Mktg Costs Brand Advertising Revenue Data Center Op’n Costs Patents & IP Key Processes Sales & Support Advertising Operating Search Engine Server/Data Centers Partnerships & Network Members Marketing & Promotion R&D New Products

  26. Knowledge Services, Revenue Intangible Benefits Back End Infrastructure Sun Microsystems Google Sales & Support Value Network Google Toolbar with downloads CPC /CPI Revenue Google Brand Marketing Regulators Advertisers AdWords Ads AdSense Ads Web Searchers/Users Google Search Engine Operation Google R&D Use Use New Products/ Services % of CPC Revenue AdWords Ads Google Network Members (incl.Fox Interactive Media) Use Google Websites (i.e YouTube. Gmail, etc)

  27. Knowledge Services, Revenue Intangible Benefits Sun Microsystems Google Sales & Support Value Network Google Brand Marketing Regulators Advertisers Anti-Trust Laws & Privacy/Security Laws Google R&D Web Searchers/Users Google Search Engine Operation Data Data Data Google Network Members (incl.Fox Interactive Media) Google Websites (i.e YouTube. Gmail, etc)

  28. Knowledge Services, Revenue Intangible Benefits Sun Microsystems Google Sales & Support Value Network Google Brand Marketing Regulators Advertisers Loyalty Web Searchers/Users Google R&D Google Search Engine Operation Sense of Community Brand recognition Google Network Members (incl.Fox Interactive Media) Google Websites (i.e YouTube. Gmail, etc)

  29. Knowledge Services, Revenue Intangible Benefits Back End Infrastructure Sun Microsystems Google Sales & Support Value Network Google Toolbar with downloads CPC /CPI Revenue Google Brand Marketing Regulators Advertisers Loyalty Anti-Trust Laws & Privacy/Security Laws AdWords Ads AdSense Ads Web Searchers/Users Google R&D Google Search Engine Operations Data Use Use New Products/ Services AdWords Ads Data Sense of Community Data % of CPC Revenue Brand recognition Google Network Members (incl.Fox Interactive Media) Use Google Websites (i.e YouTube. Gmail, etc)

  30. Google Created Value! Source: Google 2009 Annual Report

  31. Source of Revenue Statements Source: Comscore and MagnaGlobal

  32. Revenue Decomposition (by Geography) Source: Google 2009 Annual Report

  33. Revenue Decomposition (by channel) Source: Google 2009 Annual Report

  34. Key Factors to Value Creation • Key characters: web users, advertisers and competitors • Increased customer base through search (Google directs 70% of resources to this) • Google is ranked as the top search property worldwide with the number of searches increased by 58%from 55k to 88k in 2009. Source: Comscore • Increased aggregate paid clicks through maintenance of Adsense activities which are tailored to value proposition of relevance • “66% of Internet users would click on more online ads if they were better targeted to them.” Source: Internet Advertising Bureau

  35. Gaining Global Market Share • Competition: • Gaining global search engine market share • 2009 Google: 82.01% • 2009 Yahoo!: 7.19% Source: NetMarketShare data for 2007-2009

  36. NOPAT

  37. NOPAT Excluded from calculation: • Impairment of equity investments • Interest income and other, net

  38. Invested Capital

  39. Invested Capital Excluded from calculation: • Non-working cash and marketable securities • Deferred Income taxes • Non-marketable securities • Goodwill

  40. ROIC Decomposition

  41. ROIC Decomposition (Operating Margin)

  42. ROIC Decomposition (Capital turns)

  43. WACC

  44. WACC Vs. ROIC

  45. Google is capturing value! • ROIC far exceeds WACC • Invested capital decreased from prior year but NOPAT grew • Increase in revenue and cost control (both variable and fixed)

  46. Test: How value was captured Key Characters • Google Network Members • Content Distributors • Advertisers Motivation • Appropriate Profit

  47. Google is Doing Well! Create Value Yes No No Yes Capture Value

  48. Sensitivity Analysis

  49. Why is Google doing well?

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