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 / Winter 2007 / Issue 49(originally published by Booz & Company)


The Google Enigma

Google’s protean appearance is not a reflection of its core business. Rather, it stems from the vast number of complements to its core business. Complements are, to put it simply, any products or services that tend be consumed together. Think hot dogs and mustard, or houses and mortgages. (For a general discussion of complements, see my column “Complementary Genius,” s+b, Summer 2006.) For Google, literally everything that happens on the Internet is a complement to its main business. The more things that people and companies do online, the more ads they see and the more money Google makes. In addition, as Internet activity increases, Google collects more data on consumers’ needs and behavior and can tailor its ads more precisely, strengthening its competitive ad­vantage and further increasing its income. As more and more products and services are delivered digitally over computer networks — entertainment, news, software programs, financial transactions — Google’s range of complements is expanding into ever more industry sectors.

Because the sales of complementary products rise in tandem, a company has a strong strategic interest in reducing the cost and expanding the availability of the complements to its core product. It’s not too much of an exaggeration to say that a company would like all complements to be given away. If hot dogs became freebies, mustard sales would skyrocket. It’s this natural drive to reduce the cost of complements that, more than anything else, explains Google’s strategy. Nearly everything the company does, including building big data centers, buying optical fiber, promoting free Wi-Fi access, fighting copyright restrictions, supporting open source software, and giving away Web services and data, is aimed at reducing the cost and expanding the scope of Internet use. To borrow a well-worn phrase, Google wants information to be free — and that is why Google strikes fear into so many different kinds of companies.

There’s one more twist. Because the marginal cost of producing and distributing a new copy of a purely digital product is close to zero, Google not only has the desire to give away informational products; it has the economic leeway to actually do it. Those two facts — the vast breadth of Google’s complements, and the company’s ability to push the price of those complements toward zero — set the company apart from other firms. Google faces far less risk in product development than the usual business does. It routinely introduces half-finished products and services as online “betas” because it knows that, even if the offerings fail to win a big share of the market, they will still tend to produce attractive returns by generating advertising revenue and producing valuable data on customer behavior. For most companies, a failed launch of a new product is very costly. For Google, in general, it’s not. Failure is cheap.

That makes Google a poten­tially dangerous model for other businesses. Your company may find itself competing, directly or indirectly, with Google, but unless you make money by selling advertising attached to digital goods, you may not be able to learn much from its example, at least not at a strategic level. The economics of Google’s business may simply be too different. By following its lead, you may go broke.

Lessons from the Googleplex
But what about learning at a more tactical level? Can businesses at least draw some useful lessons from the way Google approaches the difficult process of business innovation? The answer is “yes and no.”

Most of Google’s success and all of its profits can be traced to three innovations: the first a brilliant insight into the organization of information, the second a creative act of imitation, and the third a breakthrough in the engineering of computer systems. The company’s founding idea was hatched by Page and Brin in early 1996 when they realized that Web search engines were deeply flawed. In ranking results for a keyword search, traditional engines looked mainly at the content of Web pages, adding up, for example, the number of times the keyword appeared. The Google founders saw that you’d get a much better sense of a page’s relevance if you looked at the number and the quality of the other pages linking to it. Links, they realized, were the Web’s version of votes: add them up and you’d get a clear picture of the importance and value of sites.

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