Google the website is just one product of Google, Inc., the company. It’s the primary product, to be sure, but it’s just one facet of a multifaceted organization.
If Google is about more than simple web searching, just what is it that the company does? Well, we can get a clue by examining Google’s mission statement:
Google’s mission is to organize the world’s information and make it universally accessible and useful.www.google.com/about
As mission statements go, this one is properly high-minded and vague. But it’s also somewhat descriptive of what the company actually does on a day-by-day basis. By using its proprietary search technology, Google does help to organize information and make it both more accessible and more useful. Note, however, that the mission statement actually doesn’t use the word “search.” Instead, Google says it wants to “organize” information. It just so happens that the way it chooses to organize this information is via searching. So, in terms of Google’s business, organizing data is the mission; searching is the chosen strategy to achieve this mission.
Google’s Business Model
You may have noticed that Google’s mission statement is a little vague about how the company expects to make money at this endeavor. In fact, a “a little vague” is an understatement; Google doesn’t say one word about how it plans to generate revenues and income.
As we’ll learn later in this chapter, Google doesn’t make any money from its main search site or technologyat least, not directly. Google generates all its revenues from selling advertising, which is something you wouldn’t guess by reading its mission statement. After all, the mission statement doesn’t say anything about “selling advertising based on search results” or “generating revenue from the sale of advertising links” or the like.
I guess the folks at Google are allowed to take a little license with their own mission statement; there’s no law that says you have to lay out all your goals and strategies for the public (and competitors) to see. But I feel it’s important for us as consumers of Google’s products to realize how the company is monetizing its technology. It’s also important if you’re thinking about investing in Google stock; you need to know that the number of site visitors or web pages indexed has no direct bearing on the company’s revenues or profitssave for the fact that the more visitors to its site, the more advertising revenues it can generate from its real customers.
How did Google get to be Google? It all started at a 5,000-watt radio station in Fresno, California….
Okay, not really. But it did start small, and it did start in California.
Google was the brainchild of two Stanford University graduate students. Larry Page, 24 years old at the time, had just graduated from the University of Michigan, and was visiting Stanford on a campus tour. Sergey Brin, then 23, was one of the students assigned to show the potential students around. Legend has it that when they first met on that weekend in 1995, they didn’t get along. That changed, however, as they both entered Stanford’s computer science grad program and began to collaborate. (The two happy fellas in photo are Larry and Sergey as they look today.)
Their first collaboration, in January of 1996, was a simple search engine they called BackRub. It was unique in that it based its search results on the number of “back links” pointing to a given websitemore or less the same approach later used by the Google search engine.
Note : The word “google” is a play on the word “googol,” the mathematical term for the number represented by a 1 followed by 100 zeros. The term was coined by Milton Sirotta, and popularized in the book Mathematics and the Imagination by Edward Kasner (Sirotta’s uncle) and James Newman.
BackRub was also unique in that it was designed to work on a network of low-end PCs, instead of the expensive mainframes used by the major search engines of the day. Larry and Sergey grew their search capacity by adding more and more consumer PCs to the network that was housed in Larry’s dorm room.
By 1998, Larry and Sergey were trying to sell their technology to Yahoo! and other search portals, but had no takers. Instead, they moved out of the dorm, wrote up a business plan, and found an angel investor in the form of Andy Bechtolsheim, one of the founders of Sun Microsystems. Bechtolsheim wrote Larry and Sergey a check for $100,000, and Google, Inc. was born.
Additional investors followed (mainly family and friends), and the company soon had an initial investment of close to $1 million. That was enough to rent an office (actually, the garage of a friend) in Menlo Park, California, which is what they did in September 1998. The company stayed in the garage until February 1999, when they moved to a real office in Palo Alto. At that time, Google had a whole eight employees.
By then, the Google.com website was up and running and handling more than a half-million queries a day. (next figure shows the original Google website from December 1998; it doesn’t look a whole lot different from Google’s current site!) Users loved what they found, which helped them garner a lot of press attention, which in turned helped to increase site traffic, which in turn garnered more press, and so on and so on. The increased traffic and increased press also helped to attract additional investors, which helped to finance the hiring of more employees and the purchasing of additional hardware.
Google was a hit.
As time went by, Google continuously expanded the size of its website index, as well as introduced additional features and services. By the turn of the millennium, Google was competing for the titles of both biggest search index and most popular search engineand continued to grow.
Amazingly, Google was able to finance this growth with nothing more than venture capital money, resisting the urge to go public during the late 1990s dot-com boom and resulting early 2000s dot-com bust. But the pressure to go public kept building, and on August 19, 2004, Google issued its initial public offering, listed on NASDAQ under the GOOG symbol. Like all things Google, the IPO had its unique qualities; the initial stock was offered through a little-used Dutch auction process, designed to attract a broader range of small investors than what you find with a normal IPO.
Today, Google continues to grow (and its stock continues to risefrom an initial price of $100/share to a high of close to $500/share in early 2006. (It’s since dropped a bit from then, but still remains significantly higher than the initial price; next figure shows a graph of Google’s stock price through March 2006.) Google is one of the five most popular sites on the Web, and ranks as the number-one search engine in the U.S, the U.K., Canada, Australia, and numerous other countries. The Google site attracts close to 400 million unique users every month. (And the number of employees has risen from the initial twoLarry and Sergeyto 5,680, at the end of 2005.)
Google not only attracts a lot of visitors to its website, it also generates a lot of money. How much money? the next table details Google’s revenues and profits for the years 2002 through 2005:
That’s right, in 2005 Google generated more than six billion dollars in revenue, and close to one and a half billion dollars in profit. One and a half billion dollars profit. That’s not bad. Not bad at all.
Is Google a Search Company or an Advertising Company?
Let’s take another look at Table 1.1, and focus on how Google’s revenues were generated. In 2005, Google generated $6 billion in advertising revenues versus just $73 million in licensing and other revenues. In other words, Google generated just 1.2% of its revenues from direct technology-related activities. Fully 98.8% of its revenues came from selling advertising.
What’s that, you say? What is a technology company like Google doing selling advertising?
Well, my friend, it’s all about monetizing the technologyand when it comes to search technology, you monetize it with ads. Since you can’t charge users for searching, you charge advertisers for placing their ads (or “sponsored listings”) on the search results pages. So while Google appears to be a company focused on search services and technologies, it’s really a highly targeted advertising company.
What does that mean to you, a loyal Google user? Maybe nothing. Or maybe it’s possible that Google focuses at least as much on how to increase advertising revenues as it does on improving search results. Or maybe the two activities go hand in hand.
After all, Google’s advertising-based revenue model is not unlike what you find in the magazine business. Magazines may charge you a bit on the newsstand, but they generate the bulk of their revenues from advertisers. And the more copies of the magazine they sell, the more they can charge their advertisers for a full-page ad.
It’s the same with Google. The more eyeballs they can deliver to their advertisers, the more they can charge for those “sponsored links.” So whatever they can do to increase the number of site visitorswhich benefits us as users, of coursethey end up making more money from their advertisers. Make the experience better for users, they attract more users, they charge more for advertising, they make more money. That’s the formula.
And how, exactly, does Google run its advertising business? There are actually two components to the business, Google AdWords and Google AdSense.
- AdWords (GoogleAds) sells targeted keywords to advertisers; when someone searches Google using one of those keywords, the advertiser’s “sponsored listing” is displayed. Google gets paid (a penny or so) whenever someone clicks on the advertiser’s listing.
- AdSense is the flip side of AdWords. The AdSense program places small ads on non-Google websites. (So if you run your own website, you can sign up for the AdSense program to put ads on your site’s pages.) Google generates an appropriate ad based on the page’s content; when a visitor clicks the ad, both Google and the site owner get paid.
Life at the Googleplex
So Google is a technology company that makes money from selling advertising. This kind of split personality is evident in Google’s many offices around the worldsome of which are strictly technology based, others of which are strictly sales based.
Note : There’s a lot more to say about the AdWords and AdSense programs. To learn more, read our post, “Making Money with Google AdSense and AdWords.”
Google’s world headquarters in Mountain View, California, is called the Googleplex. The Googleplex combines both technology offices and sales offices, although it has a decidedly Silicon Valley flavor.
Note : The Googleplex is located at 1600 Amphitheatre Parkway, Mountain View, CA, 94043. The main telephone number is 650-253-0000.
The Googleplex has been described as “a joint founded by geeks and run by geeks.” I’ve never been there, myself, but I’ve been told that it has a decidedly nonhierarchical feel, kind of an anticorporate atmosphere, where employees move from project to project regularly and frequently. Walk down the hallway and you’ll see everything from lava lamps to large rubber exercise balls; the typical office is a “high-density cluster,” like the one in Figure, where three or four staffers share couches and computers. During lunch, employees of all levels socialize at the Google Café, and there’s a workout room, massage room, washers and dryers, video games, a pool table, and a baby grand piano available for anyone’s use. Google’s a big company, but the Googleplex still has a small company feel.
Of course, the Googleplex isn’t the only Google office. Google has offices all around the world, including a handful of technology-only offices (several in India), considerably more sales-only offices, and a few offices that, like the Googleplex, combine technology and ad sales. The different types of offices emphasize the technology/sales dichotomy that drives the company; here’s a list:
- Technology-only offices. Pittsburgh, PA; Bangalore, India; Delhi, India; Hyderabad, India; Mumbai, India
- Sales-only offices. Atlanta, GA; Boston, MA; Chicago, IL; Dallas, TX; Denver, CO; Detroit, MI; Irvine, CA; Seattle, WA; Melbourne, Australia; Toronto, Canada; Copenhagen, Denmark; Manchester, England; Paris, France; Hamburg, Germany; Milan, Italy; Amsterdam, Netherlands; Seoul, South Korea; Madrid, Spain; Stockholm, Sweden
- Technology and sales offices. Mountain View, CA (world headquarters); Kirkland, WA; New York, NY; Phoenix, AZ; Santa Monica, CA; Sydney, Australia; Sao Paulo, Brazil; London, England; Dublin, Ireland; Tokyo, Japan; Mexico City, Mexico; Zurich, Switzerland; Istanbul, Turkey, Etc.