Google’s competitive advantage lies in its unique business model and its hyper-scale access. From our business perspective – it ain’t people who can access Google. It is Google that has access to billions of people. Google offers the third party to its tremendous number of users – the third pay for that access.
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In This Issue
The success of Google is an old story. It dethroned Alta Vista, Yahoo, and eat almost the internet. You have heard that story again and again – and we won’t do it here. In our journey to make a valuation of google, we begin from its business model and competitive advantage. We find several interesting things.
Google’s Competitive Advantage is Built by Acquisition. From AdMob, to YouTube.
At the beginning of its disruptive force, Google relies on its simple yet convenient UI for search engines. But the story of the original idea ends. In the next step to becoming Galactus of the Internet, Google builds its ecosystem through acquisition. Many fails, so many and Google has reputation for retiring its acquisition1. But, let us mention some honorable names along with its economic moat:
The most used OS for smartphones today – far exceeding iOS. Google doesn’t monetize this OS, but it gives access to the advertiser for millions of Android users. Android enjoys a hyper-scale network effect as its competitive advantage. The more people use Android, the better advantage for developers and advertisers.
Anticipating the shift from television to video streaming, Google launched no, not YouTube – Google video, and it turns joke. Not wasting its time, management acquires YouTube, and now it’s become a significant contributor to firm revenue. Apart from its network effect, YouTube enjoys the benefit from its User-generated content as a business model, means that YouTube doesn’t even make a single video to attract advertiser. The user makes it. This is almost an automatic money printing machine.
Not dead actually, currently it is bundled as Google Ads. Unlike television, DoubleClick introduced dynamic advertising with high accuracy targets – it is new at that time. It is the seed of a modern advertising platform.
Same like DoubleClick
As you see, the key strategic decision for Google’s growth is in its acquisition. Maybe the search engine giant is too big to grow organically, thus it needs external resources.
Our thesis about key growth is also supported by revenue shift. In 2012, Google generated 96% of its revenue through its advertising products. In 2020, that contribution down to 80%.
The last considerable acquisition is the wearable device Fitbit. In our perspective, this move will give enable Google to widen its ecosystem into the physical world – which is far from Google’s grip. It is interesting how Google plays with this card.
Business Model: Here are the Google’s Competitive Advantage Lies.
Google home page is visited at an unbelievable number
Monopolistic Business, Eating all market share.
Even for the big five2, Google has an unparalleled scale. Every day people use Google. Before you buy your gadget and type the item you want in the Amazon search bar, you may end up with Google – you watch the video review of that product on YouTube. And it is true for almost every product and service – hotel, laptop, traveling.
Want to know how inflation works? YouTube. Want to know how to build muscle without equipment? YouTube. Every search ends up with Google.
And…apart from its sophisticated search ecosystem, Google also provides the user with its productive ecosystem. And like its other services, it is free. You could do your office work with Google suite – a great Office 365 alternative. You could make a virtual meeting with Meet.
All of these make Google has access to billion people, perfect for an advertiser who need mass exposure. This is Google’s competitive advantage: Hyper-scale business. But not only it, but we also have another economic moat that will be discussed in the next section.
Google Competitive’s Advantage: AI, Perfect Network Effect
Network Effect advantages are a type of economic moat which characterized by an increasing number of the new user will enhance another user benefit. This kind of durable competitive advantage is recognized easily in businesses like Amazon, eBay, Visa, Amex, MasterCard – a new user will give benefit both customer and merchant. Google also emulates this structural advantage via its super-sophisticated AI.
The more people use Google – and any product within it, whether it is YouTube, Chrome, G-suite – the more Google AI smarter. The smarter this machine learning, the better the search result and the better for advertisers to do their business. Since the ads will be very personalized.
And there will be no machine nor intelligence like that in foreseeable future. Google simply eats the internet. A new competitor – or even old power like Amazon or Microsoft, has not had enough resources or time to catch Google.
The interesting part is – it doesn’t end there.
Microsoft or IBM or Amazon may make this level of intelligence too, but, Google’s AI has been “trained” by all people around the world for years. Unmatched.
Commentaries on Google’s Competitive Advantage
According to a study by Forrester Research, 13% of online shopping begins by googling “item name”, while 30% start with the Amazon homepage. Want to know what is behind this power? High Research and Development Expense. Amazon leads the race for Research and Development budget, Google follows in second place. It seems that to provide an answer for the universe, you need an astronomic budget – this deep pocket makes that two giant techs are impossible to be dethroned in the term of search engines.
- We are suspicious that Google does it on purpose, to kill the seed before it is big enough to beat Google
- Facebook, Amazon, Microsoft, Apple, Google