The Google Enigma

Should innovation-minded managers look at the fast-growing Internet company as a

This decades most remarkable business story has been the rise of Google from the dot-com ashes.
The company didnt even exist 10 years ago it was incorporated by its founders, Stanford
University graduate students Larry Page and Sergey Brin, on September 7, 1998 but it is today a
juggernaut that is as feared as it is admired. The companys growth has been dizzying, its revenues
shooting up from less than US$500 million in 2002 to more than $10.5 billion in 2006. And despite
a prolonged hiring binge, an aggressive acquisition program, and a multibillion-dollar investment in
building data centers, Google remains robustly profitable, earning a net income of $2 billion on $7.5
billion of sales through the first half of 2007. Since the companys initial public offering in August
2004, its stock price has risen fivefold.
Whenever a company becomes wildly successful in a brief span of time, it naturally becomes an
object of fascination for corporate executives and even the general public. More than that, it comes
to be presented as a new model for business success. Reporters and scholars scour its history and its
practices, looking to distill general lessons for other firms to copy. Google is no exception. Over the
last two years, the workings of the companys idea factory, asBusiness Week describes it, have
been dissected in cover stories in all the major business magazines, and business school professors
have published studies documenting how the company organizes and manages its product
development efforts. In his new book, The Future of Management, London Business School
professor Gary Hamel calls Google a modern management pioneer that has much to teach us
about how to build companies that are truly fit for the 21st century.
Thats heady stuff, and its hard not to get caught up in the hype. But business executives have at
least two reasons to think twice before leaping aboard the Google bandwagon. First, for all its
success, Google is still a young company, and it has yet to be tested by adversity. We dont even
know whether its approach to management, and in particular its approach to innovation, is
acause of its success or a product of its success a crucial distinction. Second, we dont know how
well Googles example applies to other businesses. Google is certainly a different sort of company,
but is it so different as to be anomalous? Is the company an exemplar or a freak?
Its probably too early to answer such questions definitively. But by taking a close look at Googles
business model and innovation program, we can discover important clues. And we may even gain a
few insights into how our ideas about business innovation are shaped.

Complementary Advantage
Some say Google is God, Sergey Brin once said. Others say Google is Satan. The confusion about
Googles identity may not be quite that Manichean, but it does run deep. Despite all the media
attention the company has received, it remains an enigma. People cant even agree what industry its
in. The many businesses that see Google as an actual or potential competitor include software
houses, advertising agencies, telephone companies, newspapers, TV networks, book publishers,
movie studios, credit card processors, and Internet firms of all stripes. Even financial advisors,
doctors, and librarians eye the company warily.
The sheer breadth of Googles influence and activity can easily be interpreted as evidence that it is
indeed an entirely new kind of business, one that transcends and redefines all traditional categories.
When you boil down Googles business model, however, you find that its not quite as mysterious as
it seems. The way Google makes money is actually straightforward: It brokers and publishes
advertisements through digital media. More than 99 percent of its sales have come from the fees it
charges advertisers for using its network to get their messages out on the Internet.
Googles 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
Googles 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.
Its 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. Its this natural drive to reduce
the cost of complements that, more than anything else, explains Googles 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.
Theres 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 Googles
complements, and the companys 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, its 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 Googles 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 Googles 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 companys 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
youd get a much better sense of a pages relevance if you looked at the number and the quality of
the other pages linking to it. Links, they realized, were the Webs version of votes: add them up and
youd get a clear picture of the importance and value of sites.
The superior results delivered by Google quickly drew the attention of Web surfers, and in short
order it became the dominant search engine. But serving up free search results is not, in itself, much

of a business model. And that brings us to the second critical innovation: the development of an
auction to sell ads linked to search results. Google did not come up with the idea of letting
advertisers bid on search terms. It swiped the concept from another search engine, GoTo. But
Google perfected the process. Whereas GoTo ranked its search ads according to the size of
advertisers bids, Google added a second criterion the likelihood that people would actually click
on the ad. That innovation made Googles ads more relevant, increased click-through rates
substantially, and, when combined with Googles superior search results, turned Googles auction
into a gold mine.
Googles third great innovation and it may well be the one most critical to the firms future
success is the design of its parallel-processing computer system. Housed in scores of data centers
around the world and incorporating hundreds of thousands of computers, the system is able to
crunch numbers and process searches and other transactions at unprecedented speeds. Because
people demand quick responses from the software they use online, Googles system has provided it
with a big advantage over rivals like Microsoft and Yahoo. The future competition among these
companies will be fought as much on the power and efficiency of their machinery as on the
attractiveness of their services.
These innovations represent a remarkable accomplishment. But its important to remember that
they largely predate the formal innovation process that Google developed as it expanded and that is
now the source of much of the praise lavished on the company. That process appears to have three
key tenets. First, Google believes in throwing lots of people at innovation. Its aggressive recruitment
of talented software engineers is legendary in Silicon Valley, and it keeps its workers happy by
lavishing them with gourmet food, toys and games, free bus service, and other generous perks.
Second, it organizes its product development staff into a lot of small teams and gives them
considerable freedom in how they allocate their time and money. In a variation on a practice made
famous by 3M, Google allows its engineers to devote 20 percent of their time to pet projects, with
little corporate oversight. Third, the company is fanatical about using computers to monitor and
analyze its employees work as well as its customers use of its services. Googles CEO, Eric Schmidt,
has said its goal is to use metrics of performance to systematize every aspect of its operations.
The companys innovation system reflects its deep roots in academia. Google operates in much the
same way that a science department operates in a big research university. It hires the smartest
people it can find, allows them to pursue their interests in small collegial teams, and measures the
progress and results of their work with scientific precision. In a sense, Brin and Page have tried to
recreate the graduate school milieu inside the halls of a for-profit corporation.

But how successful has the academic approach really been in creating thriving new products and
services? So far, the record has been less than outstanding. Google has introduced dozens of new
services, but with only a couple of exceptions, notably Google Maps, they have failed to capture
dominant shares of their markets. Even the companys much-discussed e-mail service, Gmail, lags
well behind the industry leaders, Yahoo Mail and Microsofts Hotmail, in number of subscribers.
Some of the companys heavily hyped new ventures, such as Google Answers and Google Video,
have been scaled back or abandoned altogether.
Many of the most innovative and successful of Googles new services are, in fact, ones it has
acquired rather than created. Those include the hugely popular video-sharing service YouTube, the
Weblog publisher Blogger, the virtual globe Google Earth, the online word processor Writely
(renamed Google Docs), the wiki developer JotSpot, the news syndication service Feedburner, and
the Internet phone service GrandCentral. When it comes to innovation, Google is starting to look
less like a sower than a harvester, less like an inventor than an exploiter. Thats a natural and
perhaps necessary progression for a rapidly growing company, but it belies the firms popular image
as a wildly successful innovator.
When it comes to creating hit products, Google may actually be hampered by its unique economics.
Because the cost of failure is so low, it can experiment in all sorts of areas and rush new services to
market in the early stages of their development. That kind of freedom brings many benefits, but it
can also lead to an erosion of discipline. In the absence of strong economic pressures, its easy for
companies like Google to put off making the hard choices and difficult trade-offs that lie at the heart
of long-term business success.
There are signs that Google is coming to recognize this problem. Over the past year, its management
has begun tightening the reins on its organization, imposing some restrictions on the companys
freewheeling and free-spending culture. Late in 2006, in what CEO Schmidt called a big change in
the way we run the company, it ordered its innovation teams to focus on fewer initiatives and
reduce the overall number of products under development by 20 percent. An exasperated Sergey
Brin admitted that he was getting lost in the sheer volume of the products that we were releasing.
And when the company announced disappointing earnings for the second quarter of 2007, Schmidt
put the blame on overhiring and announced that the company would be more conservative in
expanding its staff in the future. Google is hardly staid, but it is growing up.
Fantasy and Stability

Googles recent moves suggest that, though its business model may be unprecedented, it is not
immune to the growing pains that have bedeviled successful young companies in the past. As cash
pours in, it is all too easy for a fast-growing startups founders and executives to become convinced
that the old rules dont apply to them that they are blessed with the Midas touch. Investors and
reporters often buy into the fantasy, amplifying managements cockiness. But as discipline weakens,
the company inevitably begins to overreach and overspend until some lapse or failure abruptly
cures the hubris and returns everyone to reality.
The fact that Google appears to be following this well-worn path doesnt take anything away from
the companys great accomplishments or the landmark innovations that form the pillars of its
success. Nor does it mean that other companies should ignore its example. At the very least,
Googles use of powerful computers to collect and make sense of the operational and customer data
flowing through the Internet and other networks provides a window into the future of many
industries. And, on a related note, the company has created simple but useful systems for sharing
information within and between teams, a challenge that has frustrated many firms. Google may not
be a perfect model, but it deserves close attention and study.
Above all, Google teaches us, through both its successes and its failures, that smart companies the
ones that are not only consistently innovative but consistently profitable exhibit three qualities.
They hire talented people and give them room to excel. They measure progress and results
rigorously and make course adjustments quickly. And they remain disciplined in their work and
their spending, curbing the instinct to do too much at once. Of course, that sounds less like a radical
rethinking of business verities than a restatement of them. Which brings us to a further lesson:
Beware the inevitable hype about how the latest business trend or the newest overnight success
changes everything. Yes, markets and technology change, sometimes with devastating speed, but
through the turmoil, the underpinnings of business success remain fairly stable.
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Nicholas G. Carr ([email protected]) is a contributing editor tostrategy+business. His