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license to print money. By inserting itself between the shops and shoppers of theworld, the search provider takes a small commission every time it connects the two.”Beyond its core search business, Google’s activities only added cost:
[J]ust look at YouTube, the video-sharing website Google bought for $1.8bn—paid mostly in stock—in 2006. The site supplies about 40 per cent of all videoswatched online worldwide for free. That generosity comes at tremendous cost,as very few of its videos carry advertising. Credit Suisse estimates YouTube’srunning costs will be between $500m and $1bn this year, while revenues willonly be in the region of $240m. Even with the addition of more professionallycreated content, the economics appear unsustainable.3
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340 CASE 21 GOOGLE
With Google’s revenue growth hit by the 2008 recession while its costs continuedto rise rapidly, some investors believed that it was time to rein in Google’s chaoticexpansion and develop a more focused strategy founded upon a clear recognitionthat the basis of Google’s business model was the advertising revenues that flowedthrough which its dominance of internet word searches. Table 21.1 shows financialdata for Google.
Google’s Founding
Google was created by Larry Page and Sergey Brin, PhD students at StanfordUniversity. In January 1996, Page’s search for a dissertation topic led him to examinethe linkage structure of the World Wide Web. Page and Brin developed a page-ranking
algorithm that used backlink data (references by a Web page to other Web pages) tomeasure the importance of any Web page. Although several rudimentary Web searchengines were in existence, most selected Web pages on the basis of the frequency with
which a particular search word appeared. They called their search engine “Google”and on September 15, 1997 registered the domain name google.com. Theyincorporated Google Inc., on September 7, 1998 in Menlo Park, California. Google’s“PageRank” algorithm was granted a patent on September 4, 2001.Google met an essential need of the rapidly growing number of people who were
turning to the World Wide Web for information and commercial transactions. Asthe number of web sites grew exponentially, locating relevant web content becamea critical need. Page and Brin were not alone in recognizing the potential for a search
engine. Among the early crawler-based Web search engines were WebCrawler,Lycos, Excite, Infoseek, Inktomi, Northern Light, and AltaVista. Several of thesesearch engines became popular “portal sites”—web sites that offered users their first
TABLE 21.1 Google Inc.: Key financial data2004 2005 2006 2007 2008
Income data:
Revenues 3189 6139 10605 16594 21796
Costs and expenses:
Cost of revenues 1469 2577 4225 6649 8622
Research and development 395 600 1229 2120 2793
Sales and marketing 296 468 850 1461 1946
General and administrative 188 387 752 1279 1803
Total costs and expenses 2549 4121 7055 11510 15164
Income from operations 640 2017 3550 5084 6632
Interest income and other, net 10 124 461 590 316
Income before income taxes 650 2142 4011 5674 5854
Net income 399 1465 3077 4204 4227
Balance sheet data:
Cash and marketable securities 2132 8034 11243 14218 15845
Long-term liabilities 43 107 128, 610 1226
Total stockholders’ equity 2929 9418 17039 22689 28238
Source: Google, 10-K Report, 2008.
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