Why Google’s Business Model is So Revolutionary

ìGoogleís not a real company. Itís a house of cards,î Microsoft CEO Steve Ballmer allegedly said recently. His jealous remark is at least half true. What is it about Google that so mystifies every group that tries to analyze it? The more I study them, the more convinced I am that Google has a truly revolutionary business model, and are the most visible pioneers of the emerging 21st century Gift Economy. Microsoft, and the irresponsible brokers who keep flogging overpriced stocks based on unsustainable growth promises, and everyone else who owes their living to the Ponzi scheme that is the modern growth/market economy, should be very afraid.

There is a giant gulf between Google and its investors. The investors, justifiably recognizing that Google is the most customer-obsessed (their #1 principle, even ahead of ‘doing no evil’) and innovative (a neat trick — the two rarely come together) company in the world, believe that that will necessarily translate into the greatest revenues and profits in the world. They’re mistaken.

Google, meanwhile, behaves as if it really doesn’t care much about revenues and profits. Until recently, its two principal sources of revenue were (and still are) marginal and fragile: Advertising online, Google’s #1 revenue source, is a virtual oxymoron. As the economy moves from a supplier-driven to a customer-driven one, a revolution Google is helping engineer, advertising as a whole will be history, and Google’s advertising is no exception, notwithstanding their attempt to ‘qualify’ ads as relevant to each viewer. Its #2 revenue source is selling search tools to corporate customers. But the type of search tool that is needed for an Intranet is very different from the ‘popularity-based’ Google search technology that works so well in the complex Internet world. You can get a sense of this from Google Desktop, whose refreshing speed and ease of use is just a delight to its users, but which often doesn’t locate the precise document you were looking for nearly as deftly as it finds the Internet page you were looking for in a vastly larger haystack.

But recently Google discovered there’s a third great source of revenue in today’s wildly inflated and delusional stock market: IPOs. I’m convinced that, more than anything else, Google went public because it gave them a ton of cash to do even more things for free for their customers — which is exactly what they’ve done since then, offering a never-ending stream of wonderful goodies. Far from a sellout to corporatist philosophy, with its IPO Google may have pulled off the biggest Robin Hood act in history.

There are some who believe Google will be successful, ultimately, by realizing the promise of Web 2.0 — moving the focus of the 21st century worker from the desktop (documents on the hard drive) to the network (where everything is kept online). Indeed, Google has been pivotal in the advance of AJAX, the fusion of technologies that allow users to assemble a page of information from multiple web-based applications, much as MS Office allowed users to assemble a page of information from multiple desktop-based applications. I have long espoused the development of two simple desktop meta-applications — a document annotator that would let you do, electronically and intuitively, everything your pencil can do with manual documents, and a workspace manipulator that would do, electronically and intuitively, everything your hand can do in a physical office, saving, storing, moving, aggregating, receiving and sending stuff  (the illustration above shows how these applications drive all our essential information processing processes). If there is any hope of getting the 80% of the population that are not power users of computer and Internet technology on board, the use of these tools must be made this simple and intuitive, and I believe these two meta-applications are the best way to accomplish this.

But Google and Web 2.0 may offer another alternative — making the personal document, desktop and office disappear entirely. Instead of having a collection of documents on your desktop and in your ‘files’, Web 2.0 keeps all those documents out on the Web (subject to security and access permissioning rules that you set) as a designated, tagged subset of all the documents in the world on the Web. And instead of having an office that routes documents to files and mailboxes, you keep your ‘virtual’ office on Web 2.0, accessible anywhere anytime.

With Web 2.0 the two meta-applications are still the same (we all understand the functionality of the pencil and the hand) but they move from the hard drive to cyberspace. Or perhaps you have the choice of either or both — the applications work the same regardless of where you choose to keep your stuff. But strategically the development of these applications is different if the primary locus of data processing is physically local on a hard drive or virtual. Google may be waiting to see which primary locus emerges — which will depend on legal, cultural, security and technological advances and developments we cannot yet predict.

But Google surely understands that however this unfolds, Web 2.0 and future desktop applications are not going to be profit-making ventures. They will necessarily be Open Source. They will be gifts, from Google and others, to their beloved and grateful customers. Unfortunately, investors will eventually realize this, so it is unlikely that public offerings are going to provide Google with much more revenue. The money, as I’ve said before, is not in software and content, but in hardware and personalized applications (concerts and customizations).

So how will Google make money? It won’t. Perhaps it won’t have to. Perhaps in a Gift Economy customers will be so delighted by Google’s innovations that they will volunteer their time to identify and develop the next generation of applications. Open Source institutionalized.

Or perhaps we’ll find that, fundamentally, there are only so many applications for computer technology, and the Internet will become, like phone lines and pipelines, another utility, to be maintained more or less unchanged.

But back to the revolutionary Google business model. Traditionally customers have needs, wants, and nice-to-haves. Needs they will pay ‘market’ value for. Wants they will pay modestly for, especially if they’re bundled with needs. Nice-to-haves they will not pay for at all, but they’ll take them, and may make differential purchase decisions based on them (if the needs and wants of two vendors are indistinguishable). The market economy is focused on needs, since they are the corporation’s bread and butter, the only source of reliable revenue and growth, and hence profit.

Now enter Google. They fulfil needs, wants, and nice-to-haves, all free. So those of us on the leading side of the digital divide gratefully take all three, and we don’t even really differentiate between them (unless some of the nice-to-haves unduly complicate the application, in which case we don’t want them). Those on the other side of the digital divide get none of them, widening the divide to a chasm. The market understands none of this behaviour, since it doesn’t conform to any accepted business model. Google doesn’t really seem to care. They’re too busy doing what they do so well — delighting customers with valuable, intuitive, boldly innovative and expansive new products, on a scale that is the envy of every entrepreneur.

There is one last ‘search’ frontier that Google has not yet conquered, however, and it could be Google’s biggest hit yet, and possibly generate significant revenue as well. Google is well established as the company that best helps you find what. And recently with Google Maps/Earth they are becoming established as the company that best helps you find where. What if Google is now working on becoming the company that best helps you find who? The company that becomes the expertise finders, the shared-interest finders, the companion finders, the people who, at last, will help us find, effectively and intuitively, the people we’re looking for, not just their stuff. And not just find them, but make sure they’re available (and if applicable affordable) and seamlessly put us in touch with them.

If they could do that, even I might consider buying shares in the company.

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11 Responses to Why Google’s Business Model is So Revolutionary

  1. Meg says:

    That was an exceptional analysis; you made a host of excellent points. The company I work for studies Google rather obsessively — by extension, I find myself trying to find the logic behind every move they make. But, in all honesty, their greatest appeal to me is that not everything they do ascribes to easy logic. Google, at the same time as they give us all the information we want, keeps us guessing. And as with men — I like a little mystery in my genius.

  2. Chris Ball says:

    Is there a Google Dating Service in the works? You suggest it’s a possibility. And to be honest, they’d probably do a better job of it than just about anyone else.

  3. daniel says:

    > What if Google is now working on becoming the company that best helps you find who? they have Orkut (not a new idea) but it work very badly

  4. AA says:

    Nice writeup. Is Gift Economy a standard word or is this something that you have come up with to explain your ideas? Also you did not really refer to the diagram at top in your article. And while I understand that google gives stuff away for free, how do they make money? You argue, yourself, that their revenue stream is fragile. Given that, how goes giving stuff away for free make them money? OSS people have still to figure that out. Maybe Google knows!!

  5. Tim says:

    Google rocks so much. And I like their philosophy to give the masses access to information etc.

  6. Haig says:

    i don’t think the concept of google’s main revenue generator (contextual ads) is fragile/marginal as you’ve said. It’s a revolutionary (albeit not invented by google….overture?) way of bridging the gap between consumers and producers. Yes people are gaming the system (adword arbitrage, adsense click factories) but that happens in all sufficiently large, open ecosystems (type of tragedy of commons) and future iterations will evolve on necessary vectors to preserve the value.Google wants to extend this concept not only on their web page(adwords), not only on others’ web pages(adsense), but on mobiles(local/maps), shopping contexts(froogle), communication contexts(talk,gmail) and future channels(electronic ink displays all over the meatspace). I agree like you said, the money for google isn’t in the software or content. But its also not in the hardware or the applications. All those are just pieces of the whole. The execution of the entire symphony of systems in order to bring together provider and consumer is where the value comes from.

  7. Wissbegieriger says:

    AA, Aseem, there’s a pretty good description of the Gift Economy concept here: http://en.wikipedia.org/wiki/Gift_economyNote the closure with anarcho-communism and Kropotkin. I would recommend Ursula K. Le Guin’s The Dispossessed as a very fair look inside what this might be like – plus a wonderful novel.Clive

  8. Actually, I think the last frontier of search is the ability to automate the classification of unstructured data, and the construction of intelligent taxonomies. That is, search that’s explicitly content-aware and context-aware in the way that people are.As for Google’s business model, it sounds like you are suggesting that they are intentionally pursuing the strategy that many dot-com busts of the late 90s did by accident – running through a lot of investment capital with no sustainable revenues. Unless your shares are tax-deductable as a charity write-off, I’m not sure why rational investors would want to invest in that.

  9. Dave Pollard says:

    Meg: I wonder if they also keep the others at Google guessing? Chris: It would be a natural outgrowth of a good People Finder. It won’t happen overnight though. This is a tough nut to crack, so look for many experiments. Daniel: Agree that Orkut is a terrible experiment, but everyone is entitled to one mistake — and Google hasn’t exactly held it up as a model. AA: I describe the diagram in more detail in the article I refer to later in this post; you can find it here. And as Narr points out Gift Economy isn’t my term. Haig: I don’t (yet) see that much synergy in what Google is doing. Whether its revenue model is durable or not, time will tell. Wanna bet? Narr: Thanks for the book reference; I’ll check it out.

  10. I didn’t quite get how Google’s main revenue stream (advertising) is fragile. Could you clarify?Also, you seem to paint Google as a search company. But really it isn’t. It’s in the business of gathering audiences with service offerings and selling their attention to advertisers. The question is how will it find the right balance between services directly linked to advertising (search, email) and some that are just bringing more people into the network (IM, news)?

  11. Graham says:

    How interesting it would be to be privvy to the ‘grand strategy’ at Google.I have an idea for a fantastic internet business. Profit generating. International. New.Most importantly, it will generate real value for users.The problem is, how on Earth do I get through to anyone at Google, let alone someone important!Follow my adventures as I try athttp://talktogoogle.blogspot.com/

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