Google Value Chain

Business Practices Apr 24, 2007

Hi Google. I’m the guy who created HitTail, the long tail keyword tool, and am one of the most highly recommended SEO guys on LinkedIn. Feel free to reach out to me at miklevin at gmail dot com.

Get ready for another one of my long, rambling posts. The pay-off is better understanding Google’s value chain–and what a value chain IS. So, bear with me.

I’m a HUGE fan of the fundamentals of business. I often equate business principles back to the way it must have been at the dawn of the first village-cities, when seasonal herd migration patterns made seasonal cities into meeting places and giant swap-meets for our ancestors. They were just discovering things like taking a rock and artfully shaping it makes it able to be traded for MUCH more than the cost of the raw materials (picking it up off the ground). At some point in history was the first primitive conceptualization of what we know today as the manufacturing value chain.

The value chain is simply the process by which raw materials acquire more value as they get processed into finished goods. The best products have efficient value chains, where very low cost raw materials get converted into very high-cost products, with relatively little skilled labor or time spent manufacturing. Oil is one such product, because the raw materials are just sucked out of the ground (free?), and the refinement process allows you to spike the cost to above $65 a barrel (at the time of this writing).

Now THAT’S a business. To get much better, you have to look at Visa, which conducts $4.6 trillion per annum, and gets about 2.5%. That’s about $115 billion per annum for just keeping the Visa/Mastercard uber-servers running–not even calculating in what the individual banks make on interest alone. The value chain is a bit more complicated here, but they’ve made YOUR reputation (the raw material) into something of value (credit-worthiness), and the product (debt) of value to THEIR customers (banks) so they can deliver the finished product (deferred payments, with interest).

Are you getting it?

Every business has a value chain, no matter how convoluted. Raw materials are taken. In the manufacturing process, value is added. The end customer generally pays a premium for that product, and everyone who adds value in the manufacturing process gets their cut. How valuable that cut is at each step, is known as the margin. This is true, whether your product is gasoline, donuts or deferred payments.

So, why all this gobbledygook in order to discuss Google’s value chain?

Because one must follow a convoluted thought process just like with Visa. And it goes…

1. Nobody pays to use Google. No financial commitment has been made on the part of Google users to use Google. And it’s only that sort of financial commitment and subsequent loss-of-face if the solution doesn’t work out that locks you in as a customer to the vendor. If there’s no cost of switching, and there was never really a purchase in the first place, then you’re not a customer. You’re a user. And mainstream users are notoriously disloyal to brand.

2. If WE are not Google’s customers, and search is not Google’s product, then what is? How can we even begin to examine Google’s value chain if we can’t even get the players straight? Well advertisers, specifically users of Google’s AdWords service, are Google’s customers. And traffic delivered to customer websites is the product. And the ability to explicitly control what traffic ends up on what websites is the whole of Google’s value chain.

Google’s ability to arbitrate traffic comes completely from users choosing them as the de facto standard choice for search. It’s like club membership in a free club. It took nothing to sign up, and if you find another club, you can switch easily. But the fact that your club meetings are always successful and always a great hit, turns your club into a forum and a venue. Your club has taken raw materials (club membership) and added value (single-point exposure for advertisers). So now, the club is in the position to take sponsorships to help offset the cost of supporting the club.

That’s Google… before IPO.

Now, take your club and make sure the hottest stars of the day are always in club attendance as guest speakers. Now, offer interested parties the ability to hold a stake in the club, on the off-chance the club becomes REALLY successful. Now, give that club a market capitalization of $149.2 billion dollars, which exceeds the amount of money being annually earned from advertisers by a factor of x10 (conservatively), and make it the top-recognized brand on the planet.

That’s Google… now.

So, Google’s value chain is collecting up the “club-less” wandering masses of the Web (the raw material or rocks), creating a series of turnstiles and wayfinding “signs” to route these people (shaping the rocks to arrowheads), and giving advertisers access to uniquely sorted and pre-qualified sets of these visitors, based on interests expressed through keyword searches, and now long web-surfing user profiles (the arrowhead marketplace).

Yes, understanding Google’s value chain is still an esoteric process at best. And while there are plenty of established models in life and business to look at, what Google’s doing is still so relatively new and at such a massive scale, that it’s still a bit hard to wrap your mind around.

But do this little exercise. Take all the public market capital of every online search marketing company and add it together, and see if it comes anywhere near Google’s $149.2 billion (you have to keep Microsoft out of the equation). All other search companies added together don’t equal Google. Now, look at the percentage of search traffic that’s reported to go to Google. Now, the numbers here vary, but you’ll hear anywhere from 60% to 90%. If you have any doubt remaining that Google is in a position to dominate, and indeed replace the “Web” or “The Internet” as the big world computer network, then put it aside.

There’s a generation of kids growing up Googling “Is Google God?”

It’s a reasonable question, considering that at some point in any modern household, a frustrated parent upon being bombarded by the “Why… Why… Why…” child-ask game that always ends in God or the Big Bang, tells their kid to go ask Google.

Two and two, right? Google must be God. Now how’s THAT for brand loyalty?

Well, I’m here to say that having achieved the level of success that Google has, but with the entire foundations built on a shaky business premise and “club membership” goodwill value chain, that the first priority is to fortify and diversify. The AdWords money keeps pouring in, because Google charges those who cannot find their own audience to use Google’s visitor routing capability.

But what if you no longer needed Google in order to find your audience?

What if there was a method for finding your audience that worked with Google, but did not require you to pay? What if that same method worked with Yahoo, MSN and Ask.com?

Is that something you might be interested in?

What if using that method actually resulted in you building a business asset, as surely as if you were expanding a distribution network, increasing warehouse size, growing the size of your fleet of trucks, or buying property where you could run your own billboard ads? And if expanding that infrastructure only cost you (essentially) the cost of labor?

Is that something you might be interested in?

Well, that’s HitTail. HitTail is based on the premise that no matter how things change, something is “always nearly working for you”. And by zeroing in on what’s almost working for you, and merely knowing one or two of the important factors for relevancy, you can make tiny tweaks and systematically push these results over the edge (onto the first page of results).

We understand that things may change dramatically.

We know that technologies like Ajax, and radically new search technologies, such as small world theory, social arbitrage, surfing animated ontologies and the like are going to make things crazy-new.

But even then, there are going to be things that are “almost working for you” and clues that can be zero’d in on, which nobody else has thought to look at (but we have). So, there will always be HitTail. And HitTail will always remain a sustainable, long-term, cross engine marketing technique, that could even carry over into a post-Bubble 2.0 burst world.

Huh? A Web 2.0 bubble you ask? But cash hasn’t been flowing into startups anywhere near the insane rate of the late-nineties.

Sure it has. It’s just been betting safer. Follow the market capitalization to know where the Web 2.0 bubble currently resides. And marketers, hedge your bets with a low-cost, long-term, cross-engine AdWords alternative.

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