After Google’s I/O announcements, I flashed back to a dozen or so conversations I’ve had with executives and entrepreneurs about what Google is doing. Reading between the lines, some imagined buying yachts after a Google acquisition. Others feared downgrading to an inner tube if Google entered their space. The best way to think about what Google might do is to understand why it does things. Here’s my deconstruction of the strategy that makes one of the world’s most innovative companies tick.
Free to Disrupt
From free video hosting to free document management to free phone calls to free email, there’s one thing no one can deny – Google knows how to please our inner shoplifter. If Colgate offered free toothpaste to watch us brush or Ivory offered free soap to watch us shower, they’d find a few takers and a lot of resistance. Google’s products wear a brilliant disguise. Each consumer freebie is an irresistible magnet that brings users in droves, but is subsidized by a hidden information exchange – an entirely separate data exchange where advertisers pay to target those same users.
The Four E’s of Google’s Strategy
The company’s new products and streamlining of old ones reveals an underlying logic, discipline, and structure. 1. Earn – 95% of Google’s revenue comes from advertising. Other than its minimalist ads, Google’s true nature is cleverly hidden from users. It’s really a B2B network that lets a “closed loop” of business customers target Google users through ads. Google’s ad service pages waste no time distinguishing between users and customers clear. Adwords support is loaded with phone numbers to call. You’d have to hijack a truck full of Google Glasses to get someone from Google to help you recover a Gmail password.
Google has never stopped trying to diversify its revenue streams by charging for storage, business apps, and even YouTube channels. But none have made more than a 5% dent so far. No worries, Russell Crowe isn’t counting on his music to make him rich, either.
2. Entice & Defend – Google’s geeky magic comes from its non-stop inventiveness. Every Google service is a tantalizing and addictive mix of free (or cheap) utilities that make our lives easier or more productive. These utilities must accomplish one main goal – to create the biggest possible market to deliver ads. That means increasing the number of users, frequency of visits, or duration of stay on a Google property.
So each Google property must accomplish at least one of three things:
- Deliver ads to as many users as possible (like Gmail or Search)
- Bolster the “earn” by enhancing products, typically through data collection to improve ad targeting. Products like Google+ and Maps soak up user preferences, behaviors, and relationships. As this “big data” engine grows, the potential for new revenue streams and apocalyptic privacy fears multiplies. I’ll explore these in future articles.
- Defend Google and its properties against competitors that might steal usage time. Facebook, Spotify, Netflix, iPhone and Twitter have forced Android, Google+, and Play into existence to defend Google’s its share of internet time.
Google accomplishes all this through a combination of organic products, non-stop upgrades, and acquisitions. Each one must create deep roots (email, contacts, smartphone) and painful switching costs (did anyone survive Apple Maps?).
The intended effect of all Google services is a lot like a casino. Google wants to envelop you in its world until you can’t find the exits. Once inside, you’ll tell the dealer your life story as he takes your money…
3. Expand the Pie – This is probably the least understood part of Google’s strategy. Google knows its hard to find new customers and compete with every new service. So it does something I spent a lot of time promoting at MasterCard and American Express – expand the pie. In my case, it meant, promoting conversion from cash and checks to digital transactions, regardless of platform. With a bigger pie, everyone’s slice gets bigger. In Google’s case, that means expanding leisure time. That’s right, Google wants to make time. Google knows if you’re online and near a screen or smart device, they’ll be making money.
The two best examples of this are Glass and self-driving cars. With Glass, Google wants to sit on your face – literally. Their glasses can deliver digital stimulation at times previously wasted pretending to care about the people around you. Smart cars liberate you from your fear of crushing skunks and navigating New Jersey. Now you can research stocks, listen to Google music, and work on Google Docs.
4. Experiment – Google has a culture that breeds experimentation – no not the kind that starts with brownies and ends at Snoop Dogg’s house. The experiments range from Google X labs, which incubates top-secret R&D projects, to all employees who are encouraged to use 20% of their time to work on anything they like.
As important as creating this tsunami of innovation, is paring it all down. Under Larry Page Google has become much more diligent about killing even beloved services (like Reader) that no longer serve a purpose.
Mutts & Purebreeds
Some products mature -moving from one E to another. Others fit multiple categories. Wallet, for example, connects Google ads to real-world purchases that can “close the loop” on whether ads produced a purchase. Wallet also expands the pie for Google, getting people to interact digitally while shopping in the analog world. (Register at IdeaFaktory to get my deep dive analysis into Google’s strategy and what it and its competitors might do next.)
A Google Apart
At a typical company, strategy determines what to do. At Google, it determines what to stop doing. Most big companies have gangs of pricey MBA consultants with peach fuzz making slides – 98% of which die unimplemented (the slides, not the consultants). Google’s smart, discovery-driven culture rarely (if ever) lets outsiders get that close to the wheel.
It’s also important to remember what Google is not. It’s not a marketing company. Its developers are young, techie power-users who can miss the mark when designing for analog mortals. Understanding human nature has not been the company’s forte. Brilliant mathematical minds sometimes overlook the human element – or the intangible cost of their actions. For example, cancelling or changing services like Reader or Google+ can shake the faith of a loyal but vocal minority. Weakening their allegiance might look immaterial on today’s P&L, but could drip down to the bottom line in years to come.
So Will Google Eat Your Lunch or Buy You Lunch?
Google’s unique subsidy structure makes competing with individual products feel like trying to become a movie star but having poor parents. It’s not impossible, but I’d rather be Will Smith Jr. But just because Google could make money by offering things for free, doesn’t mean it will. After all, even Jayden Smith probably won’t try to star in Little Miss Sunshine 2.
As long as advertising butters its bread, Google craves your time and attention. Google will enter any space that threatens or enhances those efforts. Growth rate, potential for competitive advantage, and scalability will decide how aggressively it pursues a market. Google favors self-service, scalable businesses run by machines, not people. (That’s why a Groupon acquisition would have been completely out of character – and a big mistake.)
I’d argue that it’s often a good sign when Google enters your space. It validates your idea and boosts consumer awareness. Plus, Google hasn’t been infallible. Great service and humanity can sometimes beat the greatest machine – even one as good as Google’s.
Steve Faktor is founder of IdeaFaktory innovation incubator, author of Econovation, and keynote speaker. He is the former Head of the American Express Chairman’s Innovation Fund and ex-senior innovation & strategy executive at Citi, MasterCard, and Andersen. Follow Steve’s writing via email, Google+, LinkedInfluencer, Facebook & Twitter.