What is Google's Business Model & Why Is it Being Regulated?

3 March 2020

After reporting record revenue of $161.8 billion in 2019, Google continues to dominate the world of big tech.

The tech giant has grown from strength to strength as it diversifies into new markets, invents technologies of the future and even ventures into the hardware business.

Unsurprisingly, companies of this scale are quick to receive a bad rap. Critics fear Google is an unstoppable force with an unfair advantage over the rest of the pack.

So, does Google have a monopoly in the technology sector?

Join us as we explore the ins and outs of Google and ask whether government regulations on the technology industry are necessary to promote fair business.

What Does Google Do?

While we all know and love Google as the multicoloured search engine, the trillion-dollar giant has grown arms and legs since its humble beginnings at Stanford University.

After a groundbreaking research project by Larry Page and Sergey Brin in 1996, the pair have gone on to create a tech empire which covers everything from Google Earth to the world’s largest video-sharing platform.

In 2015, the Google brand was restructured under the umbrella name of Alphabet Inc. in an attempt to narrow Google’s focus.

Today, Alphabet Inc. is the fourth-largest company in the world with an appetite for acquiring businesses of all shapes and sizes. Whether it’s controlling the temperature of our homes with Google Nest, managing our busy lives with the Android Operating System, directing us around cities with Waze or creating pioneering artificial intelligence with DeepMind, the ever-growing Alphabet Inc. ecosystem is everywhere.

What Is Google’s Business Model?

The cornerstone of Google’s success is built upon one simple concept — relevancy.

Ever since Page and Brin wrote their first line of code for ‘Backrub’ in 1996, relevancy was their #1 focus. They wanted to filter the noise of online space by pushing the most relevant content to the top of the Search Engine Results Page (SERP).

To this day, Google’s core business model relies on is called a ‘flywheel effect’— all revolving around this steadfast obsession with relevancy.

Improved relevance brings more users; more users bring more advertisers; more advertisers bring more revenue; more revenue brings more R&D; more R&D brings improved relevance.

The flywheel effect refers to a virtuous cycle of enhanced relevancy. The improved functionality and usability of all Google products help the tech giant grow stronger and smarter over time.

Even if we look beyond Google as a search engine, relevancy plays a fundamental role in the success of the likes of Google Ads, YouTube, Google Cloud and even Google Maps.

  • The algorithm that powers Google’s ad platform is all about relevance to ensure ad auctions are meritocratic. Companies whose ads have the highest Quality Score (a measurement of relevancy) will end up with a better ad ranking while paying less than the competition.
  • YouTube is a massive video library which relies on algorithms to push the best content to the top and tailor individual user experiences to recommend the most relevant videos.
  • Google Cloud involves storing and sorting thousands of images, documents, songs and videos into an easy-to-use repository. Users need to filter through a minefield of information to find the exact file they’re looking for.
  • Google Maps collects data from millions of devices to plan the most efficient routes and learns from past trips to suggest the most relevant destinations for individual users.
  • Gmail Autofill helps users finish their sentences by learning from previous emails and analysing the way they write.

Relevancy is everything for Google. It’s business model relies on collecting, analysing and interpreting data to provide hyper-personalised services that users become dependent on.

The Money Makers: Top Google Products

So, where exactly does Google make its money and what are the hottest services/products to watch out for?

  • Google AdWords and Search Advertising. Over 82% of Google’s 2019 revenue was derived through advertising. As businesses continue to crank up the cost-per-click (CPC) for Google AdWords, the tech giant shows no signs of slowing down.
  • Google Cloud. While it may not be Google’s biggest moneymaker, Google Cloud hit the headlines after reporting53% year-over-year in the last quarter of 2019. Alphabet’s CFO, Ruth Porat, explains how the rapid growth “was led by Google’s infrastructure offerings and data and analytics platform.” Despite hot competition from Microsoft Intelligent Cloud and Amazon Web Services, Google is well on its way to taking the top spot as the world’s leading cloud provider.
  • YouTube. As the likes of Amazon Prime Video, iTunes and Netflix continue to dominate the subscription-based entertainment market, Google fancies their slice of the pie with the recent release of YouTube TV and YouTube Premium. At the end of 2019, YouTube reported over 20 million Premium subscriptions. In February 2020, Alphabet released YouTube’s first-ever revenue figures as the streaming service accumulated a whopping monthly scoop of over $1 billion in 2019.

Why Is Google Being Regulated?

As the flywheel gains momentum, critics believe regulation is necessary to avoid unfair dominance and to promote responsible business.

So, why does Google need regulating, and what are the key drivers behind its mind-boggling growth?

1. Market Dominance

Whether it’s a coffee company using Google Ads, a television manufacturer integrating with YouTube or an app developer using the Google Play Store, business owners must comply with Google’s rules to reap the benefits of their products/services.

Many fear Google holds too much control over smaller companies as growing dependence on their technology means they’re forced to play by Google’s rules. For example in March 2019, Google came under fire with its third EU antitrust penalty in two years. It was fined $1.7 billion for strangling competition in the advertising market by imposing a number of restrictive clauses in contracts with third-party websites which prevented Google’s rivals from placing their search adverts on these websites.

Market dominance and the fear of speaking out gives Google free reign to call the shots.

2. Monopolies

Don’t you hate it when one member of your family accumulates an entire board of pesky plastic hotels? Monopolies occur when a single organisation dominates an entire market.

Google could be ‘too big to fail’ if smaller companies are unable to enjoy their slice of the pie. While anti-monopoly laws do exist, governments have struggled to keep pace with the rapid growth of big tech and regulators have dismissed the option of capping profits.

However, the EU has taken measures to promote a level playing field for online retailers. The new regulations prevent Google from unfairly competing with retailers on its search engine results pages or by making it hard for alternative app stores to survive within its Android operating system.

Germany’s Social Democratic Party propose that big tech companies must share anonymised data with competitors to promote a fair economy and healthy competition.

Want to learn more about regulating companies like Google? Check out this podcast by the co-founder of Basecamp, David Heinemeier Hansson, on the dangers of monopolies in big tech.

3. Competitor Acquisition

Some regulators believe Google’s market dominance is a credit to their tendency to acquire smaller companies which pose a direct threat to their business. While many view the acquisition of brands like Nest and Waze as strategic investments, the ability to absorb outside competition means Google can grow with ease.

Democratic contender for America’s presidency, Elizabeth Warren, proposes a radical two-stage plan to combat the unfair growth of big tech firms like Google:

  1. Reverse the acquisition of smaller companies.In 2007, Google acquired DoubleClick for $3.1 billion to neutralise outside competition in the online advertising space. Warren believes in regulating these deals to prevent unfair market dominance.
  2. Declaring Google as a “platform utility”. Warren believes in prohibiting companies with revenues exceeding $25 billion from selling on their own platforms. For example, Google uses the Google Play Store to sell Google-owned apps on their own Android operating system. Selling products or services on their own platform gives the tech giant an unfair advantage.

4. Public Influence

As Google plays an increasingly important role in our day-to-day lives, regulators are concerned about the company’s political and social power. The tech giant can already control what you read online, where you shop and even what music you listen to. In many cases, Google knows you more than you know yourself.

Not only is Google accused of dominating financial markets, but it is also criticised as a source of destabilised democracy and violations of human rights. Google has a responsibility to manage the spread of misinformation and avoid its business interests from meddling with political perspectives.

But … the starfish problem

Every time Google gains new users, the value of their products and services increase — we call this the ‘network effect.’

While many regulators push for the fragmentation of big tech firms into subordinate companies, network effects mean Google’s growth is hard to stunt.

The left-leaning think-tank, Public Knowledge, refers to Google’s resilience as the “starfish problem.” Just as starfish miraculously regenerate after being torn into hundreds of tiny pieces, Google has the scope and scale to overcome fragmentation and grow into something stronger and smarter.

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