Revisiting How Serge and Larry Saw Advertising in 1998

September 1998, two young fellows, created an algorithm called PageRank. It changed the future of the internet. That’s a story we all know, and it was written by Brin and Page, founders of Google. There is another story that as a business person I like more than that. That’s the story of Google’s business model. In fact, one question that keeps coming back when I look at Google’s success is “was PageRank what made Google the business success it is today?”

And each time the answer seems to be controversial to me. In short, at the question “was PageRank what made Google successful?” Yes, it was! However, if I keep asking “was it the main contributor to Google’s business success?” No, it wasn’t! Why?

Ok, it’s hard not to admit that PageRank was disruptive. Yet what was more disruptive was Google’s business model. After two years from PageRank discovery, in 2000, just when the dot-com bubble burst, Google made its first $19 million, only to hit well over a billion dollar in revenues three years later, in 2003. How did this happen and what the future will look like for Google’s business model?

Are you trying to become a grown-up? Forget about product/market fit and find your business model/market fit

We all like to talk about product/market fit, that struggling process of getting a product from MVP to exceptionally viable so that it becomes a must-have. However, I argue that the most important step for any startup to level up its game and become a real company able to make a billion in revenues in a few years, it’s not about the product. That’s all about its business model!

When Google accelerated its growth pace back in 2002–2003, it wasn’t anymore about the product. It was all about distribution and an innovative business model. The thing is though Google didn’t invent that business model.

Back in 1998, with PageRank, Google had solved an important issue, as it was finally offering results that were more relevant than other search engines. Yet, in 1999 the company was bleeding cash! And so it was in 2000 when out of the first $19 million in revenues the company made, it was losing over $14 million.

What happened then? Google found its business model/market fit, and it was not what Brin and Page might have expected!

The curse of engineers become salesmen, and why you don’t pick a business model, it chooses you!

In 2000 over $10 million was spent in sales and marketing alone. In fact, at the time not only Google had failed with text-based advertising. But its distribution model was based on “cold-calling people, trying to get them to buy keywords.”

Smart people make great products. Engineers, programmers, and developers are the key people when it comes to writing the best code and winning against competitors. Yet, when it comes to business modeling, you need to think like a businessman. When Brin and Page put together PageRank, they were engineers first.

In their research paper “The Anatomy of a Large-Scale Hypertextual Web Search Engine” in a paragraph entitles “Advertising and Mixed Motives” Brin and Page showed a great deal of concern toward the advertising business model. The whole paragraph is worth reading to see the mindset Brin adn Page had at the time:

Currently, the predominant business model for commercial search engines is advertising. The goals of the advertising business model do not always correspond to providing quality search to users. For example, in our prototype search engine one of the top results for cellular phone is “The Effect of Cellular Phone Use Upon Driver Attention”, a study which explains in great detail the distractions and risk associated with conversing on a cell phone while driving. This search result came up first because of its high importance as judged by the PageRank algorithm, an approximation of citation importance on the web. It is clear that a search engine which was taking money for showing cellular phone ads would have difficulty justifying the page that our system returned to its paying advertisers. For this type of reason and historical experience with other media, we expect that advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers.

Since it is very difficult even for experts to evaluate search engines, search engine bias is particularly insidious. A good example was OpenText, which was reported to be selling companies the right to be listed at the top of the search results for particular queries. This type of bias is much more insidious than advertising, because it is not clear who “deserves” to be there, and who is willing to pay money to be listed. This business model resulted in an uproar, and OpenText has ceased to be a viable search engine. But less blatant bias are likely to be tolerated by the market. For example, a search engine could add a small factor to search results from “friendly” companies, and subtract a factor from results from competitors. This type of bias is very difficult to detect but could still have a significant effect on the market. Furthermore, advertising income often provides an incentive to provide poor quality search results. For example, we noticed a major search engine would not return a large airline’s homepage when the airline’s name was given as a query. It so happened that the airline had placed an expensive ad, linked to the query that was its name. A better search engine would not have required this ad, and possibly resulted in the loss of the revenue from the airline to the search engine. In general, it could be argued from the consumer point of view that the better the search engine is, the fewer advertisements will be needed for the consumer to find what they want. This of course erodes the advertising supported business model of the existing search engines. However, there will always be money from advertisers who want a customer to switch products, or have something that is genuinely new. But we believe the issue of advertising causes enough mixed incentives that it is crucial to have a competitive search engine that is transparent and in the academic realm.

What happened to their concerns? They stopped thinking like engineers and started to think like businessmen, that’s when things took off.

Google didn’t innovate, it copied!

In this blog, I covered several times the genius of the Google’s business model and why that’s the most critical piece of the puzzle for Google’s success. Of course, other aspects, like a great product and great organizations also played a key role. But without the proper business model in place, there is no scalability or profitability, and resources to hire and keep the best people.

It is important to notice that while Google might have been the most innovative company regarding the product, it was not so in terms of business model. In fact, back then, in 2000, when Brin and Page met Bill Gross, the founder of another search engine, called GoTo, then renamed Overture, it was the most innovative business model for search. Overture had a business model based on an ad network, which worked on pay-per-click won with an auction.

In short, where Google used engineering to create an incredible search engine able to offer relevant results, quickly. Overture used engineering to make the purchasing of ads based on results (how many times users clicked on those ads) and accountability (no more opaque purchase of “impressions”).

As reported by slate.com, Bill Gross affirmed “I’m wildly proud of coming up with the paid-search model,” “I didn’t know how big it was at the time.” Besides, Gross says, if Google didn’t make billions with the pay-per-click auction model, it would have made its billions some other way.”

I don’t agree with that; business model innovation isn’t so simple. Although at hindsight it seems quite intuitive that things worked out the way they did. Back then it wasn’t at all.

There is one thing that is even more complicated than business model innovation, that is a business model change.

Do you want to change the business model? That’s worse than quit smoking

Google still makes most of its money from advertising. As of the quarter ending on June 2018, of $32 billion in revenues, over $28 came from advertising. There is no reason to believe that Google wants to keep running on a business model that since the beginning was looked with skepticism and that in a way might also be the major obstacle for Google to provide the most value to its users.

In fact, willingly or not Google runs a hidden revenue business model, where most users don’t have a clue of how Google monetizes. If I think about my parents, they use Google on a daily basis for all the searches they do. Yet they don’t have a clue about what’s behind Google and how it makes money.

Google keeps experimenting with new business models. However, a business model change is not a smooth process. That is also why companies like Amazon, venture with new business monetizations that can be experimented on top of the same business model (take Amazon Prime). While in other cases new segments might make more sense (take Amazon AWS).

One source of income that is growing fast, and that can become a way for Google to generate a sustainable source of income is represented by cloud services. While this transition might not be smooth, and Google might not be successful in getting out from advertising we can assume Google will keep trying, as advertising will become more competitive and less profitable over time. Thus, what today represents Google’s primary source of income, might change altogether in the coming years.

What’s next? Google, voice search and why the most critical asset might become the most significant burden

Applying old business models to new technologies might be the formula for disaster. At the same time what has represented the greatest asset might also become the greatest burden. What do I mean? If we think of Google as a “real estate firm” then its most valuable asset is Google’s SERP. In fact, that blank page is where over five billion queries each day are performed and where advertising is sold.

Yet while the SERP has been a great companion for the advertising business model, it might not be so for the next era of search: Voice Search. In fact, today Google has a massive amount of data in its index that is shown each day on its search results pages. That’s why Google is using that same content for voice search. For instance, if you take results that show up on the search pages as “featured snippet” those are also (in many cases) served as voice commands in the Google assistants.

While this logic makes sense as Google can use the content it already has in its index and serve it as voice commands. It also might be quite limiting. As those results might also be biased, wrong and inaccurate (I don’t have data to support that, it is merely based on my experience so far).

Thus, the main issue comes from the fact — I argue — that Google is using content selected from its index, which works on the premises of an advertising business model. And while this model works for traditional search, it might not work for voice search, where a different model might be more successful.

In short, what today represents the greatest asset for Google (the SERP) might also be the greatest burden to win in the race for voice search. Yet the future always reserves us surprises!

References:

• https://www.sec.gov/Archives/edgar/data/1288776/000119312505065298/d10k.htm
• http://infolab.stanford.edu/~backrub/google.html
• http://www.slate.com/articles/business/when_big_businesses_were_small/2013/10/google_s_big_break_how_bill_gross_goto_com_inspired_the_adwords_business.html

Originally published at fourweekmba.com on August 1, 2018.