Google's dominance in the online advertising industry

¶ … company is known for many different products and services, according to the annual report almost all its income derives from online advertising, so that shall be considered to be the company's business. The online advertising business is highly competitive, with firms like Yahoo, Microsoft, Apple and Facebook all being important players.

Macro View

The online advertising industry operates, more or less, like an oligopoly. There are a handful of major companies that dominate the industry. Essentially, online advertising works much like conventional advertising. The companies in the industry must deliver an audience to buyers, who purchase advertising space. Google does this through its own family of websites, of which several are among the most-used sites on the web, and through partnership with third-party websites that use Google as their advertising partner.

The industry is growing, although the pace of growth is beginning to slow. Over the past twenty years, the Internet has come to be a dominant force is communications in the world, and today is used by billions of people for information and communication. Thus, there are tremendous opportunities for volume in online advertising. In any advertising business, eyeballs are important and the companies that can deliver that traffic will be the ones that generate the most money, since the cost of any one ad is very low. The business therefore relies on a high-volume, low-margin strategy. Within that strategy, firms attempt to differentiate on the basis of being able to deliver a specific audience, and on the ability to deliver more information about the audience. That information is then used by advertisers to better target their ads.

Growth in the industry is a function of two things -- the state of the economy and the amount of time people spend online. The more people there are on the Internet, and the more time they spend on there, creates opportunities for companies in the online advertising business. In order to take advantage of those opportunities, firms in the industry need to have customers. The customers are the advertisers, and their willingness to spend is often tied to the state of the economy overall. Firms not only must decide where they want to spend their advertising dollars -- there are many media forms available -- but they must also set their advertising budgets, and these tend to fluctuate with the business cycle.

Barriers/Failures

Google has not experienced the bitter taste of failure, save perhaps for Google Plus, its attempt at a social network. This has not proven consequential to the business, however. With respect to barriers, there were certainly barriers for the company initially. When Google was launched, there were already a number of major successful search engines, for example Yahoo and Altavista among others. Search engine use tends to be habitual, but the industry was at this point quite fragmented. Google was able to deliver noticeably superior results and very quickly eclipsed all other search engines in popularity. This points to a key way to overcome barriers to entry -- technological superiority. With better technology than competitors, Google was able to very quickly make inroads, especially because it was operating in an industry with low switching costs.

Another barrier that has arisen lately is the antitrust issues in the United States. Google's success -- while entirely earned -- has attracted the attention of competition regulators. This attention has led the company to have to defend itself -- and its success -- in particular its dominance in the online advertising industry. Such a defense is essentially a waste of time for the company, but if it had merit Google might have been forced to restructure its business. There are always governmental barriers, and the company now knows that it needs a strategy to overcome these barriers if it wants to grow unimpeded in the future.

Another barrier comes with respect to international expansion. While Google is the most popular search engine in many countries, in China it is a distant second to Baidu. Worse, Google has faced significant persecution from the Chinese government, mostly because Google has demonstrated a low level of enthusiasm for the censorship of results. Since the PRC likes to live in a fictional world of its own making, this is a problem for them, and the result is that Google has faced significant political obstacles doing business in that major market. Overcoming this barrier has proven more difficult. Google has tried numerous tactics, but has continued to run into roadblocks. There is also a perception -- it could be true -- among Chinese users that Baidu delivers better results in Mandarin than Google does Whatever Google's technological advantage might be in other languages, it apparently does not have this advantage in China. This, at least, is a problem the company can address. The political risk is a different matter altogether, but Google is likely to face similar issues in other nations, as many regimes are threatened by having informed populations and wish to control the flow of information.

Takeaways

There are two main takeaways from analyzing Google's success. The first is that in order to succeed you have to better than other people at something. For Google this is online search, which drive the advertising industry. The company has only been able to succeed because it was able to outcompete other companies for the Internet audience. Whatever your strategy might be, you need to be the one who does it best. In a globalized world, if somebody else is better, they will enter your market and win. Google has done that in most countries around the world, but not all. Absolute competitive advantage is the best way to make money, so there is little point in being an also ran. Google has a premium offering, but the lesson applies at the other end as well -- if you are going to be cheap junk, be the cheapest junk you can, because that is what your customers are going to want.

The other takeaway from Google's success is actually to monetize it. When you do something well, you need to make money from it. Google does not make money from Android, nor from Chrome. At best, these pieces of software will drive more traffic to Google's search engines, and thus to advertisers. However, what has made Google so profitable and so successful is that it figured out very quickly how to make money from its search engine, and has tailored a lot of its strategy on building those revenue streams and adding value for its clients. If Google could leverage its share of the mobile operating system or browser space to profit from those products, it would be significantly more successful.