Google reported its results today and got punished by Wall Street. Is it really true that Google has a sustainable competitive advantage? I will analyze this by first looking at Google’s value chain and then looking at how other competitors may break this down.

Google’s Value Chain

The graphic above is a simple depiction of Google’s value chain. The areas in red are the ones where Google plays a leading role. Google has also established some presence in the content creation (Google Maps) and publishing (Gmail, YouTube, Blogger, iGoogle, Reader, Groups). Google’s main business is placing advertisements on as many pages as possible. Google has two sets of customers, Internet users and advertisers. In order to ensure that Google stays dominant, it needs to make sure that its value chain is not disrupted.

Benefits that Google offers to Internet users

• Availability: Google is present everywhere! Default search box on Firefox, Google Toolbar distributed by bundling it with other software, search boxes on other websites all feed search traffic to Google.
• Good search results: For the most part Google search results are good enough. There isn’t another search engine that produces significantly better results. Also, most search that I do is essentially lookup. For example, I don’t remember the address for Southwest airlines. If I want to go to their website, I will just search for Southwest on Google. Of course, most search engines will work well for these simple queries but since Google is available everywhere, I will just use Google.
• Brand: Google has worked hard at developing its brand. Its brand promises all Internet users that it uses cutting edge technology and smartest minds to produce the best search results. In addition to their previous search experiences with Google, Google introduces really great products (content creation and publishing) that reinforce the brand.
• Fast speed of execution: Most major search engines today are fast enough. However, there are a few that are too slow to be usable (e.g. Technorati).

Benefits that Google offers to advertisers

• Market Share: Search advertising is much more effective than banner advertising (by orders of magnitude). Advertisers will advertise on a search engine that is dominant because it gives them access to the largest number of Internet users.
• Cheaper Advertising: The large inventory of ads allows Google to target the Internet users better than any other search engines. In contrast, a competitor like Yahoo does not have as much inventory and cannot often place the most relevant ads on the search page.

Sustainability of Google’s Competitive Advantage

Why does Google keeps growing its market share at the expense of Yahoo and Microsoft? Let’s analyze the main reasons:

• Google destinations : Google continues to grow traffic to its destinations by adding products like Maps, Gmail and YouTube. All this traffic increases search through Google.
• Cost advantage because of scale: Since Google monetizes its traffic better than anyone else, it can offer more money to companies like Mozilla Corporation to make Google the default search engine. This increases traffic to Google and allows it to monetize its traffic even better (larger market share leads to larger ad inventory).
• Reputation: Search is an experience good. You don’t know what the product is like till you use the product. Most people use reputation to make a choice. Google’s reputation really makes it difficult for competitors like Yahoo to make a dent.
• Learning curve: Google has a head start over all its rivals. The experience allows them to make their processes and solutions more efficient and effective. The benefits range from reducing the cost of the handling data (per TB) to reducing spam in search results.

Note that I have not included the algorithm or the employees as sustainable competitive advantages. These are either not scarce or can be bought with the same amount of money that Google is paying for them. Even something like a datacenter that I have mentioned may only be a small advantage because it is unlikely to be scarce. With the internet becoming the platform, there are other companies that are building large datacenters. Therefore, the expertise required to build a datacenter that can handle the kind of traffic that Google deals with is unlikely to remain scarce.

Beating Google

We know that Google executes very well on its current business strategy. How does someone beat Google? There are two ways to beat Google:

• Perform better than Google in its current value chain
  Based on the analysis so far, this is clearly hard. There are few companies that have the capacity to do this. The two that could possibly challenge Google are Yahoo and Facebook. Yahoo is still the most visited destination on the Internet. It has a strong reputation and an existing search engine that is used widely. The question is whether Yahoo has the will to succeed and the management ability to execute. Facebook as a destination is growing really fast. It has a reputation for being innovative. It also has a lot of information about its users. Though it does not have its own search engine, it can buy another search company and customize the results based on the profile of its users. Another possibility is that a company could offer superior benefits within the value chain - better search interface, superior commitment to privacy, etc.
• Disrupt the current value chain by changing its structure
  I think that this is a more realistic approach to beating Google. Trends like the move towards mobile devices have the potential to disrupt the value chain. As more and more people start using mobile devices to access the internet, Google’s traditional advertising model may not work. In addition, the tight control by the wireless carrier and the cell phone maker may ensure that Google is left out of the picture completely. I think Google recognizes this threat and is trying to counter by moves like developing Android and by bidding on the wireless spectrum.

Is Google going to be dominant in 2013?

Based on the analysis, it appears that Google will continue to dominate the traditional search, barring some bold moves by Facebook. The competition on the mobile devices is going to be much more intense and Google does not enjoy the same advantages that it enjoys on the desktop. With the trend of more and more people accessing the Internet on their mobile devices, Google’s overall search share will come down.