What Google can teach the newspapers about innovation

Winter 2010

This year Apple was rated number one and Google number two in Business Week's Top 50 Most Innovative Companies. However a quick look under the bonnet will reveal they have very different approaches to innovation.

For example, Google spends 5 times more on R&D as a % of revenues than Apple. It also spends significantly less on advertising as a % of revenues and, all though it has regularly been rated as one of the Top 10 best places to work over the past decade, it only extracts a third of the revenues from each employee that Apple achieves.

Apple's innovation strategy is closely linked to its industrial design capabilities, its brand management activities and its world leading supply chain management techniques. Google's is linked to its global reputation for experimentation, its culture of creative learning and its revolutionary approach Innovation.

So just what can Google teach the newspapers about innovation?

You may recall Hal Varian's call to the newspapers earlier this year to Experiment, Experiment, Experiment. It was a call to action that suggested the newspapers would be in better shape if they were more like Google. (i.e Creative Risk Takers) What Varian failed to acknowledge was the fact the Newspapers have been experimenting with the internet as a delivery channel for nearly 20 years.

Google has created more new products and services any other player in the Mobile Convergence landscape. At the same time Google's revenues have grown by a factor of almost 300. So clearly the 'experiment, experiment, experiment' strategy is a winner.

But is it? The growth in Apple's share price has consistently outperformed Google by a factor of 4 since the Search Engine's IPO in 2004. So obviously there is a very big gap between first and second place in the innovation stakes.

Take a closer look at the innovation radar and you'll soon discover that most of the best known products and services didn't emerge from Google's fabled innovation culture - they were acquired.

YouTube, Feedburner, DoubleClick, Blogger, Orkut and AdMob are all acquisitions but so too are the foundation technologies behind the benchmark products like Analytics, Android, Picasa, Docs and Maps. There are even suggestions that Google's core Adwords technology was based on an idea developed by Bill Gross at Idealab.

The only high profile product launches to emerge from the revolutionary in-house innovation culture appear to be GMail, Translate, News and Chrome.

This would suggest that Google's innovation model appears to be more about early stage acquisition, repackaging and rebranding than mirroring Apple's market leading in-house design and outsourced production model.

Perhaps the real message Hal Varian should have been delivering to the newspaper industry earlier this year wasn't "Experiment, Experiment, Experiment" but "Acquire, Acquire, Acquire".

So how useful is this Acquire, Acquire, Acquire strategy to the Newspaper Industries problems today? Is it really a better approach than Apple's?

To discover the answer to that question we need to understand what this strategy has delivered to Google's bottom line.

Google's financials provide us with some telling insights into what this ongoing commitment to experimentation and acquisition has delivered to Google's shareholders.

If we look at Google's post dot-com business model in 2001 the revenue mix was 77:23 - (i.e. 77% Google web sites and 23% other revenues (e.g. Licencing)). At that time Google was in the search engine business.

In 2003 Google became more than just a search engine when its business model evolved into helping others to profit from the web. The revenue mix for that year was 54% Google Sites, 43% 3rd Party Network and 3% other revenues (54:43:3). More importantly its revenues trebled from 0.44 Billion to 1.466 Billion.

It was the year Google revealed to the world that you didn't need to own the platform to profit from the platform. It was also the year everybody was publicly celebrating how Google's Innovation Engine was changing the world online. (See Fast Company's How Google Grows...and Grows...and Grows).

Today the revenues have grown by a factor of 15 but the revenue mix of 66:30:4 suggests that - somewhat paradoxically given the amount of investment in new innovations - Google's model is less diversified today than what it was back in 2003 (54:43:3). Google now appears to be in the business of acquiring and rebranding established and emerging mobile and web platforms to disrupt the established media and software players.

So how successful is this new "disruption" model?

or all the investment and creative energy expended over the past decade, Google's revenue model is still fundamentally based the original Search Engine coupled with a Global Aggregated Advertising Network.

With the Google Apps strategy Google attempted to disrupt a niche market equal in value to the size of its own business. If it had succeeded in taking market share off Microsoft it could have potentially doubled its revenues. It was a daring plan. However, after 6 years of R&D, only about 25 million people have signed up for Google Apps compared to Microsoft's 500 Million Office users. More importantly, unlike Microsoft's $19 Billion Office business, the number of paid subscribers for Google's SaaS offering is estimated to be in the hundreds of thousands.

Clearly the Google Apps strategy hasn't disrupted the Office market so the question needs to be asked: Did Google really need to build Google Apps to profit from the emerging SaaS Apps Market? or would it have made more money helping others to profit from disrupting the SaaS App market?

Similar questions can be asked about the launch of the Nexus One, Google's attempts to become a player in the social media space and the Chrome browser. For Example, did Google really need to acquire YouTube to profit from brokering the advertising on YouTube?

Google's monetary metrics of success still trend in the right direction, but its "search, seek, and consume" model - the core of its business - is clearly threatened by the rise in popularity of online social activities that replace search. - Gigaom: When Social Replaces Search, What Can You Do to Monetize?

The challenge Google faces today is it needs to keep growing. To do this it needs to do more than just attract the best talent and give them the time to explore new ideas. It needs to become more Agile and Efficient in the way it responds to changes in the marketplace.

With the rise of social media Google is facing a different kind of competitor and if social replaces search as the online advertising platform of the future then Google will have to reinvent itself very quickly by achieving more with significantly less. This could prove a real challenge of Google. For much of the past decade it has thrived on doing more with more while - somewhat paradoxically - becoming less and less diversified in its revenue model.

In the beginning Google proved that on the web you didn't need to own the platform to profit from the platform. If it is to survive the social media revolution it needs to rediscover that innovative idea and discover new ways of applying it to the rapidly evolving Mobile Convergence landscape.

Further Reading:

Clay Shirky's Newspapers and Thinking the Unthinkable

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