SUMMARY FOR GOOGLE CASE STUDY ONLY

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John E. Gamble University of South Alabama

G oogle was the leading Internet search f i r m i n

2012, w i t h a nearly 67 percent market share i n

search f r o m home and w o r k computers and a

95 percent share i n searches performed f r o m mobile

devices. Google's business model allowed advertisers to

b i d on search terms that w o u l d describe their product or

service on a cost-per-impression (CPI) or cost-per-click

(CPC) basis. Google's search-based ads were displayed

near Google's search results and generated advertis-

i n g revenues o f more than $36.5 b i l l i o n i n 2011. The

company also generated revenues o f about $1.4 b i l l i o n

i n 2010 f r o m licensing fees charged to businesses that

wished to install Google's search appliance o n company

intranets and f r o m a variety o f new ventures. New ven-

tures were becoming a growing p r i o r i t y w i t h Google

management since the company dominated the market

f o r search based ads and sought additional opportu-

nities to sustain its extraordinary growth i n revenues,

earnings, and net cash provided by operations.

I n 2012, Google was pursuing a cloud comput-

i n g initiative that was intended to change the market

f o r c o m m o n l y used business productivity applica-

tions such as w o r d processing, spreadsheets, and pre-

sentation software f r o m the desktop to the Internet.

I n f o r m a t i o n technology analysts believed that the

market f o r such applications—collectively called cloud

computing—could grow to $95 b i l l i o n by 2013. Google

had also entered i n t o alliances w i t h Intel, Sony, D I S H

Network, Logitech, and other f i r m s to develop the

technology and products required to launch Google

TV. Google T V was launched i n the U.S. i n 2011 and

w o u l d allow users to search live network and cable

programming; streaming videos f r o m providers such

as N e t f l i x , A m a z o n Video O n Demand, and YouTube;

and recorded programs on a D V R . The company also

launched its G o o g l e + social networking site i n 2011

to capture additional advertising opportunities.

Perhaps the company's most ambitious strategic

initiative i n 2012 was its acquisition o f Motorola

M o b i l i t y f o r $12.5 b i l l i o n , w h i c h put i t i n the hard-

ware segment o f the smartphone and tablet computer

industries. Analysts f o l l o w i n g the transaction saw the

move to acquire Motorola M o b i l i t y as a direct attempt

to m i m i c Apple's strategy used f o r the iPhone and iPad

that tightly integrated hardware and software f o r its

most profitable and fastest g r o w i n g products. Google

had launched its A n d r o i d operating system f o r mobile

phones i n 2008 and allowed wireless phone manu-

facturers such as L G , H T C , and Nokia to produce

Internet-enabled phones boasting features similar to

those available o n Apple's iPhone. By 2012, A n d r o i d

was the leading smartphone p l a t f o r m w i t h a 50.9 per-

cent market share.

W h i l e Google's g r o w t h initiatives seemed to take

the company i n t o new industries and thrust i t i n t o

competition w i t h companies ranging f r o m Facebook

to M i c r o s o f t to Applet, its CEO, Eric Schmidt, saw the

new ventures as natural extensions o f the company's

mission to "organize the world's i n f o r m a t i o n and

make i t universally accessible and useful."1

I n A p r i l 2012, he explained the company's wide-

ranging strategic initiatives by commenting " I n some

ways we have r u n the company as to let 1,000 flow-

ers b l o o m , but once they do b i o o m y o u want to put

together a coherent bouquet."2

C O M P A N Y H I S T O R Y '

The development o f Google's search technology began

i n January 1996 w h e n Stanford University computer

science graduate students L a r r y Page and Sergey B r i n

collaborated to develop a new search engine. They

Copyright © 2012 by John E. Gamble. All rights reserved.

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C-170 Part 2 Cases in Crafting and Executing Strategy

b T N I B I i 1 T h e l O Principles of Google's Corporate Philosophy

1. F o c u s o n the u s e r a n d all e l s e will follow. From its inception, Google has focused on providing the best user experience possible. While many companies claim to put their customers first, few are able to resist the temptation to make small sacrifices to increase shareholder value. Google has steadfastly refused to make any change that does not offer a benefit to the users who come to the site:

• The interface is clear and simple.

• Pages load instantly.

• Placement in search results is never sold to anyone.

• Advertising on the site must offer relevant content and not be a distraction.

By always placing the interests of the user first, Google has built the most loyal audience on the web. And that growth has come not through TV ad campaigns, but through word of mouth from one satisfied user to another.

2 . It's b e s t to do o n e thing really, really well. Google does search. With one of the world's largest research groups focused exclusively on solving search problems, we know what we do well, and how we could do it better. Through continued iteration on difficult problems, we've been able to solve complex issues and provide continuous improvements to a service already considered the best on the web at making finding information a fast and seamless experience for millions of users. Our dedication to improving search has also allowed us to apply what we've learned to new products, including Gmail, Google Desktop, and Google Maps.

3 . F a s t i s better than s l o w . Google believes in instant gratification. You want answers and you want them right now. Who are we to argue? Google may be the only company in the world whose stated goal is to have users leave its website as quickly as possible. By fanatically obsessing on shaving every excess bit and byte from our pages and increasing the efficiency of our serving environment, Google has broken its own speed records time and again.

4. D e m o c r a c y o n the w e b w o r k s . Google works because it relies on the millions of individuals posting websites to determine which other sites offer content of value. Instead of relying on a group of editors or solely on the frequency with which certain terms appear, Google ranks every web page using a breakthrough technique called PageRank™. PageRank evaluates all of the sites linking to a web page and assigns them a value, based in part on the sites linking to them. By analyzing the full structure of the web, Google is able to determine which sites have been 'Voted" the best sources of information by those most interested in the information they offer.

5. You don't n e e d to be at your d e s k to n e e d a n a n s w e r . The world is increasingly mobile and unwilling to be constrained to a fixed location. Whether it's through their PDAs, their wireless phones or even their automobiles, people want information to come to them.

6. You c a n make m o n e y without doing evil. Google is a business. The revenue the company generates is derived from offering its search technology to companies and from the sale of advertising displayed on Google and on other sites across the web. However, you may have never seen an ad on Google. That's because Google does not allow ads to be displayed on our results pages unless they're relevant to the results page on which they're shown. So, only certain searches produce sponsored links above or to the right of the results. Google firmly believes that ads can provide useful information If, and only if, they are relevant to what you wish to find.

Advertising on Google is always clearly identified as a "Sponsored Link." It is a core value for Google that there be no compromising of the integrity of our results. We never manipulate rankings to put our partners higher in our search results. No one can buy better PageRank. Our users trust Google's objectivity and no short-term gain could ever justify breaching that trust.

7. T h e r e ' s a l w a y s more Information out there. Once Google had indexed more of the HTML pages on the Internet than any other search service, our engineers turned their attention to information that was not as readily accessible. Sometimes it was just a matter of integrating new databases, such as adding a phone number and address lookup and a business directory. Other efforts required a bit more creativity, like adding the ability to search billions of images and a way to view pages that were originally created as PDF files. The popularity of PDF results led us to expand the list of file types searched to include documents produced in a dozen formats such as Microsoft Word, Excel and PowerPoint. For wireless users, Google developed a unique way to translate HTML formatted files into a format that could be read by mobile devices. The list is not likely to end there as Google's researchers continue looking into ways to bring all the world's information to users seeking answers.

(Continued)

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C-172 Part 2 Cases in Crafting and Executing Strategy

E X H I B I T 2 Performance of Google's Stock Price, August 1 9 , 2 0 0 4 , to June 2 0 1 2

(a) Trend in G o o g l e I n c . ' s C o m m o n S t o c k P r i c e

~i i i i i 1 1 r 05 06 07 08 09 10 11 12

Y e a r

700

-100

(b) Performance of G o o g l e I n c . ' s S t o c k P r i c e v e r s u s the S & P 500 Index

+450%

+400%

05 06 ~07~ 08 09 Y e a r

t̂o~ -50%

11 12

translation feature that accommodated 51 languages.

The company also released services f o r mobile phone

uses such as M o b i l e Web Search, Blogger Mobile,

Gmail, Google News, and Maps f o r Mobile. A complete

list o f Google services and tools f o r computers and

mobile phones i n 2012 is presented i n Exhibit 3.

G O O G L E ' S B U S I N E S S M O D E L

Google's business m o d e l had evolved since the com- pany's inception to include revenue beyond the

licensing fees charged to corporations needing search capabilities on company intranets or websites. The 2000 development o f keyword-targeted advertis- i n g expanded its business m o d e l to include revenues f r o m the placement o f highly targeted text-only spon- sor ads adjacent to its search results. Google was able to target its ads to specific users based o n the user's browsing history. The a d d i t i o n o f advertising-based revenue allowed Google to increase annual revenues f r o m $220,000 i n 1999 to more than $86 m i l l i o n i n 2001. A summary o f Google's financial performance

I A ] 1 MM in \v r - o n a l c o p , i

C-174 Part 2 Cases in Crafting and Executing Strategy

E X H I B I T 3 (Continued)

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Product Search

Search for stuff to buy

Scholar

Search scholarly papers

Toolbar

Add a search box to your browser

Trends

*"* Explore past and present search trends

Videos * Search for videos on the Web

^ Web Search

\ _ Search billions of Web pages

WVtl Code

" Developer tools, APIs and resources

Labs

Explore Google's technology playground

Blogger

Share your life online with a blog—it's fast, easy, and free

f r "1 Calendar { ) Organize your schedule and share events with friends

- % ? Docs \ rziA \\* J> Create and share your online documents, presentations, and

spreadsheets jp. Google Mail

Fast, searchable email with less spam

( f } Groups C£> Create mailing lists and discussion groups

§ Knol Share what you know O f f c u t Qrkut

Meet new people and stay in touch with friends

Picasa

Find, edit and share your photos

(Continued)

E X H I B I T 4 Financial Summary for Google, 2 0 0 1 , 2 0 0 5 - 2 0 H ($ millions, except per share amounts) n <3

R e v e n u e s $37,905 $29,321 $23,651 $21,796 $16,594 $10,605 $6,139 $86

Costs and expenses: Cost of revenues 13,188 10,417 8,844 8,622 6,649 4,225 2,577 14

Research and development 5,162 3,762 2,843 2,793 2,120 1,229 600 17

Sales and marketing 4,589 2,799 1,984 1,946 1,461 850 468 20 General and administrative 2,724 1,962 1,667 1,803 1,279 76 387 25 Contribution to Google Foundation — — — — — — 90 —

Charge related to the resolution of Department of Justice investigation 500 — — — — — — —

Total costs and expenses 26,163 •8.9-13 15,338 15,164 11,510 7,055 4,121 75 Income (loss) from Operations 11,742 10,381 8,312 6,632 5,084 3,550 2,017 11 Impairment of equity Investments — — — (1,095) — — — — Interest income (expense) and other, net 584 415 69 316 590 461 124 _ L D Income (loss) before income taxes 12,326 10,796 8,381 5,854 5,674 4,011 2,142 10

Provision for income taxes 2,589 2,291 1,861 1,627 1,470 934 676 3 Net income (loss) $ 9,737 $ 8,505 $ 6,520 $ 4,227 $ 4,204 $ 3,077 $1,465 $ 7 Net income (loss) per share:

Basic $30.62 $26.69 $20.62 $13.46 $13.53 $10.21 $5.31 $0.07 Diluted $29.76 $26.31 $20.41 $13.31 $13.29 $9.94 $5.02 $0.04

Number of shares used in per share calculations: Basic 323 319 316 314 311 301 276 95 Diluted 396 323 319 318 316 310 292 187

Net cash provided by operating activities $14,565 $11,081 $ 9,316 $ 7,853 $ 5,775 $ 3,581 $2,459 N/A Cash, cash equivalents, and marketable 44,626 34,975 24,485 15,846 14,219 11,244 8,034 N/A

securities Total assets 72,574 57,851 40,497 31,768 25,336 18,473 10,272 N/A Total long-term liabilities 5,516 1,614 1,745 1,227 611 129 107 N/A Total stockholders' equity 58,145 46,241 36,004 28,239 22,690 17,040 9,419 N/A

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Source: Google, Form S - 1 , filed April 2 9 , 2 0 0 4 ; Google, 2 0 0 9 , 2 0 1 0 , and 2011 10-K reports.

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C-178 Part 2 Cases in Crafting and Executing Strategy

that tracked the effectiveness o f each ad. Google also

offered a keyword targeting p r o g r a m that suggested

synonyms f o r keywords entered by advertisers, a

t r a f f i c estimator that helped potential advertisers

anticipate charges, and m u l t i p l e payment options

that included charges to credit cards, debit cards, and

m o n t h l y i n v o i c i n g .

Larger advertisers were offered additional

services to help r u n large, dynamic advertising

campaigns. Such assistance included the availabil-

i t y o f specialists w i t h expertise i n various industries

to offer suggestions f o r targeting potential customers

and i d e n t i f y i n g relevant keywords. Google's adver-

tising specialists helped develop ads f o r customers

that w o u l d increase click-through rates and purchase

rates. Google also offered its large advertising cus-

tomers bulk posting services that helped launch and

manage campaigns i n c l u d i n g ads using hundreds or

thousands o f keywords.

Google's search-based ads were priced using an

auction system that allowed advertisers to bid on key-

words that w o u l d describe their product or service.

Bids could be made on a cost-per-impression (CPI) or

cost-per-click (CPC) basis. Most Google advertisers

placed bids based o n CPC frequency rather than h o w

many times an ad was displayed by Google. Google's

auction p r i c i n g m o d e l assigned each bidder a Qual-

i t y Score, w h i c h was determined by the advertiser's

past keyword click-through rate and the relevance o f

the ad text. Advertisers w i t h h i g h Quality Scores were

offered lower m i n i m u m bids than advertisers w i t h

poor quality scores.

Google allowed users to pay a CPC rate lower

than their b i d price i f their b i d was considerably more

than the next highest b i d . For example, an advertiser

w h o b i d $0.75 per click f o r a particular keyword w o u l d

be charged only $0.51 per click i f the next highest bid

was only $0.50. The AdWords discounter ensured that

advertisers paid o n l y 1 cent more than the next h i g h -

est b i d , regardless o f the actual amount o f their bid,

A d S e n s e Google's AdSense program allowed web publishers

to share i n the advertising revenues generated by

Google's text ads. The AdSense program served con-

tent-relevant Google text ads to pages on Google Net-

w o r k websites. For example, an Internet user reading

an article about the state o f the economy at R e u t e r s ,

corn w o u l d see Google text ads by investment maga-

zines and companies specializing i n home business

opportunities. Google N e t w o r k members shared i n

the advertising revenue whenever a site visitor clicked

a Google ad displayed on their sites. The more than

1 m i l l i o n Google N e t w o r k members d i d not pay a

fee to participate i n the program and received about

60 percent o f advertising dollars generated f r o m the

ads. Google's AdSense program also allowed mobile

phone operators to share i n Google revenues i f text

and image ads were displayed o n mobile handsets.

Owners o f dormant domain names, web-based game

sites, video sites, and news feed services could also

participate i n the AdSense program. The breakdown

o f Google's revenues by source f o r 2005 through 2011

is presented i n Exhibit 6.

O t h e r R e v e n u e S o u r c e s The company's 2006 acquisition o f YouTube allowed

i t to receive advertising revenues f o r ads displayed

d u r i n g Internet videos, w h i l e its 2008 acquisition

E X H I B I T 6 Google's Revenues by Source, 2 0 0 4 - 2 0 1 0 ($ millions)

Advertising revenues: Google websites $26,145 $19,444 $15,722 $14,414 $10,625 $ 6,333 $3,377 Google Network

websites 10,386 8,792 7,166 6,715 5,788 4,160 2,688 Total advertising

revenues 36,531 28,236 22,889 21,129 16,413 10,493 6,065 Licensing and other

revenues 1,374 1,085 762 667 181 112 74 Net revenues $37,905 $29,321 $23,651 $21,796 $16,594 $10,605 $6,139

Source: Google, 2 0 0 7 , 2 0 0 9 , 2 0 1 0 , and 2011 10-K reports.

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C-180 Part 2 Cases in Crafting and Executing Strategy

h X ! f 7 Google's Revenues and Long-Lived Assets by Geographic Region, 2 0 0 7 - 2 0 1 1 (in millions)

United States $17,560 $14,056 $11,194 $10,636 $ 8 , 6 9 8 United Kingdom 4,057 3,329 2,986 3,038 2,531

Rest of the wodd 16,288 11,936 9,471 8,122 5,365 Total revenues $37,905 $29,321 $23,651 $21,796 $16,594

United States Rest of the world

Total long-lived assets

$15,963 3,853

$19,816

$ 9,432

1,898

$11,330

$ 9,783

1,807

$11,589

$ 7,335 712

$ 8,047

$ 5,071 363

$ 5,434

Source: Google, 2 0 0 7 , 2 0 0 9 , a n d 2011 10-K reports.

Mobile S e a r c h and G o o g l e ' s E m e r g i n g Rivalry with A p p l e in S m a r t p h o n e s and Tablet C o m p u t e r s I n 2011, more than 5 b i l l i o n people worldwide and 234

m i l l i o n Americans ages 13 and older owned and used

mobile phones. More than 35 percent o f Americans

and a growing percentage worldwide accessed the

Internet f r o m mobile devices, and a rapidly growing

number o f mobile phone users were exchanging basic

mobile phones f o r smartphones. Smartphones like

Apple's iPhone could connect to the networks o f w i r e -

less carriers to make phone calls, access the Internet,

or r u n various Internet applications. Between March

2011 and June 2011, the number o f smartphone

users i n the U.S. had grown by 10 percent to reach

82.2 m i l l i o n .

Apple Inc. built its early reputation i n the 1980s

and 1990s o n its innovative Mac computer lines, but

i n 2010, only $17.5 b i l l i o n o f its net sales o f $65.2

b i l l i o n came f r o m the sale o f computers. I n 2011, Apple

was the world's largest seller o f smartphones, tablet

computers, and personal media players w i t h market

shares o f 19.1 percent, 85 percent, and 73 percent,

respectively. I n 2011, the iPhone accounted f o r $47.1

b i l l i o n o f its total sales o f $108.2 b i l l i o n . The iPad con-

tributed revenues o f $20.3 b i l l i o n and iPod and related

music products accounted f o r sales o f more than

$13 b i l l i o n i n 2011. The company's h e f t y p r o f i t margins

on its electronic devices allowed i t to record a net

income o f almost $26 b i l l i o n i n 2011. Apple's perfor-

mance accelerated i n 2012, w i t h the company setting

revenue and p r o f i t records d u r i n g the second quarter

o f 2012. The record sales and earnings were driven

largely by the iPhone, w h i c h saw a year-over-year rev-

enue increase o f 88 percent and iPad, w h i c h increased

by 151 percent f r o m the same period i n 2011. The

company's strong performance allowed its stock price

to increase so m u c h that i t became the most valuable

company i n the w o r l d i n 2011, as measured by market

capitalization. Apple's market capitalization h i t $600

b i l l i o n i n A p r i l 2012—a m a r k only achieved by one

other company i n history: M i c r o s o f t , i n 1999, w h e n its

valuation reached $619. Microsoft's market capitaliza-

t i o n i n A p r i l 2012 stood at $260 b i l l i o n . A summary o f

Apple's f i n a n c i a l performance between 2007 and 2011

is presented i n Exhibit 8.

Google's i n t r o d u c t i o n o f its A n d r o i d operating

system f o r smartphones i n 2008 allowed i t to increase

its share o f mobile searches f r o m about 60 percent

to approximately 95 percent i n 2012, A n d r o i d was

not a phone but an operating system that Google

made available free o f charge to any phone manufac-

turer wishing to market mobile devices w i t h Internet

capability. Android's core applications matched most

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C-182 Part 2 Cases in Crafting and Executing Strategy

could grow to a $95 b i l l i o n market by 2013. M o v i n g software applications to the cloud offered many pos- sible benefits to corporate users, i n c l u d i n g lower software acquisition costs, lower computing sup- p o r t costs, and easier collaboration among employ- ees i n different locations. The beta version o f Google Apps was launched i n 2006 as a free w o r d process- i n g and spreadsheet package f o r individuals, but was relaunched i n 2008 as a competing product to M i c r o - soft O f f i c e . Google Apps was hosted on computers i n Google's data centers and included Gmail, a calendar, instant messaging, w o r d processing, spreadsheets, presentation software, and f i l e storage space. Google Apps could be licensed by corporate customers at $50 per user per year. The licensing fee f o r the M i c r o - soft O f f i c e and O u t l o o k package was typically $350 per user per year. I n d u s t r y analysts estimated Google Apps users at about 25 m i l l i o n and paid subscribers at about 1.5 m i l l i o n i n 2010. M i c r o s o f t estimated M i c r o - soft O f f i c e users at about 500 m i l l i o n i n 2010. Even though Google Apps had not yet recorded any mean- i n g f u l revenues as o f 2012, M i c r o s o f t had launched its o w n cloud-based p r o d u c t i v i t y package called O f f i c e 365 to defend against Google's entry i n t o the produc- t i v i t y software market.

Google's Chrome browser, w h i c h was launched i n September 2008, and Chrome operating system (OS) launched i n July 2009 were developed specifi- cally to accommodate cloud computing applications. The bare-bones Chrome browser was built o n a m u l - tiprocessor design that w o u l d allow users to operate spreadsheets, w o r d processing, video editing, and other applications o n separate tabs that could be r u n simultaneously. Each tab operated independently so that i f one tab crashed, other applications r u n n i n g f r o m Google's data centers were not affected. The Chrome browser also provided Google w i t h a defense against moves by M i c r o s o f t to make i t more d i f f i c u l t f o r Google to deliver relevant search-based ads to Internet users. Microsoft's Internet Explorer 8 allowed users to hide their Internet address and v i e w i n g his- tory, w h i c h prevented Google f r o m collecting user- specific i n f o r m a t i o n needed f o r ad targeting. Mozilla's Firefox browser employed a similar feature that pre- vented t h i r d parties f r o m tracking a user's viewing habits. The clean-running Chrome OS was an open- source operating system specifically designed as a plat- f o r m f o r cloud computing applications. Google had entered into agreements w i t h Acer, Hewlett-Packard, and Lenovo to begin producing netbooks that w o u l d use the Chrome OS and Chrome browser to access

E X H I B I T 10 Worldwide Browser Market Share Rankings, Selected Periods, September 2 0 0 8 - J u n e 2 0 1 2

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Internet Explorer 67% 53% 42% 32% Chrome 1 9 22 32 Firefox 26 31 28 25 Safari 3 4 5 7 Opera 2 2 2 2 Others 1 1 1 2

Total 100% 100% 100% 100%

Source: g s . s t a t c o u n t e r . c o m .

the cloud-based Google Apps p r o d u c t i v i t y software. W o r l d w i d e market share statistics f o r the leading browsers f o r selected periods between September 2008 and June 2012 are presented i n Exhibit 10.

G o o g l e ' s Initiatives to E x p a n d S e a r c h to Television I n mid-2010, Google entered i n t o an alliance w i t h Intel, Sony, Logitech, Best Buy, D I S H Network, and Adobe to develop Google T V . Google T V w o u l d be b u i l t on the A n d r o i d p l a t f o r m and w o u l d r u n the Chrome browser software to search live network and cable programming; streaming videos f r o m p r o v i d - ers such as N e t f l i x , A m a z o n Video O n Demand, and YouTube; and recorded programs on a D V R . Google T V users w o u l d also be able to use their televisions to browse the Web and r u n cloud-based applica- tions such as Google Apps. D I S H N e t w o r k satellite service customers could use Google T V ' s features w i t h the addition o f a Logitech set-top box or Sony Internet TV.

Google acquired On2 Technologies, w h i c h was the leading developer o f video compression technol- ogy, i n February 2010 i n a $124 m i l l i o n stock and cash transaction. The acquisition o f On2 was expected to improve the video streaming capabilities o f Google TV. Google also lobbied the Obama administration f o r Federal Communications Commission "Net neu- t r a l i t y " rules that w o u l d require Internet providers to manage t r a f f i c i n a manner that w o u l d not restrict

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C-184 Part 2 Cases in Crafting and Executing Strategy

E X I if 131 i 1 2 Financial Summary for Microsoft Corporation and Microsoft's Online Services Business Unit, 2 0 0 7 - 2 0 1 1 ($ millions)

Revenue $69,943 $62,484 $58,437 $60,420 $51,112 Operating income 27,161 24,098 20,363 22,492 18,524 Net income 23,150 18,760 14,569 17,681 14,065 Cash, cash equivalents, and short-term investments $52,772 $36,788 $31,447 $23,662 $23,411 Total assets 108,704 86,113 77,888 72,793 63,171 Long-term obligations 22,847 13,791 11,296 6,621 8,320 Stockholders' equity 57,083 46,175 39,558 36,286 31,097

Revenue $ 2,528 $ 2,201 $ 2,121 $ 3,214 $ 2,441 Operating income (loss) (2,557) (2,337) (1,641) (1,233) (617)

Source: Microsoft, 2007, 2 0 0 9 , 2 0 1 1 , and 2012 annual reports.

Semantic search technology offered the opportu-

n i t y to surpass the relevancy o f Google's search

results since semantic search evaluated the meaning

o f a w o r d or phrase and considered its context when

r e t u r n i n g search results. Even though semantic search

had the capability to answer questions stated i n c o m -

m o n language, semantic search processing time took

several seconds to return results. The amount o f time

necessary to conduct a search had caused M i c r o s o f t

to l i m i t Powerset's search index to only articles listed

i n Wikipedia. Microsoft's developers were focused on

increasing the speed o f its semantic search capabilities

so that its search index could be expanded to a greater

number o f Internet pages. The company's developers

also incorporated some o f Powerset's capabilities i n t o

its latest-generation search engine, Bing, w h i c h was

launched i n June 2009. Banner ads comprised the bulk

o f Microsoft's online advertising revenues, since its

B i n g search engine accounted f o r only 14.4 percent o f

online searches i n July 2011. Even though the market

f o r display ads was only about one-half the size o f the

search ad market i n 2009, the advertising spending on

banner ads was expected to double by 2012 to reach

$15 b i l l i o n .

M i c r o s o f t was also m o v i n g f o r w a r d w i t h its o w n

approach to cloud computing. The company's W i n -

dows Live service allowed Internet users to store

files online at its password-protected SkyDrive site.

SkyDrive's online f i l e storage allowed users to access

and edit files f r o m multiple locations, share files w i t h

co-workers w h o m i g h t need editing privileges, or

make files available i n a public folder f o r wide d i s t r i -

bution. Azure was Microsoft's most ambitious cloud

computing initiative and was intended to allow busi-

nesses to reduce computing costs by allowing M i c r o -

soft to host its operating programs and data files. I n

addition to reducing capital expenditures f o r software

upgrades and added server capacity, Azure's offsite

hosting provided data security i n the event o f natural

disasters such as fires or hurricanes.

Y a h o o Yahoo was founded i n 1994 and was the third-most- visited Internet destination w o r l d w i d e i n 2012, w i t h nearly 500 m i l l i o n unique visitors each m o n t h . Face- book was the second-most-visited website, w i t h more than 700 m i l l i o n unique visitors each m o n t h i n 2012. Almost any i n f o r m a t i o n available o n the Internet could be accessed through Yahoo's web portal. V i s i - tors could access content categorized by Yahoo or set up an account w i t h Yahoo to m a i n t a i n a personal cal- endar and e-mail account, check the latest news, check local weather, obtain maps, check T V listings, watch a movie trailer, track a stock p o r t f o l i o , maintain a golf handicap, keep an online photo album, or search per- sonal ads or j o b listings.

Yahoo also hosted websites f o r small businesses and Internet retailers and had entered i n t o strategic partnerships w i t h 20 mobile phone operators i n the

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C-186 Part 2 Cases in Crafting and Executing Strategy

strong competitor to Facebook, pushing f o r w a r d w i t h its plans to become the dominant provider o f cloud computing solutions, increasing search advertising revenues f r o m markets outside the United States, and extending search to television. Some analysts believed the company's priorities should also include the devel- opment o f semantic search capabilities, while others were concerned that the company had strayed f r o m its 10 Principles—specifically, Principle 6, "You can make money w i t h o u t doing evil."

The company agreed to a $500 m i l l i o n legal settle- ment w i t h the U.S. JusticeDepartmenttoavoid prosecu- t i o n on charges that i t accepted hundreds o f millions o f dollars i n illegal ads f r o m unlicensed online Canadian pharmacies selling controlled substances i n the U.S. A m o n g the most disturbing aspects o f the case against Google related to the Justice Department's assertion that L a r r y Page knew o f the practice and had allowed i t f o r years, I n commenting about the case, Rhode Island U.S. A t t o r n e y Peter Neronha stated "We sim- ply k n o w i t f r o m the documents we reviewed, the w i t - nesses that we interviewed, that L a r r y Page knew what was going o n . " 1 0

The company agreed to a $22.5 m i l l i o n f i n e levied by the FTC f o r bypassing Apple Safari web browser privacy settings to place tracking files on users o f Apple computers, iPhones, and iPads. Also, the com- pany was under investigation by authorities i n Canada, Australia, Germany, Italy, the United K i n g d o m , and Spain over its Street View data collection practices between 2008 and 2010. Data collected f r o m home W i - F i signals by Google included e-mails, usernames, passwords, and other private data. I n 2010, Google co-founder Sergey B r i n said the company "screwed up" by collecting personal data t h r o u g h wireless net- works i n an attempt to improve its mapping system. 1 1

I n 2012, the FCC concluded that Google d i d not violate U.S. wiretapping laws, but that i t d i d obstruct the investigation, and so was f i n e d $25,000.

Also, the company's lobbying efforts to encourage the FCC to institute policies to promote Net neutrality had drawn the scrutiny o f the U.S. House Oversight Committee. The p r i m a i y concern o f the House Over- sight Committee involved communications between the company and its f o r m e r head o f public policy and government affairs, A n d r e w M c L a u g h l i n , w h o had been appointed to the position o f W h i t e House Deputy Chief Technology Officer. Ethics rules cre- ated by an executive order signed by President Obama barred all W h i t e House officials f r o m communicat- i n g w i t h lobbyists or a company potentially affected by pending policy matters. A Freedom o f I n f o r m a t i o n Act ( F O I A ) request by a consumer group f o u n d that M c L a u g h l i n regularly communicated w i t h Google executives to discuss the administration's push to have the Internet regulated by the Federal Communications Commission to promote Net neutrality. McLaugh- lin's e-mails could be obtained under the F O I A since all W h i t e House e-mail accounts were required to be archived under federal law. The House Oversight Committee was particularly disturbed by McLaugh- lin's alleged use o f a personal G m a i l account to avoid having his communications w i t h Google executives archived and subject to F O I A requests.

Some analysts believed that pressure to achieve the revenue and earnings g r o w t h necessary to m a i n - tain Google's l o f t y stock price may have caused Google management to make decisions that pushed the bounds o f its corporate philosophy. I t remained to be determined i f Google's strategies could sustain its growth and stock performance i n a manner that w o u l d adhere to the company founders' early beliefs.

' G 0 0 Q l 6 , W W W . g o o g f e . c o m / c o r p o r a t e / ,

accessed July 13, 2010. 2 A s quoted In Brad Stone, ' T h e Education of Larry Page," Bloomberg Businessweek, April 15, 2012, pp. 12-14.

3 Quoted in Google's Corporate Information, w w w , g o o g ! « . c o m / c o r p o r a t » / H U t o r y . h t m I. 4 Google, "Our Philosophy," w w w . g o o g t e . c o m / c o r p o r a t e / t Q n t h f n g s . h t m S . 5 "For Some Who P a s s e d on Google Long Ago, Wistful Thinking," The Wall Street Journal Online, August 23,2004.

6 Quoted in "Gates vs. Google," Fortune, April 18, 2005.

7 Ibid. 8 Quoted In "With Google Gone, WIII Microsoft Come Back to Yahoo?" Fortune, November 5,2008. 9 As quoted In "Google Announces First Quarter 2012 Results and Proposal for New C l a s s of Stock," Google Press Release, April 12, 2012. 1 0 Quoted In "New Heat for Google CEO," The Wall Street Journal Online, August 27,2011.

" Quoted In "Google F a c e s European Probes on Wi-Fi Data "The Wall Street Journal Online, May 20,2010; and "Google Loses Bid to Dis- miss Street View Suit Over Privacy-Violation Claims," Bloomberg Online, June 30, 2011.

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