HBS-Google-Inc-(9-806-105)

DoNotC[e-mail]617-783-7860.9-806-105REV:FEBRUARY21,2006________________________________________________________________________________________________________________ProfessorThomasR.EisenmannandSmitaBakshi,SebastienBriensandShailendraSingh(allMBA2004)wrotetheoriginalversionofthiscase,whichisrevisedandreplacedbythisversionpreparedbyProfessorThomasR.EisenmannandandSeniorResearcherKerryHerman,GlobalResearchGroup.Thiscasewasdevelopedfrompublishedsources.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2006PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.THOMASR.EISENMANNKERRYHERMANGoogleInc.Google’smissionistoorganizetheworld’sinformationandmakeituniversallyaccessibleanduseful.—Google’smissionstatementInDecember2005Googlepaid$1billionfora5%stakeinTimeWarner’sAmericaOnline(AOL)unit.Googlesignedafive-yeardealtocontinueprovidingwebsearchresultsandsearch-basedadvertisingtoAOL,asithadsince2002.Theimplied$20billionvaluationforAOLcameasasurprise;JPMorganhadrecentlyvaluedtheunitat$13.7billion.1However,thepartnershipwasimportanttoGoogle,whichwasexpectedtoearnabout$600millionofgrossadvertisingrevenuefromAOLsearchesin2005.2TheshareofadrevenuethatGooglewouldpaytoAOLwasnotdisclosed,butseemedlikelytoexceedthe85%-90%estimatedforthepriordeal.3Inadditiontoits$1billionequityinvestment,Googlewouldprovidea$300millioncreditforadsonGooglepromotingTimeWarnerproducts,andwouldshowcaseTimeWarnercontentinaspecialboxonsomeGooglesearchresultspages.CriticscomplainedaboutreportsthatGooglewouldprovideTimeWarnerwithinformationaboutitssearchalgorithms,tohelpitspartner’spagessecurehigherpositionsinsearchresults.CommentingonGoogle’saccommodationstoAOL,authorJohnBattellesaid,“Eachofthemrepresentsastepclosertoaslipperyslope.WhattheyaregivingawayistheperceptioninthemarketplacethatGoogleisn’tforsale.”4MountainView,California-basedGooglehad2005grossrevenueof$6.1billionandoperatingincomeof$2.0billion.Asofyear-end2005,thecompanyhad5,680employeesandcashandequivalentsof$8.0billion(seeExhibit1forGooglefinancials1999-2005).Foundedin1999,thecompanycompleteditsIPOinAugust2004,withan$85offeringprice.Google’ssharepricehadclimbedto$414byyear-end2005,givingthecompanya$123billionequitymarketvalue.Itswebsite,Google.com,hada37%shareofallU.S.searchesinQ32005;Yahoo.com,itsclosestrival,hada30%share.5LeveragingitsowntrafficandthatofAOLandotheraffiliates,Googlewouldgarnerabout60%of2005U.S.search-relatedadvertisingrevenue.6OutsidetheUnitedStates,Google.comheldacommanding68%shareofallsearchtrafficinQ32005.7(SeeExhibit2forsearchenginemarketsharedata.)DoNotC[e-mail]617-783-7860.806-105GoogleInc.2SinceitsIPO,Googlehadlaunchedaflurryofproductsthathadexpandeditsdomainbeyondwebsearch.TheseincludedGmail,afreeemailservice;GoogleDesktop,whichalloweduserstosearchtheirpersonalcomputer’sfilecontents;GoogleMaps;GoogleBookSearch;GoogleTalk,whichencompassedinstantmessagingandVoiceoverInternetProtocol(VoIP)services;andGoogleBase,afreeonlinedatabaseforallkindsofuser-providedcontent,rangingfromhelp-wantedadstoproductreviews(seeExhibit3foralistofGoogleservicesandproducts).TheseinitiativesfueledspeculationaboutGoogle’sstrategicobjectives.ProductslikeTalkandGmail,alongwithpersonalizationfeaturesofferedonGoogle’shomepage,movedthecompanyfurtherintothedomainofportalslikeYahoo!andMicrosoft’sMSN.Base,BookSearch,Maps,andaplannedpaymentservice(acknowledgedtobeunderdevelopmentbyGooglemanagers)8suggestedthatGooglecouldbetargetingecommercegiantslikeeBayandAmazon.Finally,MicrosoftwasthreatenedbyGoogle’sad-supportedsoftware,includingGoogleDesktopandrumoredweb-basedproductssuchasacalendarprogramandan“openoffice”suite.Inresponse,in2005MicrosofthadproposedajointventurewithAOLtojointlydevelopsearch-relatedadvertising.SomeobserversperceivedGoogle’ssuccessindeflectingthischallengeasevidencethatGoogle’smanagementteamwasmasteringtheartofstrategicdeal-making.Battellenoted,“ThisisGoogle’sfirsttestasachessplayerinamajorcorporatebattle.Theyaresaying,‘WewilltakesomeofourpawnsandblockthemovetoourqueenbyMicrosoft.’”9Thisraisedthequestion:WhatmovesshouldGooglemakenext?CompanyHistory10TheneedforsearchservicesgrewwiththeexpandingreachandmagnitudeoftheWorldWideWeb.Oneoftheearliestsearchservices,Yahoo!,wasadirectoryofsitesselectedandorganizedintocategoriesbyhumaneditors.TheWebsoongrewtoolargefordirectory-basedsearch.AltaVistainventedtechnologythatautomatedsearch,relyingonsoftware“spiders”thatc