Google advertising model

The internet giant gets the new world of commerce.

WideModern_Google_062513.jpgIn our last entry, "Why iTunes Works, " we used the example of Apple to illustrate how innovators can hit home runs by focusing on activities that have become inexpensive or free and finding alternative ways to monetize the core value associated with these activities.

In the Apple (and Beats by Dre) cases we introduced, hardware brands effectively captured premiums previously commanded by content producers. A component of the total value enjoyed by the consumer (music content) became widely available, and those who had controlled it could no longer charge a premium for access to it. Ultimately, newly digitized music left spending to be captured by the hardware brands.

In the earlier piece, we challenged readers to think of other instances in which previously expensive items left value out there to be captured. In Acceleration Group's work with innovators and investors, we call this dangling value. Often it arises due to an abrupt change in the availability of one component in the value chain. Capturing dangling value frequently spells the difference between innovation base hits and grand slams.

If solid technology, design and service innovation support a strategy that captures significant dangling value, the wins can be extraordinary. Consider the strategy Google has pursued to expand its access to the user data it depends on to support its targeted ad platform. Google consolidated its success by zeroing in on functions that used to command premiums large enough to power companies like America Online and Microsoft. (These companies maintain robust businesses today; our point is simply that in the areas we're focused on here significant value has been drawn away). Google offers these services at no cost to the user, capturing the dangling value by monetizing user data.

Take, for example, Google's Gmail service, Google Docs platform and Chrome operating system. There was a time when many consumers paid monthly fees to providers like AOL for the use of email and other online services. When it comes to documents, of course, in the era before cloud computing, Microsoft built one of the most successful businesses in history, in no small part by charging users a pretty penny to keep up with the latest versions of its Office Suite software and Windows Operating System.

Google was a relative latecomer to the game of capturing dangling value by offering free email, of course, but it did come to dominate this game. When it comes to documents, whatever one might say about the functional limitations or collaborative advantages of Google Docs, the fact is that for users, they are free. And a growing number of users are happy to let someone else pay for our use of these tools, as long as all that's asked of us is that we give that someone access to our information when we press "I accept.

This is a powerful case of dangling value captured. Google makes the vast bulk of its revenues from AdWords. These are at the heart of the company's model, which makes it possible for advertisers to reach users who have shown, through the words they use across Google's platforms, that they are likely to want what those advertisers are selling. This is why you're offered functional incentives for signing in when using the Chrome browser, and for extending your use of Google's platforms onto an Android phone. Integrating all of your digital activities gives Google a more complete picture of your preferences as a user. This in turn enables Google to further differentiate its targeted advertising proposition.

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