How Google Works: Unauthorized Edition

Over the years Google earned a reputation as a unique workplace endlessly generating great innovations. This image of an engineering wonderland missed many important aspects of the company’s inners. You could expect Google’s management to be a bit more critical about this. But as Eric Schmidt’s new book How Google Works shows, it’s not the case. The book reestablishes all the major stereotypes, while paying little attention to the things that made up 91% of Google’s success.

Revenue: Auctions

The 91% is the share of revenue Google generates from advertising sold at the famous auctions occurring each time when someone opens a webpage. While an auction is an efficient way of allocating limited resources such as ad space, these ad auctions squeeze advertisers’ pockets in favor of the seller, that is, Google and its affiliates.

In economic terms, auctions eliminate consumer surplus:

Wikipedia
Wikipedia

That’s a “normal” market, when advertisers pay the equilibrium price. Instead, Google takes the entire surplus by selling ads in individual units—each for the maximum price advertisers would pay. The blue supply curve is nearly flat in this case, and the prices go along the red demand curve. Technically, advertisers pay the second highest price—the mechanism chosen by Google for stability (see generalized second-price auction and Vickrey auction)—but in intensive competition the difference between the first and second prices is small.

How does it work in practice? Suppose you are looking for a bicycle and just google it. When your AdBlock is off, you see something like this:

screenshot

Now, you click on “made-in-china.com,” buy whatever it sells, and have your bicycle delivered to you. Made-in-China.com pays about $2.72 to Google for you coming through this link (you can find prices for any search query in the Keyword Planner). This price is determined during the auction, when many bicycle sellers automatically submit their bids and ad texts attached to the bids.

The precise auction algorithm is more complex than just taking the highest bid, because the highest bid may include an ad that you won’t click on and the opportunity will be wasted. Also, since conversion rates are way below 100%, Made-in-China.com has to pay these $2.72 several times before a real buyer comes by. It increases the price of bicycles the website sells. Some insurance-related ads cost north of $50 each—all paid by insurance buyers in the end.

Though this mechanism would make no sense without users attracted by Google’s great search engine, the mechanism takes most out of customers—and transfers it to Google.

Retention: Monopoly

How does Google Search attract users? Well, first, by showing them relevant results. It sounds more trivial now than it was ten years ago. Now users expect Amazon.com to be the first link for almost any consumer good and Wikipedia for topics of general interest. These websites are considered the most relevant not because they’re the best in some objective sense, but again because of particular technologies that made Google so successful.

Larry Page and Sergey Brin’s key contribution to their startup was PageRank algorithm. PageRank is patented, but the underlying algorithms are easy to find in graph theory. The more links point to your website, the higher position your website gets in search results. When I google “PageRank,” I have Wikipedia’s article on the top. When I link to this article here, it becomes more likely that Wikipedia’s article will remain at the top. As a side effect, linking to the first page of Google results creates a serious competitive advantage for top websites. For Wikipedia, it may be a plus as more people concentrate on improving its pages. But strong positions in search results also secure Amazon.com’s monopoly in e-commerce.

Google’s search technologies are supported by its intensive marketing efforts in eliminating its competitors. Google paid Mozilla for keeping Google as its default search all along before Yahoo! outbid it in 2015. Four years ago, Eric Schmidt testified at Senate hearing about unfair competition practices by Google regarding search results allegedly biased in favor of Google services. The European Commission investigates Google’s practices in Europe. In mobile markets, Google demands from hardware manufacturers to install Google Mobile Services on all Android devices—so users go after their status quo bias and stay with Google everywhere.

There’re more fascinating examples of Google protecting its market share. They’re missing in Eric Schmidt’s book, which gives all credit to Google’s engineers and nothing to its lawyers and marketing people.

Development: Privileges

When a typical business creates something, managers carefully look after costs. They negotiate with suppliers, look for quality, build complex supply networks, balance payments, insure their company from price shocks. Google is the fifth largest company in the world, but it’s mostly free of these headaches. Unlike Walmart, ExxonMobil, or Berkshire Hathaway, Google employees make things out of thin air and outsource routines, like training its search engine, to third parties.

It ensures that even entry- and mid-level employees are extremely skillful. Not surprisingly, most Google legends concern its HR policies. These legends split into two categories: that make sense and that don’t.

The culture stuff is what makes no sense. It’s easy to see in non-policies like granting 20% of time to personal projects. This rule might mean something for car assembling jobs; but here it’s software development. An engineer’s personal projects may take 50% of the time if he’s done his daily job—or zero otherwise. It depends on his ability to deliver results expected from his salary. More importantly, his personal projects belong to Google, even if he delivers his daily projects in time but once edited his personal code at the campus.

The book also mentions the 70/20/10 rule: “70 percent of resources dedicated to the core business, 20 percent on emerging, and 10 percent on new.” Even if the authors could prove that the rule is optimal, most other companies are so limited in resources that they have to put 100 percent into the core business.

Neither real things make the Google culture different. Each employee must have a decent workplace, attention, and internal openness, but these things are not sufficient for a great company. We are not in Ancient Greece. Other companies also treat employees well: not much slavery around, meals are fine. Google just tends to be at the extreme.

Laszlo Bock, SVP of People Operations, tried to dissuade the public from thinking that good HR policies require Google’s profit margins. In his opinion, you can get much out of people with openness and good treatment alone. His examples include telling employees about sales figures. It’s sort of an alienated example. First, sales numbers aren’t always as optimistic as Google’s history. Ups and downs, you know. You have to learn how to communicate downs to employees and keep them optimistic.

Soberness appears in less fortunate startups. Evan Williams of Blogger had the moment when the money ran out and employees didn’t appreciate it: “Everybody left, and the next day, I was the only one who came in the office” (from Jessica Livingstone’s Founders at Work, a good, balanced account on early days at startups). It’s just one example that relationships with employees are not as trivial as Bock presents them.

If not culture, then what makes the difference? Quite trivially, the privileged access to job candidates. First, it’s not about money because Google easily outbids everyone else. Its entry-level wages surpass those of Wall Street firms, including major hedge funds, like Bridgewater Associates and Renaissance Technologies. Second, Google has the right of the first interview. That comes with exceptional reputation, low-stress jobs, secure employment, ambitious goals and resources to implement big ideas.

So What?

How Google Works understates the actual achievements of the company. The book is all about famous corporate rules making the business look simplistic. It’s not. The $360 bn business consists of hundreds of important details in each key operation, like hiring, marketing, and sales.

Keeping these things together is an achievement of Eric Schmidt, Laszlo Bock and other executives. However, Schmidt’s book should not mislead other entrepreneurs into thinking that the 20% rule creates great products and reporting sales numbers to employees increases sales better than ad auctions do. Google is a good role model for learning hardcore IT business, but readers will have to wait for some other book to learn from this company.

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