Anthony J. Pennings, PhD

WRITINGS ON DIGITAL STRATEGIES, ICT ECONOMICS, AND GLOBAL COMMUNICATIONS

Google’s Competitive Advantages – Fixed Costs

Posted on | March 17, 2011 | No Comments

We’ve been reading The Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies by Jonathan A. Knee, Bruce C. Greenwald, and Ava Seave in my Digital Media Management II class at NYU. The book challenges some of the key assumptions regarding the management of media companies including the importance of brands, talent and deep pockets. But its main point is to drive home the importance of some key competitive advantages for media companies. It perceives them primarily as a way of setting up barriers for other companies competing or entering into its markets. These barriers include fixed costs, network efforts, customer captivity, proprietary technologies, and government protection.

In this post, I wanted to focus on Google’s fixed costs as a competitive advantage. Fixed costs are those that do not vary according to production or sales levels, or in Google’s case, the amount of advertising sold. While fixed costs can certainly be a liability to a firm, they make it difficult for any other company to challenge them without matching its expenditures or finding a way to be more efficient or transformative. (Google itself transformed the advertising business)

If you are not very familiar with Google’s business strategy, I would recommend reading Steven Levy’s “Secret of Googlenomics: Data-Fueled Recipe Brews Profitability” on the Wired website. It provides an excellent introduction to the search behemoth’s business model, primarily built around its Adwords and Adsense advertising business. Preliminary estimates for Google’s 2013 revenues look to be around $58 billion dollars.

Google has a number of advantages, perhaps foremost being the massive investments in its built infrastructure. Google’s mission of “organizing the world’s information” requires more than the most sophisticated “big data” software. It also necessitates huge investments in physical plant, particularly data centers, power systems, cooling technologies, and high-speed fiber optic networks.

Google has built up a significant global infrastructure of data centers (increasingly located close to cheap, green tech) and connecting its storage systems, servers, and routers is a network of fiber optic switches. For example, the Eemshaven data center facility in the Groningen region of the Netherlands is at the end connection point for a transatlantic fiber optic cable. The US$ 770 million data center is also being built near a power plant and contracts for other green energy providing an estimated 120 megawatts of cheap electricity. For the most part, the details on fixed costs are not readily available as they are proprietary and represent trade secrets. However, aggregate numbers of Google’s fixed costs are informative.

Microsoft of course, has the financial wherewithal to compete with Google. They have been investing in data centers for a number of cloud services including Microsoft Live’s SkyDrive. With the expansion of their Bing search challenge to Google, you can expect significant investment in a global infrastructure of server farms and communications links integral to a wide range of new advertising and e-commerce services. Whether they can catch up with Google remains to be seen but a whole industry focusing on data centers is emerging that will make them more efficient to run and more economical for investment.

Anthony

Anthony J. Pennings, PhD has been on the NYU faculty since 2001 teaching digital media, information systems management, and global communications.

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  • About Me

    Professor and Associate Chair at State University of New York (SUNY) Korea. Recently taught at Hannam University in Daejeon, South Korea. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, media economics, and strategic communications.

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