Google’s Success

TCS: Tech Central Station has an article by David S. Evans and Peter Passell which offers an interesting perspective:

For while the company did initially distinguish itself with superior technology, that fleeting advantage hardly explains how it managed to break out of the dot-com pack. Google’s most impressive achievement, we would argue, was to use its technology edge to create a balanced, “multisided” market — that is, to satisfy very different classes of customers whose demand is nonetheless interdependent.

The above may read suspiciously like the worst sort of business school babble. In fact, it follows from striking new research at the intersection of classical microeconomics and game theory. Look closely, and you’ll see that businesses as disparate as singles bars, electronic game console makers and credit card companies all face the core problems that Google has so profitably solved.

Thus success in a multi-sided market takes more than a good product or an edge in costs. It takes exceptional insight into how the demand from each side of the market affects the other — and, more often than not, the patience and capital to survive until you get the prices right and reach the scale needed to capture the network effects.

Which brings us back to Google. Good technology was certainly a prerequisite to success. And in light of Web surfers’ notorious reluctance to pay for anything, it’s no shock that the search engine users’ side of Google get the service at no charge. The company’s singular achievement was linking search results to advertising in a way that was both productive to advertisers and inoffensive to users of the search engine.

Google is now gearing up to extend the model to e-mail. And there’s even talk of challenging Microsoft on its own turf by offering Web-based applications software along with targeted advertising. Can the two sides of these markets be balanced in ways that make the services profitable?

We don’t know. What we do know is that those who, one way or another, fail to come to grips with the problems of balancing demand in multi-sided markets are courting failure.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.