What Google really is: A multi-sided platform
Everyone knows Google as the king of web search. Google started its life with some clever software that was relatively good at figuring out the best web pages that people were searching for. This is a valuable thing, but it’s hard to earn money from it directly, because web searchers probably aren’t willing to pay a membership fee or per-search fee to Google. So Google earns most of its money from advertising, placed alongside its search results, as everyone knows.
So through its search technology Google has created a site that people visit often. Places that people visit often are valuable to advertisers. So Google really creates value by bringing consumers and advertisers together. It attracts consumers by having a good search engine, and attracts advertisers because its popular with searchers. In essence, it’s pretty similar to a railway company that puts advertising on the inside of its trains. A railway attracts consumers by providing transport services, and since it has so many people in one place, it becomes a valuable place for advertisers to advertise. In economics we call this type of business a ‘platform’, because it’s like a stage where different groups come together, and providing that stage is valuable.
More recently, Google has been trying to expand its platform into other areas. Basically they’re trying to create useful things to bring consumers to their website, which is valuable for selling ads. Some of these ‘useful things’ Google creates itself, like Google Maps and Gmail. In other cases they add an extra dimension to the platform to provide the content. An example is Blogger, Google’s free blog site. They provide the tools for people to write blogs, and allow bloggers to put advertisements on their blogs using Google’s adsense service. In this case Google provides the basic technology for the platform, but the valuable content is provided by the people who write the blogs. So this is a more complicated business than a search engine, because Google has to deal with three groups (blog writers, blog reader, and advertisers).
From an economic and business point of view, these ‘multi-sided platforms’ are more complex than ordinary businesses that sell apples or toothbrushes. Actually, in economics they are more often referred to as ‘two-sided platforms’ or ‘two-sided networks’. The reason is that its simpler to analyse a platform that brings together only two consumer groups, although the same principles apply if there are three groups (as with Blogger) or even more.
There are many examples of platform businesses both in Internet markets and offline markets. The reduced cost of collecting and distributing information makes Internet-based platform businesses particularly attractive. Other examples aside from Google include eBay which brings together buyers and sellers, and ‘matching’ sites like online dating services or employment search sites. All of these businesses work in basically the same way: creating value by bringing together two distinct groups in an efficient way.
Recently, there has been quite a lot of attention paid by economists to understanding these types of business. In the Resources section of this site I’ve compiled a guide to the economic literature. Some of it is quite technical and suitable only for readers who are trained in economics. If you lack relatively good knowledge of economics, I highly recommend the book Invisible Engines which is available as a free download under a creative commons license from the MIT Press website or you can buy from Amazom.com here
Multi-sided platform businesses face a number of challenges that we don’t usually see in other businesses. These include deciding what prices to charge to the two (or multiple) groups that use the platform, and how to get both sides ‘on board’ at once. In some future posts on this blog, I’ll be discussing these and other basic issues related to multi-sided platform businesses like Google.
[tags]Google, two-sided markets, platform economics[/tags]
