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Friday, March 17th, 2006

The Goods on Google – A Few Facts From Their SEC Filing

 

When the management team at Google decided to take the company public in August 2004, they made the decision with the knowledge that being a publicly traded company would force them to open their doors to public scrutiny. Before their IPO, 18-months ago, Google was, for all intents and purposes, a shuttered shop from which light rarely leaked.

Now that Google stock circulates on the open market, US law requires them to file an annual report (Form 10-K) and quarterly reports (Form 10-Q) with the Securities and Exchange Commission (SEC). These reports are made available to the public by the SEC and can also be found in Google’s Investor Relations Center. As a result of these reports, Google is no longer able to hold a wealth of information about it or its business as secrets.

Google’s 2005 Annual Report (Form 10-K) was filed yesterday, making it immediately available to the general public. Weighing in at 103 pages in 10-point font, the report contains a great deal of information about the business of being Google, and offers a glimpse of how Google sees itself.

Some of the information contained in the report is trivial. For instance, did you know that Google leases approximately 1.3 million square feet of office space in Mountain View California? It owns a further 644,000 square feet of building space near its Headquarters at 1600 Amphitheatre Parkway, Mountain View, California 94043.

The firm also leases office and research space in; Amsterdam, Ann Arbor, Atlanta, Bangalore, Beijing, Belo Horizonte, Boston, Cambridge, Chapel Hill, Chicago, Copenhagen, Dallas, Denver, Detroit, Dublin, Duesseldorf, Frankfurt, Hamburg, Hong Kong, Hyderabad, Irvine, Istanbul, Kirkland, London, Madrid, Melbourne, Mexico City, Milan, Montreal, Mountain View, Mumbai, Munich, New York, Oslo, Paris, Rome, Santa Monica, Sao Paolo, Seattle, Seoul, Shanghai, Stockholm, Sydney, Tel-Aviv, Tokyo, Toronto, Trondheim, Warsaw, Washington D.C. and Zurich. Its datacenters are located in the United States, the EU and Asia.

Other pieces of information in the report are already well known. You likely already knew that Google’s URL is www.google.com and that their mission is “organize the world’s information and make it universally accessible and useful.”

If you don’t know this already, you should know that Google says its “… search results will be objective and we will not accept payment for inclusion or ranking in them.” It also states, “Advertisements should not be an annoying interruption. If any element on a search result page is influenced by payment to us, we will make it clear to our users.” [Editors Note: Don't let anyone tell you, (or sell you), otherwise.]

There is a fair amount of information in the report relevant to SEOs and other search marketers. Ten pages of the report (pages 6 – 16) are dedicated to detailing how the various facets of Google’s search engine works and how its component parts function along side each other. While it does not spell out the exact ranking formulas, a close read of the lengthy document is like a survey course in University. For some it will be an education, for others a reiteration of knowledge they already carried.

Starting with a short description of the 33 unique search applications available from the Google Home and Services pages, the report offers details on most of the dozens of software products and packages Google offers. The report separates various tools and appliances in to several categories, in order to coherently present the vast array of search tools and features offered by Google.

The specialized features included under the Google Web Search category (pg. 6) include; Advanced Search, Spell Checker, Web Page Translation, Stock Quotes, Street Maps, Calculator, Currency Conversions, Word or Phrase Definitions, Phone Book, Search by Number (phone, FedEx, Vehicle ID, etc…), Travel Information, Cached Links, Movie Information (by US zip code), Music Information, Weather, and Q & A. This section also notes that, when relevant to the search query, News, Product (Froogle), Local, Image, Book, and Groups results might appear above, alongside or integrated with, general search results.

The Web Search category also offers a short explanation of Google News, Local, Froogle and Desktop.

The next category in the report is noted as Web and Search Content (pg. 7). It lists short descriptions of Google Scholar, Book Search, Google Base, Google Video, Personalized Search, the Personalized Homepage, Google Alerts, the Google Directory, and Music Search.

Following search content is Communications and Collaboration (pg. 8), under which Gmail, orkut and Blogger are noted.

The report continues with Downloadable Applications (pg. 8) and includes detailed descriptions of Google Toolbar, Google Earth, Picasa, and Google Pack. Google Mobile and Google Local for Mobile are included in a short section under the header Mobile (pg. 9)

The next section in the report covers Google Labs (pg. 9) and offers short descriptions of some of the projects currently underway in the Labs. The projects mentioned include; a wireless platform for Froogle, Public Transit information (testing in Portland, OR), a taxi location service called Ridefinder, more Firefox extensions, and the continuing work on Google Web Accelerator.

The majority of the next three pages, (pgs. 10, 11 & 12), of the report are dedicated to Google AdWords and AdSense, offering short but highly detailed explanations of the many features and tools included in the two paid-advertising packages. This is a must-read section for anyone interested in AdWords or AdSense, including experienced search marketers. To see all the features listed in one place is a good reminder of how Google’s paid advertising machine works and why it works so well.

The last section addressing specific products or services covers Google’s Enterprise search applications (pg 12), Google Search Appliance and Google Mini.

The next four pages give greater details on how Google sorts and ranks documents in its index, as well as a light shot at the SEO community. Here are a few excerpts.

On Organic (free) Search Listings:
Our web search technology uses a combination of techniques to determine the importance of a web page independent of a particular search query and to determine the relevance of that page to a particular search query. We do not explain how we do ranking in great detail because some people try to manipulate our search results for their own gain, rather than in an attempt to provide high-quality information to users.

Ranking Technology. One element of our technology for ranking web pages is called PageRank. While we developed much of our ranking technology after Google was formed, PageRank was developed at Stanford University with the involvement of our founders, and was therefore published as research. Most of our current ranking technology is protected as trade-secret. PageRank is a query-independent technique for determining the importance of web pages by looking at the link structure of the web. PageRank treats a link from web page A to web page B as a “vote” by page A in favor of page B. The PageRank of a page is the sum of the PageRank of the pages that link to it. The PageRank of a web page also depends on the importance (or PageRank) of the other web pages casting the votes. Votes cast by important web pages with high PageRank weigh more heavily and are more influential in deciding the PageRank of pages on the web.

Text-Matching Techniques. Our technology employs text-matching techniques that compare search queries with the content of web pages to help determine relevance. Our text-based scoring techniques do far more than count the number of times a search term appears on a web page. For example, our technology determines the proximity of individual search terms to each other on a given web page, and prioritizes results that have the search terms near each other. Many other aspects of a page’s content are factored into the equation, as is the content of pages that link to the page in question. By combining query independent measures such as PageRank with our text-matching techniques, we are able to deliver search results that are relevant to what people are trying to find.

On AdWords:
We use the Google AdWords auction system to enable advertisers to automatically deliver relevant, targeted advertising. Every search query we process involves the automated execution of an auction, resulting in our advertising system often processing hundreds of millions of auctions per day. To determine whether an ad is relevant to a particular query, this system weighs an advertiser’s willingness to pay for prominence in the ad listings (the cost-per-click or cost-per-impression bid) and interest from users in the ad as measured by the click-through rate and other factors. Our Quality-based Bidding system also assigns minimum bids to advertiser keywords based on the Quality Scores of those keywords – the higher the Quality Score, the lower the minimum bid. The Quality Score is determined by an advertiser’s keyword clickthrough rate, the relevance of the ad text, historical keyword performance, the quality of the ad’s landing page and other relevancy factors.

On How Google Charges Advertisers per Click:
The AdWords auction system also incorporates the AdWords Discounter, which automatically lowers the amount advertisers actually pay to the minimum needed to maintain their ad position. Consider a situation where there are three advertisers – Pat, Betty and Joe – each bidding on the same keyword for ads that will be displayed on Google.com. These advertisers have ads with equal click-through rates and bid $1.00 per click, $0.60 per click and $0.50 per click, respectively. With our AdWords discounter, Pat would occupy the first ad position and pay only $0.61 per click, Betty would occupy the second ad position and pay only $0.51 per click, and Joe would occupy the third ad position and pay the minimum bid of $0.01 per click.

On AdSense:
Our AdSense technology employs techniques that consider factors such as keyword analysis, word frequency, and the overall link structure of the web to analyze the content of individual web pages and to match ads to them almost instantaneously. With this ad targeting technology, we can automatically serve contextually relevant ads. To do this, Google Network members embed a small amount of custom HTML code on web pages that generates a request to Google’s AdSense service whenever a user views the web page. Upon receiving a request, our software examines the content of web pages and performs a matching process that identifies advertisements that we believe are relevant to the content of the specific web page. The relevant ads are then returned to the web pages in response to the request. We employ similar techniques for matching advertisements to other forms of textual content, such as email messages and Google Groups postings. For example, our technology can serve ads offering tickets to fans of a specific sports team on a news story about that team.

Another highly interesting section of the report highlights risk factors related to the business (pg. 20). In it, Google identifies Microsoft and Yahoo as “significant competition”.

“We face formidable competition in every aspect of our business, and particularly from other companies that seek to connect people with information on the web and provide them with relevant advertising. Currently, we consider our primary competitors to be Microsoft Corporation and Yahoo! Inc. Microsoft has announced plans to develop features that make web search a more integrated part of its Windows operating system or other desktop software products. We expect that Microsoft will increasingly use its financial and engineering resources to compete with us. Both Microsoft and Yahoo have more employees than we do (in Microsoft’s case, approximately 11 times as many). Microsoft also has significantly more cash resources than we do. Both of these companies also have longer operating histories and more established relationships with customers and end users. They can use their experience and resources against us in a variety of competitive ways, including by making acquisitions, investing more aggressively in research and development and competing more aggressively for advertisers and web sites. Microsoft and Yahoo also may have a greater ability to attract and retain users than we do because they operate Internet portals with a broad range of content products and services. If Microsoft or Yahoo are successful in providing similar or better web search results compared to ours or leverage their platforms or products to make their web search services easier to access than ours, we could experience a significant decline in user traffic. Any such decline in traffic could negatively affect our revenues.”

The report also notes that Google is competing with the traditional media for a share of advertising dollars noting that Google expects the majority of ad-spending to continue to be concentrated in the traditional media.

Lastly, the report reiterates CFO George Reyes’ comments earlier this month where he noted the unprecedented revenue growth rates Google has experienced over the past three years are likely to slow. The report says, “We expect that our revenue growth rate will decline over time and anticipate that there will be downward pressure on our operating margin. We believe our revenue growth rate will generally decline as a result of increasing competition and the inevitable decline in growth rates as our revenues increase to higher levels.” This does not mean Google is going to stop making money or showing a profit every quarter. It does demonstrate that Google recognizes its market is maturing and serves as a gentle correction to outrageous investor exuberance.

The remainder of the document outlines Google’s business structure, revenue figures from 2005 and other financial data. It is a very long and detailed read but it tells a remarkable story. Going in to 2006, Google is in excellent shape though the report does suggest it is wary of several market and competitive factors. As a chapter in the history of Google, the 2005 SEC filing is a worthy weekend read.


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