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Business model of Google Back in the day, when PC stocks were kings on Wall Street, a pesky college kid named Michael Dell figured out that he could do an end run around the then-established PC makers by developing a smarter way of making and selling boxes. His strategy was simple: get components and PCs from the factories in Asia to the U.S. as fast as possible, but only after he had charged for the machine.
By squeezing the supply chain as hard as he could, he turned Dell into a fearsome (and loathsome) competitor. With his help, the supply chain for the PC era came to consist of foundries, ships, U.S. assembly plants and UPS trucks. Google (GOOG), with over $200 billion in market capitalization, is following a similar strategy, fine tuning and adapting it for the Web & broadband.
Instead of trucks and assembly plants, however, Google’s supply chain is made up of fiber networks, data centers, switches, servers and storage devices. From that perspective, its business model is no different than that of Dell’s (DELL): Google has to deliver search results (information, if you want to be generous about their other projects) as fast as possible at as low a cost as possible.
To better understand Google and its business model, one needs to break it down into three data inputs.
* Relevancy of results.
* Speed of search.
* Cost of executing a search query.
While their results aren’t optimal, they are good enough. Just like Microsoft Windows was good enough to dominate the market. Google now has 64 percent of the total search market. And although a typical Google query can often be an act of futility, we put up with it because the results are fast. If they’re wrong, we can just start all over again.
The faster the results show up on our browsers, the less inclined we’ll be to switch to a rival search engine, no matter how great the rival’s search methodology may be. The faster (and more efficient) its infrastructure, the more easily Google can keep serving the ad-based money machine.
In other words, the company has to make sure that the speed of its search is really, really fast. Any random search on Google these days takes between 0.12 to 0.06 seconds. Now that is really, really fast. Google does this by indexing the Internet quite well. The magic is in delivering the search results from this index at lightening speed, and that requires an infrastructure — oodles of bandwidth and specialized hardware — that is finely tuned, much like a Formula One Car.
Against this backdrop, it makes perfect sense for Google to build their own servers, storage systems, Internet switches and perhaps, sometime in the future, even optical transport systems. Let me rephrase that: Imagine connecting thousands of hosts (storage and server systems) at speeds of, say, 10 gigabits per second, in a manner that allows any-to-any connections.
The number of racks, fiber, routers and everything in between is mind-boggling. If this system were built using gear from established hardware makers, it would take a superhuman effort to make it all work together. In other words, the sheer cost to keep such a beast going would suck up a major component of the infrastructure.
A better option is to have gear that is customized for your processes, ones in which you have a major operational expenditure advantage. In the telecom bubble, large service providers were brought to their knees by operational expenditures.
With the exception of optical systems, Google has built or is building the gear. It has been rumored to be a big buyer of dark fiber to connect its data centers, which helps explain why the company spent nearly $3.8 billion over the past seven quarters on capital expenditures.
You can argue that building customized gear is an expensive strategy, but when you are the scale of Google, it starts to become less of an issue. Why? Because process-optimized infrastructure ensures that Google’s cost of executing a query keep going down.
To sum it up, Google’s gigantic infrastructure is the big barrier to entry for its rivals, and will remain so, as long as the company keeps spending billions on it. That said, there’s another thing Google could learn from Dell: Maintain the quality of your search results.
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Originally Posted by nilact 
Good one