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Summary:

Just like Dell used its supply chain to keep ahead of the competition, Google is using its infrastructure to constantly increase its web presence. Building its own network, data centers, servers and more recently are part of Google’s larger plan to use its infrastructure as a strategic advantage. (Full report after the fold)

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, according to Hitwise, 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 — customers will only put up with shoddiness for so long.

Note #1: Ethan, you are absolutely right about the software aspect of Google architecture, and I was going to do a separate post. This one is already 750 words.

Note #2: Earth2Tech has a post about Google’s vertically integrated green energy strategy.

  1. Great article Om. The cool thing in both cases (Dell and Google) is that all this fast mechanism is hidden behind the scenes and transparent to the user. Dell has been the leader for quite a while but its competitors have in the meantime learned a lot, I expect the same to happen with Google sooner or later, probably later…

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  2. You can compare this entry deterence strategy as a “building excess capacity” strategy. As economic literature goes, this is a very credible threat to deter entrants.

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  3. Google’s search algorithms blow me away. The speed is mind-boggling considering the task. Go Google!

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  4. I don’t infrastructure explains much of Google’s strength
    $3.8BN of investment over two years for a company that makes that much in Net Income in a year? Peanuts. If that was all it took to win in search, Microsoft and Yahoo! wouldn’t have to worry!

    Rather, there are entry barriers in terms of brand power (consumers think Google when they think search), and in terms of the liquidity and scale of their adsense market place (they can better monetise queries because they can offer more relevant ads)

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  5. I would agree that Google’s infrastructure is indeed part of their competitive advantage, but the other part is the Google employees that built it. They have what is arguable the brightest group of people ever assembled for a publicly held company.

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  6. [...] Om Malik has a rather eloquent piece on Google’s infrastructure putting up barrier to entry for competitors. [...]

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  7. Excellent article, Om. It really shows that Google has the lead in not just infrastructure, but also strategy. I agree with you, though, their search results need to improve in quality! Speed is important, as long as they continue generating money, they can keep improving their infrastructure and becoming more efficient: http://fishtrain.com/2007/08/30/googles-trading-floor/

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  8. I am excited to see how the new G*Drive project works. It’s great that they are offering these services and it will be fun to play around with yet another Free Google tool…

    The breadth of their projects really is the key to their success. They have branched into so many channels online that AdSense will continue to grow with and into these multiple channels.

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  9. Do you see Google’s push into renewable energy as part of its drive into building infrastructure? Or is that more of just a pet project of Eric Schmidt’s growing interest in green technology?

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  10. Wow. This blog is so much better than Techcrunch. You guys actually have well thought out posts. Awesome. Finally, an alternative.

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