Google: Porter's 5 Forces Analysis

Google, now a subsidiary of Alphabet, Inc. (NASDAQ: GOOGL) as of November 2015, is the most trafficked website in the world, at least according to the 2015 rankings by Alexa Internet. By the end of 2014, Google accounted for more than 31% of the global digital advertising market, generating a reported $38.42 billion in ad revenue. In other words, lots of companies are willing to pay lots of money to Google to put the right ads in front of the right consumer.

As a company, Google provides other products and services aside from selling ad space. During the fiscal year 2014, 32% of Google's $68 billion in revenue came from sources other than its own websites. Much of that comes from the AdSense program, which allows non-Google websites to incorporate Google's ads into their websites. Then there are the periphery purchases and research projects, such as self-driving cars and other automated services.

Not all of these have been successful. For example, the company purchased Motorola in 2011 to bolster the Android phone network, infamously leading to a $9.6 billion write-down. The much-anticipated Google Glass project was a flop as well, something angst-ridden shareholders point out while bemoaning Google's focus on nonadvertising income.

Buyers may not be lining up for Google's pet projects, but they keep coming back to spend on ads. However, Google is far from the only option in a market such as the Internet. In fact, potential competitors are virtually limitless online since it takes very little upfront capital cost to build a website and leave room for ads. This kind of flexibility gives ad space buyers a lot of power.

What Creates Buyer Power?

Within the Porter's Five Forces method of investment analysis, the term "buyer" is used instead of "customer." Buyers are said to have power whenever they can influence prices in an industry. To make an economic analogy, buyer power is somewhat analogous to the elasticity of demand for a given product or service. Industries with high degrees of buyer power tend to show fewer profit opportunities, all else being equal.

Buyers exert power in several ways. One version is where buyers make bulk purchases, or where one buyer's purchase constitutes a relatively large portion of income. Another way buyers show power, such as with Google, is with the threat of an easy switch to another company or industry.

Who Are Google's Buyers?

It is easy to assume search engine users are Google's buyers, but that is only superficially true. Most Web-browsing individuals do not send money directly to Google. Instead, some of them click on other company's ads and spend money; it is the other companies that directly generate revenue for Google since they are the ones buying space.

Buyers are not bound to long contracts with Google, and there is very little to prevent them from taking up ad space on a competing website. For example, a furniture company may determine it will sell more chairs and sofas by placing ads through Facebook than through Google, and it can actually complete that entire switch without having to move any physical assets.

Buying Power in Action

In early 2015, Google saw losses in U.S. market share for the first time in decades. Both Google and Yahoo fell below 2014 levels, while Microsoft's Bing realized gains in market share.

Add this to the growing amount of search traffic on social media and e-commerce websites, and it is apparent Google faces stiff competition across the board. There are only two unique elements to the Google ad product: sheer traffic volume and advances in search engine algorithms. It is very easy for a buyer to pick up and switch companies quickly.