There is no doubt that Google is one of the most successful technology companies in the world. The secret of its success as described by Hal Varian, Chief Economist for Google, explains why Google really owes its success to the ‘secret sauce’ it is using. In his report he states:

It seems that a lot of people are trying to figure out why Google has done so well. The difficulty is that the typical economic forces at work in many technology businesses that lead to entrenchment don’t seem to explain our success. Let’s take a look at the usual culprits.

If it isn’t economies of scale, lock-in, or network effects, what is it that explains Google’s success?

The answer, at least in my opinion, is a much older economic concept called “learning by doing” that was first formalized by Nobel Laureate Kenneth Arrow back in 1962. It refers to the widely-observed phenomenon that the longer a company has been doing something, the better it gets at doing it.

Google has been searching the Web for nearly 10 years, which is far longer than our major competitors. It’s not surprising that we’ve learned a lot about how to do this well. We’re constantly experimenting with new algorithms. Those that offer an improvement get rolled into the production version; the others go back to the drawing board for refinement.

So I would argue that Google really does have a better product than the competition — not because we have more or better ingredients, but because we have better recipes. And we are continuously improving those recipes precisely because we know the competition is only a click away. We can’t fall back on economies of scale, or switching costs, or network effects, to isolate us from the competition. The only thing we can do is work as hard as we can to keep our search quality better than that of the other engines.

Which than brings up the question about Microsoft trying to buy Yahoo!. Will Microsoft be able to make Yahoo! as successful as Google or does it also need a ‘secret sauce’ to succeed?

Comments welcome.

Complete article is here.