That formula is from a great article in Wired about the economics of google. It explains how the auctions work for adwords, and how google makes money. They’ve actually solved the question of how to monetise the net very creatively. Another example of business model innovation. Google actually innovates effectively across a number of time horizons. You could argue that their search algorithm is an incremental innovation – after all, we had search engines before google, it’s just that google’s was better.

However, their auction system for selling ads on the internet is revolutionary. So while the product/service that they provide in the search engine has remained basically the same, the revenue generation mechansim has changed dramatically. Like I keep saying, business model innovation is one of the most fruitful arenas around, and it’s something that everyone has a chance to work at.

On the other hand, google constantly works at product innovation too. The demo of google wave is definitely worth checking out (at least the first 20 minutes or so). That looks like a fairly radical product innovation – from the guys that developed google maps.

And if you listen to Seth Godin, google is even pretty innovative in their presentations!

One thing I’ve always liked about google is that they appear to have been acutely aware of the threat that someone might devise a better search algorithm, or even a better search model (something that Wolfram|Alpha is aiming for…) – so they’ve constantly looked for new products, for ways to improve existing products, and for ways to change their business model. I think that this level of change is absolutely necessary. If you don’t come up with these ideas yourself, someone else inevitably will. Whatever you might think of google, their approach to innovation is certainly worth replicating.