IBM 1950-1980 Microsoft 1984-1998 2001-
Google has won both the online search and advertising markets. They hold a considerable technological lead, both with algorithms as well as their astonishing web-scale computing platform. Beyond this, however, network effects around their industry position and brand will prevent any competitor from capturing market share from them -- even if it were possible to match their technology platform.
To paraphrase an old comment about IBM, made during its 30 year dominance of the enterprise mainframe market, Google is not your competition, Google is the environment. Online businesses which struggle against this new reality will pay opportunity costs both in online advertising revenue as well as product success.
Competitors such as Yahoo should quickly move to align themselves with this inevitability. Yahoo could add an extra $1.5B to their revenue overnight by conceding monetization to Google and becoming a distribution partner for Adwords, as Ask Jeeves did.
Google is the start page for the Internet
The net isn't a directed graph. It's not a tree. It's a single point labeled G connected to 10 billion destination pages.
If the Internet were a monolithic product, say the work of some alternate-future AT&T that hadn't been broken up, then you'd turn it on and it would have a start page. From there you'd be able to reach all of the destination services, however many there were.
Well, that's how the net has organized itself after all.
From this position, Google derives immense and amazing power. And they make money, but not only for themselves. Google makes advertisers money. Google makes publishers money. Google drives multi-billion dollar industries profiting from Google SEM/SEO.
Most businesses on the net get 70% of their traffic from Google. These business are not competitors with Google, they are its partners, and have an interest in driving Google's success. Google has made partners of us all.
Why does Google make so much money?
It turns out that owning the starting point on the Internet is really, really valuable.
Not just because it gets a lot of traffic. It's because that traffic is so much more valuable than the rest of the page views bouncing around the net. Google's CPMs are $90-120, vs. $4-5 for an average browse page view elsewhere.
This value premium on search vs. content is because of the massive concentration of choice potential which exists on the decision point, Google.
John Battelle calls this power behind user search queries "intent". This is why the ROI of a clickthough bought from Google is so much higher than a clickthrough bought from a banner ad impression. It represents a higher likelihood that someone is going to take action if they came from a search instead of a mouse click.
No one wants to be on a search engine, they want to be on one of the 10 billion destination or application pages of the net. They may navigate "directly" to these pages because they know the name and/or have been there before. And they may move between pages by following links - say, from a blog like Valleywag to an interesting article. But these are 1:100 fan-out effects.
Google is a 1:10,000,000,000 fan-out effect. When you need to find a new page, or perhaps even to navigate to one you've been to before, you go back to the starting point -- Google.
To reconstitute Google's full value on the destination pages, you'd have to have a network which participated in a majority of the destination landings. Such a network would also participate in repeat visits which G does not see; but it would hit users after a decision point, and so might still have less overall value; it will be harder to distract someone to go elsewhere from the sidebar than when you're on the locator service.
But it's a lot easier to monetize G's 1:10B branching point than to participate in 10B destination pages.
And once you own it, you can have the rest of the net too.
Google's next step: owning the rest of the page views on the net
Just as Microsoft used their platform monopoly to push into vertical apps, expect Google to continue to push into lucrative destination verticals -- shopping searches, finance, photos, mail, social media, etc. They are being haphazard about this now but will likely refine their thinking and execution over time. It's actually not inconceivable that they could eventually own all of the destination page views too. Crazy as it sounds, it's conceivable that they could actually end up owning the entire net, or most of what counts.
Complaints are already being heard about Google using their starting point power to muscle into verticals.
Competitors who want to dethrone Google need to fight a two-front war. They have to build a killer consumer search service as well as a successful advertising network. Building one of these is difficult, but doing both simultaneously is nearly impossible. Google's dominance in both of these areas gives them an unfair advantage, and allows them to easily parry any attacks.
How zero switching costs paradoxically yield a winner-take-all market
Search engines have zero user switching costs. Unlike switching email providers, there is no user data to move over, or addresses which need to be forwarded or communicated to peers. You just type in a new name and go to the new place.
If switching costs are zero, the first thought is that it should be easy for a worthy challenger to take some share away from the leader. Paradoxically, it's the reverse that happens.
Zero switching costs lead to a winner-take-all market for the leader. Even a modest initial lead will snowball until majority market share is reached and maintained. This is because, faced with a choice between two products, in the absence of switching costs users will choose the better one, even if it is only slightly better.
Google had a vastly better product than any other search engine for a number of years. Competitors have closed the gap somewhat, but Google is still better. Everyone (70-80%) knows this now, and so the Google-has-better-search concept is now built into Google's brand.
Even if a competitor such as Yahoo, MSN or Ask were to fully close the gap at this point, they would still have to overcome the final brand perception gap. This is the effect where market research shows that users who see Google's logo on top of Yahoo's results perceive the results to be of higher quality; users looking at Google's results with Yahoo's logo on top view them as having less relevance. Brand perception effects have been measured to account for about 8% in things like beer. A few years ago an AOL researcher replicated this study in a shopping mall in Virginia with AOL Search results vs. Google.
Back to the zero switching cost and winner-takes-all. Suppose the product gap has been closed, and the two products are now identical. But one product has a powerful brand perception that it is better. In the marketing analysis, that's the same as being better. Users will stick with the leader.
Economic and social forces reinforce a feedback loop of success for the leader. The best programmers will leave the losers to work for the winning team. Major online sites will invest in organizing their sites to appeal to the winning search engine. Advertisers will be drawn to the leader, giving it a greater share of resources to invest in continuing and strengthening its lead.
Yahoo is leaving a lot of money on the table
Everbody wants to own their own advertisers. Talk to newspaper execs if you want to get an earful about ceding sales to the online giant. Controlling sales is a point of pride, and of some perceived strategic value. But quantifying the opportunity cost throws a stark light on the huge cost of opting out of Google's winning monetization platform.
This story has played out before. In 2001, Ask Jeeves was on the ropes. Battered by the dot-com crash, its ticker symbol was in danger of being de-listed from the Nasdaq. Skip forward to 2003, and they're flying high again. The magic in between was doing a deal with Google to have Adwords take over monetization. Google quickly become responsible for 70% of Ask Jeeves revenue, and Ask Jeeves stock rose 1,685% in the year following that deal.
Yahoo should accept Google's search and monetization dominance. Yahoo will not recover the search application, and browse views are not competitive and cannot be made to be so. They should do a deal with Google for Adwords/Adsense across their entire network, as Ask Jeeves did. They should be able to obtain at least an 85% rev share; that would take them from $0.10/search to $0.17, a 70% increase in search revenue overnight.
That's an extra $1.5B or so of yearly revenue being left on while they try to build a copy of Google's revenue platform.
Such a deal could even see Google's triumphant return to powering Yahoo's search results, which would provide superior results for users. In a way, this is simply rolling back Yahoo's configuration a few years, to the point where Yahoo used third parties -- Google and Overture -- for both search and monetization. Yahoo's effort to vertically integrate these functions has failed; it hasn't yielded a winning consumer product, and it's leaving billions of dollars in potential revenue on the table.
What about Microsoft?
Microsoft isn't a player online any more than IBM is. IBM?
IBM still has a great business, inhabiting the business enterprise market where they've been since they started. When the PC era arose, the popular question was why IBM couldn't own that new market too. Sad requiems were printed the day IBM finally gave up and exited the PC business.
Stodgy old IBM was perfect to selling to Fortune 1000 CIOs and the government, but wasn't configured to deliver PCs to consumers. The winner of that game was Microsoft. Surprise...the winner of the PC market didn't actually sell PCs! How could IBM have known...
The PC market isn't going away either. Microsoft has a great business too. But now the question everyone asks is why Microsoft doesn't own this new thing, the Internet. Surely with all those resources it could own any new market that arose.
But it shouldn't be surprising that huge successful companies can't make the leap into owning a completely new and different market. New markets bring with them new rules, and require different skills to win. Microsoft has the same shot as any well-funded venture at knocking off Google's crown. But they don't get a special pass just because they make a lot of money selling Word and Excel and have their logo on keyboards.
We get used to seeing the giant squash everything it steps on as it strides through the domain of its market dominance. But sooner or later, the terrain changes, and the old leader can go no further.
Nobody even bothers asking why IBM isn't a player in consumer search. IBM and consumer websites just don't have anything to do with one another. PC software and websites don't have anything to do with each other either.
All Hail the New King Google
The interregnum between the end of the PC era and the rise of the online world has concluded, and Google is the new king of forward market growth in computing and software technology. Major companies will succeed by working within the framework of Google's industry dominance, and smaller players will operate in niches or in service to the giant.
"I for one welcome our new insect overlords."