Google’s rise to a 600-pound gorilla, in just over a decade, is nothing short of incredible. The key to its success, of course, has been its superior search engine product. Its product has fueled a virtuous circle of success: relevant search results lead to more users, which in turn lead to more advertisers and higher profits. Profits, or a portion thereof, are plowed back into research, development and capital spending, allowing Google to better its search technology and develop more innovative products, attracting even more users.
The underpinning of Google’s success is the relevance of the search results it spits out. Just as Wal Mart shoppers have come to trust Wal Mart’s lowest prices, without even checking the competition, Google users have come to trust Google’s search technology as providing the most relevant results without checking Yahoo, Microsoft or other competitors. The user’s confidence comes from countless successful search queries and social proof. Not only does Google have the largest search market share, but perhaps more importantly, it has the largest share of mind among Internet users, to such a degree that “Google” has become a verb.
Google’s popularity has led to big profits. The largest profit engine for Google is its AdWords program, which lets advertisers bid for keywords that trigger relevant ads during a search query. These ads have significant advantages over different types of traditional ads. First, advertisers generally pay only if a user clicks on an ad. Second, the return on investment ad dollars is more measurable than a television, radio or newspaper ad, because a subsequent purchase is easier to trace with conversion tracking, one of the many useful tools included in the AdWords program. In essence, because ads are tied to search queries, the most relevant search engine theoretically should deliver the most targeted (i.e. relevant) ads. And since the ads are quantifiable and more relevant, advertisers have a good idea of what the ads are worth, and therefore what the advertiser can spend to generate the desired return on investment. As users benefit from better relevancy with Google, so too do advertisers, as fewer “wasted” clicks—those that occur when the ad displayed is not relevant—translate to a higher return on investment.
In trying to unseat Google, Microsoft or other competitors need to compel users to switch search engines. This is clearly easier said than done. Switching to another search engine is unlikely because it would be difficult for users to break the habit, and switching is senseless if it involves moving to an inferior product. As Google takes advantage of its scale and pours billions into improving the user experience, the quality gap will likely widen between itself and its competitors, supplying all the more reason not to break the habit and switch.
Over time, Google has steadily increased its search market lead. Just over four years ago, in April 2005, according to research firm comScore, Google had a 36.4% market share in U.S. search, compared to 64.2% this past April, leaving Yahoo with a much smaller 20.4% and Microsoft with a paltry 8.2% share.
A serious competitor to Google would need to have both the means and willingness to spend many billions just to have a small chance to displace it. Google’s two largest competitors, Yahoo and Microsoft, are far behind. The former may have the willingness, but not the ability, to spend more than a small fraction of what Google invests in R & D and capital expenditures, while the latter has the ability, but perhaps lacks the willingness to sustain years of large losses with no end in sight.
To be sure, Microsoft has tried to make a push for search market share. It recently released its new search engine, Bing. It is too early to tell what, if any effect Bing will have on Google, but the odds of it displacing Google’s dominant position are slim.
Google, the hands-down superior search engine product, believes that only a small fraction of the world’s information is stored and searchable. As more of this information becomes available on the Internet, the more time people will spend searching on the web. Google’s advantages virtually ensure that it will see most of this traffic, along with the lion’s share of any search advertising dollars. And the beauty of course is that most of what results from a Google query is content created by others. In a nutshell, Google may be the ultimate royalty on information, curiosity and entertainment—at least for a long while, until some new technology disrupts it. That is what Microsoft should be working on, not Bing.
Guest columnist William Pappas ([email protected]) is manag ing partner of Pappas Management LLC, a New York City-based money management firm. He does not hold a position in any of the stocks mentioned.
The underpinning of Google’s success is the relevance of the search results it spits out. Just as Wal Mart shoppers have come to trust Wal Mart’s lowest prices, without even checking the competition, Google users have come to trust Google’s search technology as providing the most relevant results without checking Yahoo, Microsoft or other competitors. The user’s confidence comes from countless successful search queries and social proof. Not only does Google have the largest search market share, but perhaps more importantly, it has the largest share of mind among Internet users, to such a degree that “Google” has become a verb.
Google’s popularity has led to big profits. The largest profit engine for Google is its AdWords program, which lets advertisers bid for keywords that trigger relevant ads during a search query. These ads have significant advantages over different types of traditional ads. First, advertisers generally pay only if a user clicks on an ad. Second, the return on investment ad dollars is more measurable than a television, radio or newspaper ad, because a subsequent purchase is easier to trace with conversion tracking, one of the many useful tools included in the AdWords program. In essence, because ads are tied to search queries, the most relevant search engine theoretically should deliver the most targeted (i.e. relevant) ads. And since the ads are quantifiable and more relevant, advertisers have a good idea of what the ads are worth, and therefore what the advertiser can spend to generate the desired return on investment. As users benefit from better relevancy with Google, so too do advertisers, as fewer “wasted” clicks—those that occur when the ad displayed is not relevant—translate to a higher return on investment.
In trying to unseat Google, Microsoft or other competitors need to compel users to switch search engines. This is clearly easier said than done. Switching to another search engine is unlikely because it would be difficult for users to break the habit, and switching is senseless if it involves moving to an inferior product. As Google takes advantage of its scale and pours billions into improving the user experience, the quality gap will likely widen between itself and its competitors, supplying all the more reason not to break the habit and switch.
Over time, Google has steadily increased its search market lead. Just over four years ago, in April 2005, according to research firm comScore, Google had a 36.4% market share in U.S. search, compared to 64.2% this past April, leaving Yahoo with a much smaller 20.4% and Microsoft with a paltry 8.2% share.
A serious competitor to Google would need to have both the means and willingness to spend many billions just to have a small chance to displace it. Google’s two largest competitors, Yahoo and Microsoft, are far behind. The former may have the willingness, but not the ability, to spend more than a small fraction of what Google invests in R & D and capital expenditures, while the latter has the ability, but perhaps lacks the willingness to sustain years of large losses with no end in sight.
To be sure, Microsoft has tried to make a push for search market share. It recently released its new search engine, Bing. It is too early to tell what, if any effect Bing will have on Google, but the odds of it displacing Google’s dominant position are slim.
Google, the hands-down superior search engine product, believes that only a small fraction of the world’s information is stored and searchable. As more of this information becomes available on the Internet, the more time people will spend searching on the web. Google’s advantages virtually ensure that it will see most of this traffic, along with the lion’s share of any search advertising dollars. And the beauty of course is that most of what results from a Google query is content created by others. In a nutshell, Google may be the ultimate royalty on information, curiosity and entertainment—at least for a long while, until some new technology disrupts it. That is what Microsoft should be working on, not Bing.
Guest columnist William Pappas ([email protected]) is manag ing partner of Pappas Management LLC, a New York City-based money management firm. He does not hold a position in any of the stocks mentioned.
