Thursday, July 26, 2007

Life After Search?

Over the last week, three web giants reported earnings. The business press typically focused on the Yahoo! vs. Google battle over the enormously lucrative search market. Yahoo! once again posted lackluster results and a relatively stagnant share of the search market, while Google pushed forward with decent revenue growth, but failed to exceed expectations of profits as hiring costs increased slightly. This seems to be the story of the last several quarters: Google is growing more quickly than Yahoo! and even a management shake-up at Yahoo! hasn't inspired much investor confidence in the company. What's wrong with this story? Well, it completely ignores another web giant, Amazon, which has climbed a stunning 113% since January. This week Amazon reported great earnings and the market value shot up 26%. Amazon's results are impressive seeing that Yahoo! is down 6% and Google is only up 10%. What's going on here? The paradigm is changing. Search is the bread and butter of the internet companies now, but the battle for the search market has largely been won, and it is only one small battle in the war for web dominance. In the near future the battle will be about infrastructure, services, and high-quality content.

Is Google a search company? The obvious answer is yes, as nearly 99% of their revenues come from search advertising. A more astute and informed answer, is no. Google is not a search company--it is an infrastructure and web services company. Their superior search technology and the creative thinking of Bill Gross (Bill Gross invented textual search advertising with Overture, which Yahoo! subsequently bought) has provided Google with a phenomenal profit driver over the last several years, enabling them to amass a war chest of cash, amounting to $12.5 billion in liquid assets, just over half of Microsoft's cash and short term investment position. Make no mistakes, Mr. Schmidt, Google is rivaling Microsoft by encroaching on its traditional operating system and productivity applications turf. The Google infrastructure has created what will be a web operating system which will render Microsoft's costly and complicated line of operating systems ancient history. Google has created an infrastructure for web applications that will rival the Redmond giant. The game is not only about search, but about the web operating system of the future and all the applications that are built around it.

What about Yahoo!? While Yahoo! learned how to monetize search well before Google, they have failed to capture hearts and minds. From the day Yahoo! began, it has been a portal, or a place to explore interesting areas of the web, editorialized by humans. There is no doubt that there is a plethora of valuable information contained in the Yahoo! directory, but their approach to the web is much different than Google's. Rather than taking the bottom-up approach and letting others be responsible for content and its organization, Yahoo! has taken the top-down approach to organize and provide content. Yahoo! is akin to an online newspaper or distribution platform in this way, as it prints third party content and hopes to make a profit on the difference between the cost of content and what advertisers will pay. See this post for more background on the importance of owning content in the media business.

The third major and often overlooked player in the consumer web space is Amazon. With Amazon's presence as one of the first most successful etailers, it doesn't receive the same credit that Google or Yahoo! do because much of their business is based in the terrestrial form, requiring shippers and inventory accumulation. Recently CEO Jeff Bezos has transformed Amazon into a web services and content hub. Amazon's web services strategy includes selling data storage and computing power to developers through the S3 program and Elastic Compute Cloud. What is important about S3 and web services is that Amazon is building the future of the web as more and more applications moving online through the software-as-a-service model. Additionally, Amazon's foray into high-quality content rivals iTunes as a destination for media. With the Unbox initiative consumers can download video directly to their machines, bypassing trips to the store and restrictive iTunes device management strategies.

Conclusion: Despite the hype and cheerleading surrounding Yahoo!'s Panama upgrade to their search monetization, it's unfortunate for the firm that the game is no longer exclusively about search. What is relevant is web dominance through a web operating system and building infrastrucutre to host future web-based applications. Along with this is high-quality content available on demand, something that both Amazon and Apple's iTunes seem to understand very well.


Dotty said...

Good for people to know.