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Posts Tagged ‘Google Internet Search

The Best Business Ever

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Google is the best business ever.  No company has ever created so much equity value so fast.  Search is a natural monopoly.  Competition is futile.  As the Internet expands in every direction, Google gets stronger.  As Nicholas Carr has explained:

Google’s protean appearance is not a reflection of its core business. Rather, it stems from the vast number of complements to its core business. Complements are, to put it simply, any products or services that tend be consumed together. Think hot dogs and mustard, or houses and mortgages. For Google, literally everything that happens on the Internet is a complement to its main business. The more things that people and companies do online, the more ads they see and the more money Google makes.

Google’s economies of scale give it a growing lead in providing the best search experience.  Google deserves immense credit for winning search.

Search monetization is a different story.  Google was pushed, kicking and screaming, into running ads on, known as AdWords.  Little did they know that search turns out to be the most monetizable moment in online behavior.  It also turns out that the revenue yielded per search is jacked up by the volume of advertisers bidding for terms.  So, if you’re Google and have the most search traffic and get advertisers to show up, you have a virtuous cycle.  More traffic brings more advertisers and more monetization, which generates more revenue to invest in user experience, which generates more traffic, etc.

Google’s CPC-based ad network, AdSense, feeds off of these dynamics.  In the past, Google forced advertisers bidding on search terms at to also bid on its content network (AdSense) for those same terms.  This huge advertising base ensured relatively high prices per click since inception, enabling Google to provide market-leading payouts to publishers while keeping large portions (often up to 70%) to invest in R&D and to fall to the bottom line.  This enabled AdSense to rapidly build scale and create a large payout gap between itself and other CPC-based networks, even as Google now allows advertisers to bid on AdWords traffic without having to bid on AdSense.

While AdWords revenue from will always have better margins than AdSense revenue from its content network, both businesses benefit from overwhelming and overlapping economies of scale. Google’s stranglehold on monetizing the Internet gets tighter with every bit of additional anything put online.

Some might question the durability of Google’s leadership position in search.  After all, there’s no switching cost for users to leave Google.  What is to keep users from going to the next great search engine?  This logic has encouraged legions of poor, unfortunate souls to waste countless millions trying to fund the mythical Google-killer.

But, as Rick Skrenta explained, zero switching costs create a winner-take-all market.

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.

That’s why Google’s market share will steadily inch towards 100%.*

(* = Yes, MSFT is buying market share with OEM deals like those announced today with Dell and Verizon, but MSFT is fighting a losing battle.  They are better off dividending out their cash hoard than wasting it tilting at windmills.)

Written by sandykory

January 8, 2009 at 1:22 pm

Posted in Uncategorized

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