ANOTHER month, another string of victories for Google, the world’s emerging internet superpower. On Tuesday April 17th, in the latest sign that Google has the upper hand over all its rivals, Yahoo! disappointed analysts with its first quarter results: profits were down by 11% to $142m. Google’s share of web searches keeps going up. It now executes more than 64% of all searches, according to Hitwise, a market-research firm. Yahoo!, its main rival, appears stuck at about 21%, and distantly third, Microsoft’s MSN continues its decline, to below 10%. With both the most popular search engine and the most efficient system for placing sponsored text advertisements, Google dominates the lucrative and fast-growing market for so-called “paid search” advertising (where advertisers pay only for actual mouse clicks).
Google’s grip is tightening elsewhere. Last week it said it would pay $3.1 billion for DoubleClick, the web’s largest broker between online publishers and advertisers for “branded” or “display” advertisements (paying for views rather than clicks). This segment is growing as fast as paid search. Google also struck a deal with Clear Channel Communications, America’s largest radio broadcaster, to sell airtime on 675 radio stations to advertisers in Google’s network. Earlier this month Google said it will place advertisements with EchoStar, a satellite-TV operator, and also with traditional newspapers. Google is thus launching an all-out attack on the entire advertising market.
In the process, Google is bashing Yahoo!. It, along with Microsoft and Time Warner, owner of AOL, had also bid for DoubleClick and failed. Terry Semel, Yahoo!’s boss, has suffered a string of strategic defeats, having been outbid by Google for a stake in AOL and for YouTube, the leader in online video. Moreover, Mr Semel had recently been trying to defend against Google in display advertising, while hoping to attack it in paid search. Traditionally, Yahoo! has placed text advertisements on its search pages based only on how much an advertiser bids for a given search term (or “keyword”, such as “mountain bikes”); Google takes other variables into consideration and so makes its advertisements more relevant to web searchers, thus earning more revenues.
In February Yahoo! launched a new advertising algorithm, called Panama, that is meant to close this technical gap, but there is scepticism that it can make much difference. Advertising systems do not ride on their algorithm alone but also on their network of advertisers and publishers. Google’s network, in paid search, is now so large that advertisers cannot afford to abandon it. So Panama may only prevent Yahoo! from falling further behind.
Mr Semel’s other defence is to use the growing fear of Google among “old-media” companies to engineer various alliances to contain the enemy. In March Yahoo!, along with MSN and AOL, signed on to a new partnership with NBC and Rupert Murdoch’s News Corporation, which intend to form a joint venture in online video to counter Google’s YouTube. Last week Yahoo! expanded an advertising alliance with Viacom, which is currently suing YouTube. And this week, Yahoo! announced a deal with a consortium of newspaper publishers to run their content on Yahoo!’s websites, and to place advertisements on the sites of the newspapers.
For MSN the picture is even bleaker. Online advertising is still a minuscule part of overall revenues but is still crucial to Microsoft’s growth strategy. So far Microsoft is failing. Sarah Friar, an analyst at Goldman Sachs, estimates that Google will make operating profits of more than $5 billion this year, which will grow by 36% for the next three years and Yahoo! will make $3 billion and grow by 20%. Microsoft’s online businesses will make losses of $2 billion, and more in the next two years. Microsoft’s nightmare scenario, however, is that Google will at some point disrupt its core business of selling shrink-wrapped software. Google recently said that it would add presentation software to the word processing and spreadsheets that it already offers free online.
Google may face a downside to its expansion, as Henry Blodget of Cherry Hill Research, points out. Placing advertisements on its own search pages gives Google profit margins of about 60%; placing advertisements on other web pages, such as blogs, yields margins between 10% and 20%. As Google expands into new segments, such as broadcast, its margins will probably keep declining, especially as new media partners are likely to give Google only “left-over” inventory. So Google is far from becoming a monopolist but it is, for the moment, far ahead of its peers.
