Thursday, May 19, 2005

Search Wars: “Google Kicked Our Butts”

Surprisingly, this comment came from the mouth of Microsoft Chairman Bill Gates in response to the ascension of Google as the preeminent player in the internet search market. It may seem shocking that the leader of the world’s most powerful software company openly admitted defeat. Although Microsoft had been on the forefront of most of the world’s software, they fell asleep when they should have been perfecting the next big thing - the search engine.
Google’s emergence as the leading search engine has helped position itself as a major threat to Microsoft’s dominance in software. How big is the search market? According to Safa Rashtchy of Piper Jaffray, Google leads in global market share in search at 51%, followed by Yahoo and Microsoft at 24% and 13%, respectively. Advertising revenue for the market is expected to be a $22 billion market by 2010, up from $7.5 billion in 2005.
It was only in 2003 that the light bulb finally turned on for Microsoft. Up until that time Microsoft outsourced its search function to third parties. Microsoft viewed the search industry as a money loser and merely a convenience service for its users. In the meantime, Google had developed a well regarded search engine that differentiated itself through its simple design and relevant search results from even the most arcane requests.
Google perfected a revenue model for the market which Microsoft had never identified. The list of vendors accompanying search results appeared adjacent, but not embedded, with the rest of Google’s results. Prices were set through an auction rather than fixed fees. This differed from Microsoft’s original approach whereby advertisers paid to be included in the main search results, which was often confusing and misleading to consumers.
In February 2003, Microsoft committed over $250 million to build and advertise its own search engine. Gates knew the company needed to act fast against Google’s attack on the core of Microsoft’s franchise – the ability to control the centerpiece or portal of the computer user. Rather than buy search software from another company (which Yahoo did in acquiring Overture), the company decided to develop search in-house completely from scratch. After more than two years of development, Microsoft finally launched its own search toolbar for Internet Explorer. The successful launch suggested that the software giant was ready to make its move on the increasingly competitive yet lucrative internet search market.
Two characteristics of the web search market will play an important role in determining a winning strategy: customer loyalty and network externalities. Switching costs are low, and many analysts agree that the better search technology will cause users to switch. Google and Microsoft have different advantages in terms of reaching out to the customers. Microsoft’s strong brand recognition gives it a large and loyal customer base they can reach. On the other hand, Google has already established a strong user base through its consistent and reliable search results, and more recently through its introduction of the e-mail service Gmail. The synergies between the two products have helped grow its client base.
Building a customer base has a multiplying effect in the search market. The relationship between a search engine, its customers, and advertisers creates a network externality. There is a “circular” relationship in that the more users a search engine has leads to more advertisers, which leads to more relevant results, which in turn leads to more users. Microsoft’s recognized brand name will help in luring advertisers, which as a result will help reap the benefits of the circular relationship.
Certain challenges exist for Microsoft in succeeding in the web search industry. Google is a huge brand with the “Kleenex” advantage - people use their name as a verb for searching. Google is a much leaner company that can respond better to customer needs. Although Microsoft can try to integrate search with its other products, they face the risk of antitrust lawsuits. Even if you remove this concern, Microsoft can not use predatory pricing tactics like they did in the browser wars, as search is provided to customers for free.
Yet the future is not so bleak for Microsoft, as several factors will play in their favor. Most obvious is their size and financial resources. As mentioned before, having the best search technology will greatly affect market share. For now, Google owns the claim to the best technology, but they can not match Microsoft’s investment in R&D. In addition, there is a large amount of content that can not be searched on because they are pay sites. Microsoft has the deep pockets to buy such content and make it available exclusively on their search. Lastly, if they can avoid antitrust barriers, Microsoft can greatly benefit from integrating search into the other products such as Internet Explorer and Office. Look for the next version of Windows called ”Longhorn”, coming late this year, to have search more integrated into the operating system.
Microsoft’s commitment to search is a smart one considering that Google’s success could be leveraged to compete in other types of software. According to analysts at Credit Suisse First Boston, “Google is one of the bigger long-term threats to Microsoft as it leverages its power position in the search market into a number of other personal productivity areas.” Google already beat Microsoft to market on a “desktop search” tool that uses their search technology for finding data on a user’s computer. Such advancements show how Google can take over operating system features from Windows. Even if Microsoft takes an approach of winning even if they end up losing money, it is a defensive move that will help protect the rest of their products.
- Joel Amico, Carol Pinlac, Jason Rosenthal

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