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When 2+3 = 1 or How Microsoft + Yahoo can compete with Google By Steve Baba, Ph.D., Economist, January 2008 Fake Steve Jobs writes that the Microsoft-Yahoo merger won’t work. “Here's why. It's like taking the two guys who finished second and third in a 100-yard dash and tying their legs together and asking for a rematch, believing that now they'll run faster.” Others have expressed the same view differently; add up the number of searches on Microsoft and Yahoo and they total to only about half Google’s number of searches. But this is a fixed-in-time static analysis that depends on the game analogy used. If we replace the 100-yard dash example with a tug-of-war example, the results change. If we tie the two guys who finished second and third together and ask for a rematch in tug-of-war against the guy who finished first, I would bet on two guys being able to out-pull one guy. But isn’t Google like an 800-pound gorilla playing tug-of-war against two 150-pound mortal men? No. Google only looks like an 800-pound gorilla because it has won virtually all past search engines match offs, partly because Google has a head start and partly because Google has a great team. If search engine design is like a 100-yard dash, then whoever hires the fastest people wins. Google hires the fastest, I mean smartest people in the world and the smartest people in the world want to work at Google. Smart people want to work with other smart people, and Google has an attractive work environment. Google promotes the image that they are smarter than everyone else. Google was even smart enough to invent a new way for their initial public offering. Google’s founders came from Stanford University and may think of themselves as smarter, as opposed to luckier, than others from Stanford University whose start-ups failed. Google may also promote the view that they are smarter than anyone else for marketing reasons: search with the smartest people for the smartest results. But is Google really smarter than anyone else? Even if it’s true that Google has the best shot at hiring the top person out of 1,000 applicants, what is the difference between the first, second, third and fourth person out of 1,000? Can Google even be sure they are hiring the very best applicant out of 1,000? Likely there is miniscule difference among the applicants Microsoft, Yahoo or Google can hire. In our 100-yard dash example, suppose Google was able to hire the three top sprinters, (and we can only tell which sprinters are the best because running has a clear quantifiable result, unlike most occupations) leaving the next three for Yahoo and Microsoft. What is the time difference between the top sprinters? It’s only a few hundredths of a second. And the only way one would even notice the miniscule time difference would be if the sprinters were next to each other in the same race. People naturally choose which search engine will get them to their answer the quickest, which makes the 100-yard dash analogy attractive. When I want to find a football game’s kickoff time, I use the search engine that will, from my past experience, answer the question the quickest. I don’t use the second-place search engine. This is a “winner take all” or “contest” business model which is described in more detail in my paper at www.gstockreport.com . But search engine design is not an individual sport such as the 100-yard dash. Search engine design is a team sport that takes hundreds of people on the search team to design a search engine. Search engines are more like tug-of-war where the team that can pull or carry you to your goal wins. The BBC reports: It’s clear the search giant (Google) is determined to stop this deal. “We’re very nervous about it,” a Google insider told me. “Microsoft is so huge it can just hire a couple of thousand engineers at the click of its fingers and put them to work on any problem.” Google is worried, and I would worry if I owned Google stock. Of course nothing is certain and there is a good chance the Microsoft-Yahoo merger will be unsuccessful due to a legal or business challenge. But overall, I would agree with Microsoft’s analysis in the letter sent from Steve Ballmer, Microsoft CEO, to Yahoo’s board: “While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers.” While different corporate cultures can be a management challenge, being able to use two different cultures is also an advantage. In our recruiting example, Seattle Microsoft can recruit talent who wants to live in a standard American suburb, while Silicon Valley Yahoo can recruit younger talent who want to walk around town with a ring in their nose. Steve Baba, a sometimes teacher, sometimes consultant, has a Ph.D. in economics from the University of Maryland at College Park and can be reached at SteveBabaPdD@aol.com . More information on the economics of the search engine industry is on my website www.gstockreport.com, which was written at the time of Google’s initial public offering.
by Steve Baba, Ph.D. Written in 2004 Google is a great website, but a lesson of the dotcom bubble is that a great website is not always a great business. Google’s expected IPO has attracted enormous, one-sided, positive buzz from Google fans, techies nostalgic about the boom years, and day traders hoping for quick profits. For balance, below is a list of Google’s many potential business challenges, several of which could turn Google into a penny stock. A more detailed analysis is available at the bottom of this page. 23 Reasons Google Could Become a Penny Stock 1. Companies that grow quickly by viral marketing, also known as word-of-mouth advertising, can fall just as quickly by competitors’ viral marketing. 2. Companies that grow quickly from free publicity can also fall quickly by competitor’s free publicity. 3. Switching costs and brand loyalty of search engine users are low. 4. A winner-take-all business, also known as a contest business model, is only profitable if you are the winner, as Google is today. 5. While Google is free to searchers, a price of zero, profit-lowering price-competition is still possible with a negative price. 6. In addition to price competition, search engines can compete for users by offering less advertising. 7. A competitor could develop a better, patentable search algorithm, as some hopeful inventors claim to be working on. 8. The search engine industry may be in a temporary disequilibrium, and the long run equilibrium, dominance by Google or highly competitive industry, is unknown. 9. Microsoft and Yahoo might actually try and compete with Google. 10. The rapidly declining cost of technology, computers, storage, and bandwidth (Moore’s Law), will reduce the cost of entry for competitors. 11. Any competitor can outsource software deployment to India, Russia or China, which will reduce the cost of entry for competitors enabling new competitors. 12. There is open source competition. 13. The increasing power of programming tools, languages, and scripts reduces programming costs, which increases competition. 14. Google’s revenue source, text Pay-Per-Click advertising (PPC) often causes a race to the bottom as the most expensive/profitable products outbid less expensive products for the limited PPC positions, having negative reputational then financial effects. 15. Text pay-per-click advertising is only one form of advertising and is subject to competition from other forms of advertising. 16. Google’s revenue source, advertising, may be blocked or replaced by ad blocking software. This is similar to the TiVo problem for television advertisers. 17. Google’s reported 50% margin with AdSense (displaying ads on third party sites) is unsustainably high for a middleman. 18. Much of Google’s future profit potential depends on brand extension to other services, such as their shopping comparison site Froogle or Gmail, which involves risks and cannibalization. 19. Being number one, Google is the number one target for search engine spammers and search engine optimizers, which reduces Google’s quality. 20. After an IPO, with no prospect of great stock options to employees, Google may be at a comparative disadvantage attracting and retaining top talent. 21. Google may not discover significant new advances in search if none are there to be easily discovered and all the easy techniques, the low hanging fruit, were already discovered, wasting Google’s research investment. 22. In contrast to the already discovered and easily copied low hanging fruit, the high hanging fruit of artificial intelligence may be decades away if it’s even possible, wasting Google’s research investment. 23. Everyone online, including Internet entrepreneurs, uses Google or another search engine, making search a well-known business opportunity. (If you are one of these entrepreneurs, my report analyzing Google’s competitive threats can be read as, “How To Compete With Google,” - in a niche search market or in the advertising market unless well financed.) A report analyzing the above risks with a conclusion and possible events affecting Google stock is available under the Amazon.com honor system. You may read the report for free. But if you find the information valuable, donate $5 with Amazon.com’s honor system.
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Disclaimer: About the author: Steve Baba has a Ph.D. in Economics from the University of Maryland, a B.S. in Computer Science and has written Internet business plans. Steve is a minor partner in www.Shrewd.com, a new price comparison service that finds low prices for new and used books, CDs, videos and other products. Steve is also author of a free ebook on domain names (PDF, 250K). |
