The economical path towards the future search engine
Today’s first Guest Author is Alex Ginzburg of the NooTag Team
At the present, the Search Engines market is one of the few fields on the Internet that has been proven to be very profitable. This fact encourages hundreds of entrepreneurs to challenge Google, which currently enjoys the income almost exclusively. In the process, a debate has been raised regarding the nature of the innovation that will create a worthy alternative. For instance, there is an ongoing argument between those who believe that the answer will be found in a revolutionary search algorithm and those who are confident that a new interface will do the job. There is no consensus even among the followers of each approach. Though, there is one thing in common to most of them: they all seek for a technological solution. However, I’m not sure that their choice suits the natural direction of search engines’ development. I’d like to present an alternative approach, an economical evolution of this field.
Today, Google dominates the search market, almost solely, due to its economic strength. It keeps an army of the smartest people available, by providing them the most desirable workplace on earth (7). It pays billions to companies like Dell (1), Mozilla (2), Adobe and others just to spread its search service through their computers and programs. It spends hundreds of millions of dollars on dozens of non-profitable products. The lunching of those free services is used to obtain positive PR and to maintain Google’s reputation as a generous and innovative company. Under those circumstances it’s difficult to imagine how anyone can overthrow Google from its leading position. It’s not enough to provide search results that are a bit better than Google’s, since people won’t change their habits just because some new SE manages to present a satisfactory result on the third raw instead of the fifth. On the other hand, in most cases competitors won’t be able to gain a significant advantage over Google and even if they will, it probably won’t last long due to Google’s economical strength. The conclusion is that Google won’t be significantly challenged as long as it maintains its solid financial position. Therefore, in order to predict how the SE market will evolve, Google’s financial future needs to be discussed first. But before we do that, we must understand what makes Google so economically strong in the first place.
Google can be seen as an information mediator that supplies its audience the desirable content and in exchange enjoys the income from advertisements that are presented along with the content. This function is fundamentally similar to what happens in other kinds of media, like radio and TV stations, newspapers and magazine publications. However, as opposed to others, Google enjoys a phenomenal profitability (above 50% gross margin). The reason is simple; as opposed to other kinds of media, Google doesn’t pay for the content that it supplies. While radio stations pay royalties to the song writers, TV networks purchase or produce programs; Google harvests the web pages on the Internet for free. Those extra funds are used to fortify its monopolistic position and they are the source of its economical power. Hence, this power will keep exiting as long as Google doesn’t have to pay for the content that it presents in its search results.
There are very few reasons that may cause Google to start paying for the products it sales. First of all there are the legislators, which may change the legal status of the content on the Internet so that any commercial usage, like the one done by the search engines, would entitle its creator compensation. However, this scenario is extremely unlikely to happen. Another option is that the content producers themselves, at least the key ones, would charge search engines for benefiting of their content (the right to show it in the search results). Let’s take Wikipedia for instance. Currently it is referred by Google about 1.67 billion times per month (5), meaning that Wikipedia provides service to about 5% of all Google’s users (3). Since Google’s income generated by advertisements, it depends entirely on its number of visitors. Therefore, Wikipedia generates about 800$ millions income for Google every year (6). If Wikipedia demanded just a quarter of a percent of that amount, its income would exceeded the 1.7$ million collected with donations to finance its operation (4). Even if the demand was ten or twenty times higher, it would still be accepted, since no search engine would ever disregard Wikipedia or any other major content producer in its search results. Even though Wikipedia is a non-profit organization, it could use the extra funds to expand and improve its free services. It may take a while for this scenario to happen, since it will be realistic only after the content producers will realize that they are essential to the search engines and not vise versa. The third and the most likely reason to weaken Google’s financial status would be competition. We’ve already established that it’s extremely difficult to compete with Google as long as you offer nothing but the same search results ordered or presented in a different manner. Consequently the natural course for a competitor would be to look for a unique and valuable content. The only way to prevent Google from getting this content is by making it exclusive. Therefore, we should expect that the next battle of the search market war would occur over the content. If only one major competitor offers the content producers a reward for an exclusive usage, the whole market would change and the new equilibrium would set on a point that every search engine, including Google, would have to pay for high quality content just to prevent others from getting exclusivity.
This way or another, the profitability of the search market will decrease. As a result, Google won’t be able to maintain its dominance and only then the opportunity will emerge for the alternative search engines to present their merchandise. This will eventually lead to a competitive market that is much more efficient and innovative than it is today. Another benefit of this development would be the stream of income to the content producers that would definitely improve the quality of the content on the Internet and would drive it from amateurism (like YouTube and Wikipedia) to professionalism (like Hollywood and the Academy).
(1) http://www.forbes.com/2006/05/25/google-dell-0525markets15.html
(2) http://www.informationweek.com/news/showArticle.jhtml?articleID=181501852
(3) http://www.telegraph.co.uk/connected/main.jhtml?xml=/connected/2007/10/11/dlgoogle111.xml
(4) http://fundraising.wikimedia.org/en/fundcore/list?page=1233
(5) http://leuksman.com/log/2007/06/07/wikimedia-page-views/
(6) http://finance.yahoo.com/q/is?s=GOOG
(7) http://money.cnn.com/magazines/fortune/bestcompanies/2007/
Alex Ginzburg is a co-founder of the NooTag initiative. For more information visit their blog at http://nootag.com/blog
December 20th, 2007 at 12:04 pm
I agree with the basic assumption that the question of what search engine is going to change the search market is neither gui or search technology related. The alternative search engine market is extremely rich in both areas however nothing happens. We reached a point, when Google results are good enough for the majority of users and as the author says Google has the financial ability to push its product through a lot of channels. So the economical environment of the search market should be changed in order to expect any change in this.
It would be extremely interesting, if Wikipedia would decide its going to give its results for example to Yahoo only, for a share of advertising revenues. Actually in the short run it would loose a lot of visitors (however because it is non profit organization, it would make the whole thing more profitable, because it would need less servers), but in the long run it could really shift the current market.
December 20th, 2007 at 1:43 pm
Alex,
This is one of the most interesting readings I saw lately!
I agree with most, but talking of how wikipedia part can influence, what would you say after the official news of launching Knol project soon? It is obvious that they want to introduce a ‘better/stronger’ and more reliable rival?
http://googleblog.blogspot.com/2007/12/encouraging-people-to-contribute.html
December 21st, 2007 at 9:00 am
In the long run the promise of revenue share is going to move a lot of people to publish on Knol instead of Wikipedia. It seems to me, that the only way for Wikipedia to escape this situation is the one what Alex proposed: asking for some ad revenue, and share it with its writers.
December 26th, 2007 at 2:23 pm
the financial approach to search market domination will only help google more, because only google would be able to buy the rights to maximum content because of its strong financial muscle. harvesting the internet freely makes it possible for small search engines to enter the market with as much content as google. thus the entry to the market would be too tough for a new player if it has to pay for the content it indexes. google then would be insurmountable.
surprised on how you could miss this.
December 26th, 2007 at 9:12 pm
Google will pay for indexed content that cannot be Googled at the moment. A consortium of small players can put up a good price with caveats and command respect from Google.
An example of content that cannot be Googled at the moment is the movie script i am writing. It is titled I want to buy Google! The excerpt of the story can be heard at www.addcast.net
December 28th, 2007 at 11:49 am
Anup,
Maybe I wasn’t clear enough so I’d like to explain myself. I meant that getting exclusivity is just an intermediate phase. The amount of content that Google can purchase is extremely low due to the competition among content producers. Every source of content that will become exclusive to Google, will present a successful business model that will encourage many others to follow its steps and to try taking its place in Google’s payroll. Therefore, exclusivity can’t be obtained in the long run. On the other hand, competition over exclusivity can be a trigger for search engines to start paying for the content. It’s enough that one major competitor is willing to pay for content; everybody else would have to follow him just to stay competitive. The only stable equilibrium possible is when every SE pays for the content it uses. The meaning of content usage is its exposure to the users and not indexing, since every website will wish to be indexed to get a chance for income. Alternative search engines can handle this since the expanses are relative to the number of visitor exposed to the content, which means that they’re related to the income from advertisements. In other words it’s like a revenue sharing program, search engine with few visitors won’t have much income but on the other hand it won’t use much content thus it won’t have considerable expanses. I do agree that it will be harder to start new search engine than it is today but those who will live to see the daylight will be much more competitive. For my opinion it is a good thing – instead of scattering the venture capital among thousands of search engines it can be invested much more efficiently within fewer but more promising projects. Although the most important consequence is that much more capital will be invested in improving content rather than in handling the existing low quality one. We should remember that search engines are just a tool and not the purpose.