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If Search is Settled, Will History Repeat Itself?

Written By Drupad Sil | May 13, 2008 | Share This |

Google-Microsoft

A lot of talk on Google today, probably spawned in the wake of the failed Microsoft-Yahoo (MicroHoo?) merger. First up is a fantastic Financial Times article written by Richard Waters that discusses Google’s business outlook now that the company’s greatest short-term threat is out of the picture. From the article:

“The scale of Google’s victory over Microsoft in online advertising, sealed by the failure of the Yahoo takeover approach, is hard to exaggerate. By next year, half of the world’s online advertising – set to reach $55 bn in total – is expected to flow through Google’s systems. Of that, slightly more than two-thirds will come from advertisements that run on Google’s own websites. The rest represents advertising that the internet company, acting as a broker, places on other companies’ sites in return for a small cut of the action.

It is a stunning victory that raises two overriding questions. Will Google be able to use the respite provided by the disarray at Microsoft and Yahoo to carry its dominance of search over into other areas of online – and broader digital – advertising? And should it now be a cause for alarm that one company is in a position to control so much of the lifeblood of the internet?”

Even if Microsoft and Yahoo weren’t in disarray, it would be difficult to keep up with the sheer volume of projects that Google seems to be working on. Google has been sticking its fingers in every pie imaginable, from social networking to WiMax and mobile technology. Adding these to the already-placed bets on the growth of display advertising and online video with its acquisitions of DoubleClick and YouTube, Google is reminding some observers of one of its biggest competitors… Microsoft.

This has spurred some speculation as to which company will be bigger in the long run. Henry Blodget at the Silicon Valley Insider claims that Google Search will be bigger than Microsoft Windows in 2009 for the following reasons:

“Both products are natural monopolies. Google’s share of the search market should continue to approach Microsoft’s share of the operating system market (90%+).

Both products are wildly, fantastically profitable. Microsoft’s Windows business has operating margins of 75%-plus. So does Google’s search business (once you factor out the billions Google is spending on products that produce zero revenue).

Google natural monopoly is growing a lot faster than Microsoft’s. Google’s search business should be bigger than Microsoft’s Windows business by early next year (at the latest). Google is also growing faster than Microsoft’s two monopolies combined – Windows and Office. Google has yet to develop a second huge, fantastically profitable monopoly - the Office equivalent – but AdSense is getting there.”

While I certainly agree with Blodget’s general analysis, I think he’s missing a couple points. First off, I think the barriers to entry are a little more complex than described here. On the one hand, you could make the argument that barriers to entry in online search are low – there are a large number of engines out there with significant market share, especially outside the US market (Baidu comes to mind). However, the counterargument here is that while producing engines may be relatively simple, getting people to pay for ads on their pages is another story entirely. With Google dominating the online space the way it is, its conceivable that more and more people will have to turn to them to deliver the search volume required, leaving other engines out in the cold. And, as we learned in the late ‘90s, it actually takes real revenue to build a successful company, not just a cool idea.

That being said, people dismissing anyone else’s chance at competing with Google are forgetting the lessons of the not-so-distant past. After all, it wasn’t that long ago that Yahoo was cruising out in the lead. Then Google appeared with its streamlined search results and quickly crushed the apparent king. In order to avoid the same fate, Google has wisely diversified its services beyond just search, increasing the company’s long-term profitability and causing talk like that at SAI and this at HipMojo by Ashkan Barbasfrooshan:

“So in 2010, Google’s current historical growth rate projects a revenue figure of $34 billion, with 25% profit margin of $8.2 billion, and with a P/E of 35, could technically command an enterprise value of $287 billion. It currently boasts some $10 billion, so at these levels it would carry enough cash to push up its market cap northwards of $300 billion.

Today MSFT has a market cap of $284 billion, and that includes a wallop of cash.

Tale of the tape: Google $287 billion; MSFT $284 billion…

There you have it. Told you it’s not a bubble, we’re actually talking revenues, profits and P/E.”

That last was a posted estimate from 2006, but the general sentiment is echoed by many observers. While I agree that Google’s outlook is definitely strong, there’s a real danger in extrapolating historical data points to predict future performance, especially in Google’s case. The company hasn’t made a mistake yet, but there’s no guarantee of this going forward. Getting complacent, pushing a shoddy product out the door, a poor acquisition – these are all very real possibilities. Even the highly touted purchase of YouTube hasn’t generated serious cash yet, a la NewsCorp and MySpace. Furthermore, the company’s reputation may begin to create more problems than goodwill. Despite longstanding positive perception of its brand, Google’s growth and massive access to data have brought this angelic standing under some fire, both from individual supporters, who are starting to worry about the privacy of their data, or the monopolistic power the company is starting to wield, and companies it works with in other domains, like phone companies hesitant to partner with Google to serve ads on mobile networks. Today, however, Google is making all the right moves and is a tech story for the ages, but it’s still premature to declare victory, even just in the search domain.

MicroHoo: Still a Mirage

Written By Drupad Sil | May 5, 2008 | Share This |

MicroHoo

Unless you’ve been in a cave the last three weeks, you’ll have heard of Microsoft’s unsolicited bid for Yahoo! and followed the complex tango performed by the company’s respective top executives, Steve Ballmer and Jerry Yang. The soap opera-like unfolding of this financial ordeal played out daily in newspaper headlines, with assurances and deadlines from both sides ultimately being worth less than the ink it took to print them as Microsoft pulled its offer, abandoning talks three months into the process.

Well, in the end the magic numbers were 19, 33, 37, and 24. $19 is what Yahoo was trading at on January 31, immediately before the Microsoft acquisition story broke. Overnight, Yahoo daily share volume increase tenfold and share price skyrocketed about 53%, where it remained during the three months of talks. Microsoft’s final offer for Yahoo was $33 a share (a 72% premium over January’s pre-acquisition talks price), with Yang holding out for a sky-high $37 a share. Not unexpectedly, as today is the first full trading day since the end of negotiations, Yahoo’s share price has plummeted about 15% to around $24, the biggest drop for Yahoo in two years.

The questions being asked are how will Microsoft expand its online market share without Yahoo, and what Yahoo’s next move will be. There is some speculation that Microsoft is eying AOL, or waiting to get back at the table with Yahoo in a quarter or two (about the time it’d take to think of a better name for this deal than ‘MicroHoo’). Since Yahoo’s share price is hovering above the original $19 a share, I’d wager the latter is getting priced in.

Another issue that is getting priced in is the potential of a Yahoo-Google deal. The two had a mutually-described successful implementation of Google’s search advertising on Yahoo’s properties, which could point to future joint projects ahead. However, I think Google may have pushed a little harder to get in with Yahoo because of the pressure from the Microsoft offer. Now that there’s no competitor at the table, Google can take its time in whatever it chooses to implement, leaving Yahoo the big loser in all of this.

Indeed, it’s difficult to get away from being negative on Yahoo after everything is said and done. Despite Yang’s assurances that all is well, there is little that points to investing in Yahoo as a defensible long-term strategy that will produce returns. No doubt this aggravates shareholders and execs, who could have escaped with a sweet profit from the Microsoft deal. Any combination of the Big Three would be subject to government review and antitrust regulations, but this first move represents the opening gambit of an acquisition chess game as Microsoft looks to combat Google on its home turf, search.

Microsoft Launches Live Search News

Written By Drupad Sil | April 16, 2008 | Share This |

The big news today is the launch of Microsoft’s Live Search News, an all-purpose news aggregator. The service will compete directly with Google News, and is Microsoft’s second foray in the field. Anthony Ha at VentureBeat describes one of the features:

“Live Search News does have some unique features of its own. For one thing, there’s a local news sidebar, which takes your IP address and finds news stories based in your area. The sidebar is pretty nice, since it helps readers quickly find stories that are directly relevant to them. Google News recently unveiled a way to find local news, but it requires a search of a town name or zip code.”

CNET’s Harrison Hoffman talks about another:

“The orange breaking-news bar on the top is a decent feature of the site and only appears when big news is happening. The breaking-news information, unfortunately, appears only to be provided by MSNBC and not automatically generated by trends. Even considering this, it is still a good way to call attention to important stories.”

The early word is that while the absence of RSS feeds and small pool of sources are negatives, the simplicity of the site, clean layout, and distinct features all point to Live Search News being a contender in the online news aggregation field.

Yahoo: Financial Plan as Negotiation Tactic

Written By Sepideh Saremi | March 18, 2008 | Share This |

yahoo.jpg

Yahoo yesterday filed its three-year financial plan from December 2007, detailing expectations of doubled cash flow by 2010 and reiterating that it believes Microsoft’s takeover bid offer of $31/share undervalues Yahoo. But it may be too little, too late, as the economy has taken a bit of a nosedive since December ($2 shares of Bear Stearns, anyone?), making those Yahoo’s financial forecast optimistic. Mashable lays it out nicely:

Unfortunately, they’re forgetting that in December 2007 Dow Jones was some 1500 points higher than it is today, and a lot of crappy things have happened for the US economy in the meantime. Thus, what they predicted last year probably doesn’t hold water anymore; and let’s not forget that they weren’t doing all that well in 2007, either. There’s a reason why Microsoft went with an unsolicited bid - they knew where Yahoo was at and they knew where it was heading.

Yahoo has been trying to fight off Microsoft’s $44.6 billion takeover bid, made at the beginning of February, by engaging in talks with AOL, News Corp, and private firms in efforts to avoid a union with the software giant. CNET notes that part of Yahoo’s presentation to investors detailed its investments in Asia, which are doing very well and Yahoo complains weren’t adequately taken into account when valuing the company. Despite the presentation (or maybe because of its slightly desperate timing), it’s looking more likely that Microsoft will end up owning Yahoo - something that analysts polled by Reuters are still convinced will happen.

More:

Searchviews: Week in Review

Written By Sepideh Saremi | February 29, 2008 | Share This |

searchviewslogolarge.gif

This week in search engines and social media: Yahoo launched a couple of new initiatives, Microsoft got a big fine from the EU, and fake Facebook profiles are proved more trouble than they’re worth, at least in some parts of the world. And in other news… (more…)

EU Slaps Microsoft with $1.3B Anti-Trust Fine

Written By Sepideh Saremi | February 27, 2008 | Share This |

microsoft antitrust fines

Despite Microsoft’s recent promise to focus on interoperability, the EU’s European Commission today levied a $1.35 billion fine against the company for not complying with the EU’s 2004 order to provide interoperability information to its competition. This brings total Microsoft anti-trust fines from the EU to about $2.6 billion.

From TechCrunch:

At a press conference EC commissioner Neelie Kroes said of Microsoft’s last-minute overture last week: “We don’t want talk, we want compliance. If you cheat the rules, you will be caught.” She also noted that was Microsoft’s fifth announcement about improving interoperability.

Microsoft To Add “Engagement Mapping” for Better ROI Measure

Written By Sepideh Saremi | February 25, 2008 | Share This |

online metrics microsoft engagement mapping

Microsoft has just announced the beta of a new reporting metric: “Engagement Mapping” aims to capture all the various online marketing messages a user is exposed to before making a purchase, rather than giving credit for a sale to the last ad that was clicked. Microsoft’s SVP of Advertiser & Publisher Solutions Brian McAndrews called the current practice of giving credit to the last ad clicked “outdated and flawed.”  (more…)

Microsoft Shifts Business, Will Open Up APIs

Written By Sepideh Saremi | February 21, 2008 | Share This |

Microsoft today announced it will change the way its operations and philosophy to open up many of its products and encourage interoperability with third-party developers. With news of Microsoft’s ambitions to buy Yahoo still reverberating in the tech business world, the move is seen by many - and acknowledged by Microsoft execs - as at […]

Microsoft today announced it will change the way its operations and philosophy to open up many of its products and encourage interoperability with third-party developers. With news of Microsoft’s ambitions to buy Yahoo still reverberating in the tech business world, the move is seen by many - and acknowledged by Microsoft execs - as at least partly an effort to stave off European antitrust issues. The “strategic shift” aims for the following:

  1. Ensuring open connections
  2. Promoting data portability
  3. Enhancing support for industry standards
  4. Fostering more open engagement with customers and the industry, including open source communities

Last month, Microsoft was one of several high-profile companies to join Dataportability.org, a group that promotes Internet users’ ability to access/use/own their own data, regardless of platform. The move also comes at a time when companies are increasingly relying on outside development to spur their growth (see Facebook, in which Microsoft has a stake).

And because Microsoft has a bunch of products which will be affected by this initiative, the most familiar of which is its Office suite, this really points to the emergence of cloud computing and the increasing importance of Web 1.0 desktop-based software to be able to compete with free Web 2.0 products that basically do the same thing. The company seems to be applying the Facebook model to itself; could we see Microsoft apps on Facebook soon, as we had proposed the company consider? From the press release:

According to Ray Ozzie, Microsoft chief software architect, the company’s announcement reflects the significance that individuals and businesses place upon the ease of information-sharing. As heterogeneity is the norm within enterprise architectures, interoperability across applications and services has become a key requirement.

It will be really curious to see what an open API could do for Office and how it will all work; though Microsoft isn’t going open-source, it is “providing a covenant” (so ominous, so biblical!) not to sue open source developers. But Matt Asay at CNET notes the “we won’t sue” promise is not new, and the biggest news is in the open APIs and the 30,000 pages of documentation that Microsoft will be revealing to developers.

Further reading:

[Full disclosure: Microsoft is a client of Reprise Media, which owns Searchviews.com.]

Yahoo Rejects Microsoft Bid, Might Merge with AOL?

Written By Sepideh Saremi | February 11, 2008 | Share This |

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Yahoo’s board today officially rejected Microsoft’s $44.6 billion, $32-per-share bid to buy the company, leading to continued questions about what the company will do to revive its flagging stock price. From the release:

Yahoo! Inc. (Nasdaq:YHOO), a leading global Internet company, today said the Yahoo! Board of Directors has carefully reviewed Microsoft’s unsolicited proposal with Yahoo!’s management team and financial and legal advisors and has unanimously concluded that the proposal is not in the best interests of Yahoo! and our stockholders.

After careful evaluation, the Board believes that Microsoft’s proposal substantially undervalues Yahoo! including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments. The Board of Directors is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment and we remain committed to pursuing initiatives that maximize value for all stockholders.

Is Yahoo just negotiating, holding out for more money? It’s possible, and that’s bolstered the DealBook blog’s post of acquisition rejection letters, which posits Yahoo’s as rather friendly, noting, “Yahoo’s words seemed to lack the hard edge or the fighting spirit of some other recent brush-offs.”

But the big rumor this morning comes from The Times, which reports that Yahoo is allegedly looking at a merger with Time Warner’s AOL. If there’s any truth to the rumor, it could get tricky, because Google actually owns 5% of AOL and likely doesn’t want its competitor there. Search Engine Land notes that it would be a boon for AOL and less duplication/overlap of existing services than would exist in a Microsoft/Yahoo merger.

AOL has been spending a lot of money acquiring ad networks and Yahoo has a huge audience that they’re not monetizing as well as they could, so one very compelling part of a rumored merger would be the combination of Yahoo’s huge audience and its search capabilities with AOL’s newly formed Platform A ad network. Still, Yahoo needs to pull out some stops to either keep Microsoft out or figure out a merger with someone else, which is why many think the Microsoft acquisition is imminent, despite this first rejection.

Update: Unsurprisingly, Microsoft responded to Yahoo’s rejection today: “Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal.”

Microsoft’s Yahoo Bid Update: Google’s Two Cents

Written By Sepideh Saremi | February 4, 2008 | Share This |

google microsoft yahoo bid

The big G didn’t waste a lot of time after Microsoft announced on Friday that it wanted to acquire Yahoo for $44.6 billion. In a blog post published Sunday, Google’s head lawyer, David Drummond, argued that Microsoft’s bid threatens the future of the Internet, wondering if it will make the Internet less open:

Microsoft plus Yahoo! equals an overwhelming share of instant messaging and web email accounts. And between them, the two companies operate the two most heavily trafficked portals on the Internet. Could a combination of the two take advantage of a PC software monopoly to unfairly limit the ability of consumers to freely access competitors’ email, IM, and web-based services?

Of course, what Drummond doesn’t mention is search share, which is likely a big part of Microsoft’s bid, because Yahoo is runner-up, even if by a long shot, to leader Google. That’s what Microsoft lawyer, Brad Smith, countered with in Microsoft’s statement yesterday:

The combination of Microsoft and Yahoo! will create a more competitive marketplace by establishing a compelling number two competitor for Internet search and online advertising. The alternative scenarios only lead to less competition on the Internet.

Meanwhile, the Wall Street Journal reported today that Google CEO Eric Schmidt called Yahoo CEO Jerry Yang to lend a hand against the Microsoft bid, which some say means Google wants to take over Yahoo’s search arm. But there are arguments against Yahoo outsourcing search, like this one by Saul Hansell at Bits:

But for Yahoo not to be in search or in search advertising, I think, would consign it to a much smaller role in the future. Search is so much a part of how people navigate the Web that it is hard to imagine being a successful Web portal without search at the center. Moreover, there is no longer a strict difference between search ads — sold in a huge auction — and brand ads — sold by a sales force over lunch.

Clearly, search is a huge part of the Yahoo-Microsoft issue, and it will take some time and likely countless blog posts for everything to get hammered out.

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