The Importance Of A Competitive Search Market

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Is Microsoft’s vision to compete in search and reinvent itself as an advertising company nothing more than an attempt to get back into its familiar position as Top Gun? Should Microsoft, Google and everyone else just give up on search and outsource to Google? That’s what Tim O’Reilly argues in a blog post today, and I don’t think he could be more wrong.

O’Reilly says Microsoft lost its way after accomplishing its long time goal of seeing “a computer on every desk and in every home.” They’re drifting now, he says, and “their only goal seems to be to stay on top of the heap.” Trying to “eat Google’s lunch” in the search wars is a symptom of this problem he argues. Google already claimed the mission to “Organize all the world’s information,” and he says they’ve already won at search, “or close enough to make no difference.” Microsoft, therefore, should move on to something new that it can win at.

So his advice to Microsoft: outsource search to Google, and go tackle a different problem – building out the Internet Operating System.

I’m not going to argue with Tim about whether it’s a good idea or not for Microsoft to put more resources into the web services infrastructure and software world. I think that’s a fine idea. But what I don’t understand is why he thinks Microsoft must abandon their efforts in search to do so. And I also think that what he suggests – an absolute monopoly in search – would be a disaster for the Internet.

Innovation In Search Has Just Begun

I simply cannot believe that just a little over a decade into the commercial Internet, Tim O’Reilly is willing to say that the search war is over. Did he not read his good friend John Battelle’s book, The Search? He’s not the only expert out there who thinks the war is over – Danny Sullivan argued as much on the Gillmor Gang last week. But I simply cannot believe that this is all we can expect in terms of search innovation.

There are so many areas on search that remain to be conquered. Semantic search. Real language/AI search. The deep web. Media search. Today search basically returns web documents. What I want is for search to complete tasks for me. We’re no where near that today.

We are just getting started in search. To think that search has reached its pinnacle today is like saying aircraft were perfected before World War I. And if just one company were to carry on in aircraft innovation at that point, I doubt we’d have jetliners whisking us around the world today.

Innovation does not occur at a rapid pace without competition. If Google or any company were to control search exclusively, we could expect to see little happen in search technology or business models over even the medium and long term.

Sure, the odd startup or two would still come along and try to shake things up. But search is infrastructure intensive – the cost and difficulty of indexing the web and building a business in an established market requires resources that most new startups can’t realistically access. And if the market consolidates further, competing will become that much harder. There’s a reason monopolies get broken up by governments – market forces can’t generally undo them.

Search Monopoly And A Healthy Internet Are Mutually Exclusive

Search is important because it is the starting point for most commercial intentions on the Internet. As I wrote earlier this week, 68% of online purchases begin at a search engine or shopping comparison site. That drives revenue, and a lot of it. About 40%, or $16 billion, of the $40 billion collected in online advertising comes from search. And 80% of that $16 billion comes from commerce related searches.

The online advertising space is still growing rapidly; there are estimates that it will grow to $80 billion by 2010. If Google continues its dominance of search, they may surpass Microsoft in revenues, and certainly in profitability, in the next few years. The fact that Microsoft won’t be able to count on fat desktop software profits forever only makes the problem worse.

Search and Advertising are effectively mirrors of each other. To say that it’s ok for there to be one player in search is saying that it’s ok if there is a monopoly in advertising.

We’ve already seen what happens if there is a dominant player in search – little effort is put into innovation, and the not enough revenue flows to companies that add value to the system. The risk of the entire ecosystem is put at risk.

For example, the CPC (cost per click) model is flawed, but in Google’s favor because it puts fraud risk inefficiently on the advertisers, who have no way of controlling it at the search engine level. CPA (cost per action) models work much better, but Google has done little more than test them. The current system is great for Google and bad for advertisers. But advertisers have nowhere else to go since Google has 60+% of the search market (and perhaps as much as 90% of search revenue), so they have to live with it. Microsoft’s recent Live Search Cashback initiative shows that competition can and will create more efficient systems.

On the publisher side things are even worse. Google doesn’t share enough revenue with content sites that show their ads. The only thing keeping them even close to honest is the fact that Yahoo and Microsoft will occasionally compete for those partners. Take that away, and Google will go back to keeping the majority of advertising revenue generated at those sites (their only competition will be other types of advertising, which generate far less revenue). That is a terrible outcome when you look at it from the perspective of the health of the Internet.

Microsoft can’t ignore the online advertising market, it’s just too big and important. And we need to be behind them in this effort, because if Microsoft and Yahoo lose interest, we’ll be stuck with a monopoly, and the Internet will suffer. Competition drive innovation. Competition drives prices down. To wish this away is irresponsible.

Update: See Tim’s video response from the comments below, and his follow up post here:

http://seesmic.com/Standalone.swf?video=WXpetWJ1ZD

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