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Why Arrington is Wrong about Yahoo!-Google Deal

I was inspired by Fred Wilson’s excellent piece on the subject to add my own two cents to Mike Arrington’s rant about how Yahoo!’s deal with Google is bad for the industry. I wrote the following in Arrington’s comment stream, and will reproduce it here:

Let me weigh in as well on why I don’t think Google’s dominance in search is going to cause the problems you imagine.

1. Search is only one way to find things. It’s the most easily monetizable, so it gets the lion’s share of the attention. But take a look at (and report on) what percentage of techcrunch’s traffic comes from search. For the O’Reilly Radar blog, it’s about 35%. Significant, sure, but hardly a sign of lack of competition. If Google absorbed both Yahoo! and Microsoft, the share of our visits coming from search would still be below 40%. (That tells you what a small share of our search traffic comes from the other guys today.) And that’s just the web traffic. Count in RSS (which is much bigger than web for most blogs, including ours) and the Search share of traffic goes down to a much smaller amount. So there’s not much worry about people not being able to find information.

2. You specifically raise the specter of Google taking a bigger share of the search dollar absent competition. I’d be interested to know if you have concrete case studies of better deals because of competitive pressure. Seems to me that if Google does this, they will undermine the virtuous circle that drives their success. Maybe they will do this, but if they do, attention and value will migrate elsewhere, as eventually happened with Microsoft.

At O’Reilly, we always say “Create more value than you capture.” All successful companies do this. Once they start capturing more value than they create, their market position erodes, and someone displaces them. It may take a while but it happens eventually. If Google takes too much of the pie, it will be a great opening for a new competitor. Right now, because Google is creating the most value for the ecosystem, competitors continue to lose share. If they started taking a lot more of the revenue, Microsoft’s share would go up, plus new startups would have an opening that they don’t have now.

3. The real source of my argument for this position, which you linked to in your piece, but I’ll point to again here, is that Web 2.0, the internet operating system we’re building, is much bigger than search. Search is an incredibly powerful subsystem of that OS, but it is just a subsystem. There is lots of competition across the system as a whole, and we’re a LONG way from the concentration of power that represents monopoly when we take that into consideration.

4. The landscape is changing so fast. To take only one axis, consider mobile. Google doesn’t dominate mobile/local search. That’s a whole new game…. Again, there’s lots of competition.

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  • http://www.kamlashow.com kamla bhat

    Great post. Sometimes we tend to forget that there are places outside of Silicon Valley and the USA where companies have to compete, gain market share and revenue.

    Just want to chime in on two things: Google is only big in the USA and some parts of Europe, but not in Asia, Africa or Latin America…these are the emerging markets with significant potential for growth. And two is your point about mobile: Google is as you rightly identified is not a big player in this area. Mobile is big in Asian and African countries and might be the primary access point for the Internet. What is Google’s mobile strategy in these countries?

    Kamla Bhatt

  • http://tim.oreilly.com Tim O'Reilly

    kamla –

    Great point about global markets. That’s another major reason why there’s still competition.

  • gregory

    kamla, yes …. and chinese, the number 2 language on the web yet? and with more levels of meaning than english can ever have, and a ton of creative programmers and hackers, will be the dominant language of the semantic web, semantic search …. yes, get your kids into a chinese class (hard to do in india where i am though)

  • chrishar

    Tim, your first point assumes that people use search for *navigation* to a particular site, vs. using it for *discovery* of a site. I read 35% as new people discovering your site using search. subtle, but important distinction.

  • Thomas

    Tim, I love your thoughts, but I have to agree with Michael here. The business will follow the profits and if Google is absorbing most of the profits as search is substantially more profitable than display, then they will aggregate the rest. As your business isn’t solely based on advertising this may not be as great of a concern for you, but for others this may become a big deal.

  • Guilherme Ambros

    Kamla: most of the Google’s growth in Q1 came not from the US, but from Asia and Latin America. Besides, internet penetration is increasing fast at BRIC countries, and google’s share increasing more than competitors.

    Tim: c’mon, 40% is a LOT! And consider the trend, in a few years this will easily be 50-60%. I don’t want to have 60% of my traffic on the hands of a single vendor. As a marketing professional it scares me to have just one single vendor controlling half of my budget alone.

    I agree that you need to create more value than you absorb and google masters it, but wish we had more powerful options out there. Too bad Jerry messed up. Whatever; let startups keep flowing…

  • blabla

    If there is no problem for Google-Yahoo deal, then you should tell people to shut off whenever they complain about Microsoft monopolies.

  • http://phaistonian.pblogs.gr George Papadakis

    Competition is a key ingredient for healthy markets.

    I am pretty sure Google (at least) is concerned on keeping this market healthy, and thus make sure that this new upcoming status quo will not result on establishing them as monopoly.

    If that’s not the case then I guess we have a rather serious ethics issue that Google will have face either sooner or later.

  • http://www.homeportfolio.com Rolly Rouse

    Excellent post.

    It’s easy to get caught up in the dominant search model of the day, as if things will stay the same forever.

    My recollection is that from 1997 to about 2002 my wife – and I dare say most non-technical Web users – thought Yahoo was search (and I don’t mean the little text box up top). Later, when the general public woke up to Google, the popular definition of “search” changed.

    With Yahoo, human editors picked favorite sites. You discovered search results by clicking on words. Links took you to home pages. Traffic was monetized using graphical banner ads priced passively per thousand eyeballs.

    Then Google redefined search in the public mind. Computer scientists and algorithms helped you find what you wanted. You found things by typing in keywords. Links took you to pages deep within sites, not to home pages. Ads were spartan text, priced actively per click.

    In the not-too-distant future, the popular definition of search is likely to change again. That doesn’t mean Google will go away, of course, anymore than Yahoo did. It does, however, suggest that the search landscape will keep evolving in unexpected ways. Ways that fit consumers’ changing needs and rising expectations.

    Rolly Rouse

  • http://tim.oreilly.com Tim O'Reilly

    blabla –

    You don’t seem to understand the law around monopoly. It isn’t illegal to have one, merely to abuse the power that it gives you, or to use illegal techniques to acquire one. And hey, 40% of the market is not a monopoly.

    But more to the point, even a 100% monopoly on web search is a tiny fraction of all the touch points that consumers have with the internet and cloud services.

    How about Microsoft’s 70% browser market share and 90+ percent share of PC operating systems underling the other appls used to reach the net? Apache’s 60% plus server share? Apple’s dominant share in online music? Amazon’s dominant share in books? Craigslist’s dominant share in local classifieds? Mapquest’s dominant share in web mapping (yes, Google Maps is #3, despite all the attention it garners)? MySpace and Facebook duking it out for dominant share in social networking?

    Owning search is like owning the PC processor. A hugely powerful position (and one that is subject to possible abuse) but hardly control over the entire internet, any more than Intel’s control over the processor gave them control over the industry.

    It would be considerably less than Microsoft’s sway over PCs, even today, even if Google was 100% of search.

  • http://joeduck.com Joe Hunkins

    Although I *hope* you are right to suggest that Googly search dominance fueled by Yahoo’s stubborness is good for the industry I think Arrington’s take is probably more accurate. We saw a huge quality spurt from Google as they came to realize search dominance would become web dominance. We are not seeing much improvement now that their virtual monetizing monopoly is in place, and it seems like the new deal only consolidates that position and freezes out one of the few ways we might have seen competitive pressures push both MS/Yahoo and Google to better quality.

    Sure, 2.0 is far bigger than search but in the meantime we need more, not less, competitive pressure.

  • http://tim.oreilly.com Tim O'Reilly

    Joe –

    I agree that Google needs competition to keep them on their toes, but were we REALLY seeing any competition in search, with Google’s share growing month after month? All the Yahoo! deal does is accelerate something that was well underway.

    And then it frees Yahoo! to focus on all the areas where THEY are #1.

    Yahoo! putting all its resources into competing with Google on search would be like Google putting all its resources into competing with Microsoft on Office. Google’s putting some eggs in that basket, but Yahoo! and Microsoft’s focus on search is making them ignore all the areas where they could still get competitive advantage. (That was the point of my original post, which Michael has been responding to ever since.)

    I don’t think that people get what the game really is. Yahoo! and Microsoft’s focus on search is completely backward looking.

    Would a competitive search market be better than a single provider? Sure. But there was no sign that it was going to happen, and all the big competitors focusing on it is a sure way to let Google dominate in other areas as well.

  • Erik Graf

    1) Yes search is only one way to find things.
    It may be true that RSS is big for you, but honestly my guess would be that 80-90% of the internet population don’t have a clue what RSS is. Stepping out of the geek zone I guess that things look pretty different. While you might have managed to build up a loyal readership and therefore are less dependent on search traffic, that might just be the contrary for other Web categories such as shopping, and generally so for all newcomers on the Web. I don’t have any figures, but I would assume that non-household name Web shops almost completely rely on search engine traffic.

    2) They might not be evil, but in absence of competitive pressure they won’t voluntarily give up on their impressive margins. Google’s as well as for example Microsoft’s ability to sustain such margins does make one wonder. Eventually in the case of Microsoft is twenty years, … still counting.

    3) Well, a lot of ifs here. And for your forth point, tech moves fast if not hindered by Monopoles. That is exactly the point of the discussion.

  • PVRK

    Tim,
    I m totally missing what you are sying here. 90% market share is good because ..?
    If I understand you correctly some other player MAY come to dispalce them later?
    You are asking Arigton to show studies, can you back your claims that googe is creaing more value? The last time checked, VCs don’t fund anyone who aims to be a direct competitor to Google
    Regards,
    PVRK

  • http://tim.oreilly.com Tim O'Reilly

    PVRK –

    You do appear to be missing my point.

    Ask yourself this: why is Google gaining share? Answer: because they do a better job. That is, they are out-competing Yahoo! and Microsoft. This is NOT the same as Microsoft gaining dominant share by sharp business deals that required distribution of Microsoft software. In fact, Google has achieved its dominant position *in spite of* such deals. So that tells me that, as of now, Google is creating value better than the competition.

    Might some future Google resting on its laurels act differently? Sure. But last time I checked, we don’t have laws that provide pre-punishment for things that people *might* do.

    As to VCs not funding direct competitors to Google, I wonder how Powerset, Mahalo, Wikia Search, and a host of others got funded.

    But that’s still not the point. The point is that if you’re Yahoo! or Microsoft, the best way to compete with Google is to find the areas where you are strong and they are weak, not to compete where they are strong and you are weak, which is what both Y! and MS have been doing. The point is that we’re still in an early stage of the market, with so much left to be discovered and created.

    So if you believe in competition, and don’t believe that we’re in a closed dead-end state of the market, you should be rooting for MS and Y! to compete by doing an end run around Google and creating new functionality in areas that Google hasn’t yet imagined.

    Take Facebook. They aren’t saying “we have to dominate search,” and yet for a certain class of search, they may well end up doing that. They are solving new problems.

    In other words, if you like competition, you should be rooting for people who compete by growing the market rather than by trying to take away someone else’s slice.

  • http://www.onemoreidea.org Brij Singh

    Thanks for sharing “Create more value than you capture”. I am sure I will be using that sentence in many more places.

    I tried to put a different take on your third and fourth point –

    I think search market has to be redefined to reflect new reality of information politics. I don’t think Google is in search market alone. To say Google is a search company is to insult their imagination. Google is in a market to build services to search the world of information. They are not subsystem, they want to be THE system. I don’t have data point on this but I suspect Google owns the world’s biggest bandwidth hog – YouTube. Amount of meta data they are capturing in that loss-making venture is just staggering. That’s not search.

    Other point which is missing from debate is how Google is using scalability as a power to extend it’s network effect. Scalability is a real deal now. Services are supposed to address global market and scale is a critical component of that design. No other (yes including Microsoft, their ass is getting kicked and they are innovating on business model now!) company can match Google’s ability to scale data centers.

    In a way this scalability advantage will dramatically reduce probability of any new player coming and threatening their core search business. Take aviation industry, knowledge to make commercial airplanes is widely available but how many companies are able to successfully run that business? Just two! Boeing and European (heavily tax-incentivized) AirBus. Same example in capital intensive microprocessor business. High cost of fabrication makes that business painfully unattractive to new players. Intel still rules.

    On “landscape in changing so fast” point, I think there is a theme running in opposite direction. Few things are not at all changing. Need to better scale data management, security, performance, user experience etc. They are old challenges, we are still dealing with them. Google, with their superior execution talent, is using scalability to successfully tackle these challenges. Their smartness is in converting solutions into platform services so other companies can leverage them as well. That strengthens Michael’s network effect point.

    We can have new game but it will eventually hit a bottleneck. Either it will be a scaling bottleneck (Twitter and Mobile search for non-Google services) or inefficient monetization bottleneck (Myspace/Facebook and other mobile apps). Companies will figure out solutions but I am hard pressed to imagine a scenario where new company can upstage Google without disrupting Google’s scalability innovation. This same scalability strength is giving them advantage in efficient monetization.

    Brij

  • Matt Milosavljevic

    While I will agree with certain aspects of what you had to say, the premise that monopolization of a particular market is not an issue purely because there are other markets available is a little narrow minded.

    I’m sure that everyone here would agree that search is by no means the be all and end all of the web, but that doesn’t make competition in that particular market any less important. If that reasoning was to hold true then Microsoft should be heavily reimbursed for the penalties it paid during its anti-trust case purely based on the fact that Netscape had plenty of other software that it could make and didn’t have to focus on the browser. An extreme example I know, but I’m sure the point comes across.

    Furthermore, your last comment is slightly misleading. You mention that Google created a dominant position for itself by offering superior value, fair enough. However you go on to say that they achieved this without the use of sharp business deals, however the deal at hand is just what you said they don’t do. They aren’t offering value here, they’re essentially cannibalizing a competitor.

  • http://blog.workhound.co.uk william fischer

    I think it’s certainly possible the YHOO made the right decision. They’re smart folks who obviously have deeper domain knowledge of their business. My concern though is that this is a tactical but not strategic move. If they were punting on search because they couldn’t match GOOGs ability to capture/structure data that could be a fair concession. They’ve outsourced search tech since the beginning. But, as a content + services company, that relies on monetization, punting to temporarily gain higher CPMs seems like it could hurt them to the core. Offline metaphors are dangerous since the web really is different. But, if News Corp [NWS] through its sales channel and ad inventory position could get higher effective rates than Viacom [VIA], should VIA offer up its inventory? Doesn’t this continue to weaken VIAs relative position? The web isn’t a zero-sum game, YHOOs inventory position is variable, taking more revenue with higher CPMs allows YHOO to invest in other aspects of their business — these elements could make a collection of tactics add up to a successful strategy.

    But I think this will undermine their overall advertising position since many of the dynamics that made it difficult for them to compete in search advertising will continue to make it difficult for them in display advertising. There are differences between search and display. But the factors that contribute to GOOGs ability to achieve higher CPMs for search (massive base of advertisers, great contextual ad serving, good campaign management tools) will be utilized to build their display business. My concern is that the millions of businesses that might have used Panama for search and could be upsold into display will just focus on Adwords and to use a hackneyed expression – sometimes companies move the piano bench when it’s the piano that needs to get moved.

    Bill

  • http://www.seobook.com aaron wall

    *This is NOT the same as Microsoft gaining dominant share by sharp business deals that required distribution of Microsoft software.*

    Not sure I agree with that. Google lobbied to ensure consumer choice on Internet Explorer, then spent big money to ensure consumer choice was absent from Firefox – which lacks Live search as one of the core build options, and automatically has Google set to the default.

  • http://www.plexnex.com Sam Hiser

    Tim’s right.

    Oh, and Carl Icahn is a backward-looking, money dork!

  • http://www.internetgeekgirl.com Stephanie Agresta

    Tim – appreciate your perspective. My only fear is that GOOG will become the Internet Operating System you envision (and which I believe in). Also, you state, “Google doesn’t dominate mobile/local search.” Correct, not yet!

    I’m not a super paranoid Google hater. In fact, I love Google, and use it as my own personal operating system. However, I would have liked to see the competitive landscape that evolved as a result of the YHOO/MSFT merger.

    Thanks,
    Stephanie

  • http://peterdawson.blogspot.com /pd

    @Sam, yeah Carl Icahn is a money Dork- nothing wrong with that !!

    Point to note, We won’t be having this conversation, if YHOO and boght out GOOG when they had the chance, circa early 90′s !!

    Having said that, I have to agree with Tim, Search is the subsystem of Web2.0. For all we know, search will become stuff of the past. I see smart phones being able to alert you for items of interest based on you book marking a ‘like’ . In japan, theres the experiment that permits a user to be alerted when a specific item is available close to them. In short, the web knows where you are and what you want and accordingly it reacts to the user preference. Search will become history and along with that, Ad’s !!

  • http://www.jasonkolb.com Jason Kolb

    Is there anything that Web 2.0 DOESN’T mean to you? I don’t mean to pick nits, but seriously, you seem to have the idea that the “Web 2.0″ label applies to anything and everything, and it’s seriously undermining your credibility because you’ve trademarked that term. Just my 2 cents.

  • http://www.25hoursaday.com/weblog Dare Obasanjo

    This seems like an example of two people talking past each other. Arrington’s point is that GOOG is poised to have a monopoly on the most significantly revenue generating market on the Internet (Search advertising) and is also not far from a monopoly on how a majority of people find information on the Web (which you yourself admit drives 35% – 40% of the traffic on most sites).

    You seem to be arguing against some sort of strawman argument which claims that GOOG will have a monopoly on the “Internet” (whatever that means). Since that is clearly a bogus concept you then try to dismiss Arrington’s valid points.

    It is possible to have a monopoly on a key part of an industry without having an end to end monopoly. The only question that is left then is whether monopolies are healthy for the affected industry or consumers. And I believe the answer to that question is in every entry level economics textbook in the world.

  • http://tim.oreilly.com Tim O'Reilly

    Some great comments here.

    @Brij – I completely agree that scalability of cloud services is more critical than search. I’m pretty sure that Ray Ozzie knows this even if Steve Ballmer doesn’t. And that completely supports my point that Y! outsourcing search advertising to Google doesn’t significantly change the current competitive dynamics of the industry.

    As I keep saying, the point is not that competition isn’t good, it’s that smart competitors compete where they can win. Dumb competitors compete where they will lose, and spend all their resources there so that they lose in other areas where they could win.

    Case in point: did IBM change the competitive dynamics with Microsoft in the 90s with OS/2? I don’t think so. IBM regained its bearings and its power by remaking itself as a services powerhouse, and eventually by embracing and extending open source software.

    Meanwhile, where *did* the real competition to Microsoft come from? To date, every desktop competitor has failed. Microsoft was undone by competition from a market that didn’t even exist — the internet — when their ostensible competitors were focused on trying to wrest away Microsoft’s dominance in desktop operating systems and applications.

    My point is that if you care about competition, think about the future, not what has already been accomplished.

  • http://tim.oreilly.com Tim O'Reilly

    @Jason Kolb -

    You obviously never read my original paper on Web 2.0, or the preceding paper, The Open Source Paradigm Shift. Web 2.0 means exactly the same thing to me today as it did when I kicked off the term, and the same thing that it meant when I was calling the future we were building “the internet operating system” back in 2001! It’s other people who keep trying to get it to mean something else.

    I’ll also remind you that O’Reilly didn’t trademark the term. That was done by CMP (now Techweb), our partner in the Web 2.0 events–and their trademark applied ONLY to events. Lots of events have trademarked names: Linux World; The O’Reilly Open Source Convention; InterOp. None of these trademarks mean that you can’t use Linux, or Open Source, or interop to describe — well, what they each describe. The trademark is designed simply to prevent someone from creating an event with a confusingly similar name.

    Please do your homework before you tell me I’m undermining my credibility.

  • http://tim.oreilly.com Tim O'Reilly

    Dare -

    I’m not arguing that monopoly is good. I’m arguing about whether Yahoo! outsourcing search to Google is a good idea or a bad idea, for Yahoo! and for the industry.

    1. I’m saying that wasting your resources and your focus in a war that you clearly are losing, day by day, is a bad idea. Nothing that Yahoo! has done has moved the needle. Meanwhile, they have neglected all the parts of their business where they are #1, and new areas where they could be #1.

    Contrast this with two companies that I believe are doing a far better job of competing with Google: Amazon and Apple. Amazon threw their hat in the ring trying to compete with Google in search, figured out that it was a losing proposition, and then redeployed those resources into a cloud computing initiative that has Google desperately playing catchup. Apple never even bothered with search, but have built powerful, defensible, and profitable businesses by tying media to devices with Apple cloud services — again, a strategy that Google is trying hard to counter and emulate.

    So if you’re a fan of competition in the computer industry, who do you think is doing a better job: Yahoo! and Microsoft trying to compete with Google on Google’s terms, and losing, or Amazon and Apple, going where they aren’t, and occupying high ground that they will need if they are going to win the bigger competition that is unfolding before our eyes.

    I don’t think this is a straw man. Search is NOT the end game. It’s a very powerful play in the end game. But it’s not the only one. And I believe that it’s a better strategy to win the end game by finding your own strengths than to desperately try to slow down an opponent with little or no hope of winning.

    2. You are right that in making this larger point, I am seeming to dismiss the risk that Google having a monopoly on search advertising will turn out to be a BAD thing. But I haven’t actually dismissed that possibility. I’ve mainly been saying that I don’t see any reason to believe that aggregating Microsoft’s failed search strategy (and execution — see Jason Hunter’s pieceabout MarkMail, Stuffing six million pages down Google’s throat) and Yahoo!s will do more than slow down the inevitable. In fact, I’d wager that if the deal went the other way, and Microsoft had successfully bought either Yahoo! or just Yahoo!s search business, that Google’s search share would be at least as great (and maybe greater) than it will be by Y!s current outsourcing deal. So my point is that even granted that Michael is right that we need competition in search, this ISN’T THE WAY TO GET IT.

    Returning to Apple — does Google dominate music search? No, because Apple found a better way to dominate that niche.

    Will Google dominate local search on phones? Maybe, if everyone else is asleep at the wheel, as they appear to be. I’d be way more worried about Google’s deals with Apple than about their deal with Yahoo! (Although it’s pretty clear there that open mobile is important enough to Google that more head to head competition with Apple is in the cards.)

    So in the end, the question isn’t whether monopoly is good. As you say, the answer to that is in every economics textbook. The question is how to effectively compete when someone is gaining a monopoly.

  • http://tim.oreilly.com Tim O'Reilly

    @Stephanie — As I said in my comments to Dare, a Microsoft-Yahoo! tie up would likely have given Google more power in search than the current Y! deal with Google. Microsoft has failed badly in search; Y! doesn’t want to be acquired. All I can see coming from that merger is a catastrophic drop in what share Y! currently has, with Google picking up the difference.

    I could be wrong about this. I keep coming back to the idea that if you want competition, you don’t meet a larger enemy head on with a strategy that matches their own. It’s just stupid. Imagine if Google, instead of offering free, lightweight office applications in the cloud, started making corporate deals to bundle office applications on slightly better terms than Microsoft does. We’d all laugh and think they were crack brained. Yet when Microsoft does the same in return, everyone says, “oh great, some competition.”

    This is kind of like what Bruce Schneier calls “security theater,” only it’s “competition theater.”

    Meanwhile, the real security measures, and the real competitive measures, aren’t put seriously into play….

  • http://tim.oreilly.com Tim O'Reilly

    @william fischer -

    Good point. It’s certainly possible that it will play out that way. But I would also point out that many companies do just that, building business supply chains. Others build integrated supply chains.

    Take one of my businesses: publishing. Publishers used to own their own printing presses, and their own stores. Eventually they figured out they could do better by owning neither, and sticking to a core competency in aggregating authors for retailers and aggregating retailers for authors.

    Now, that particular model may be breaking down, with folks like Amazon trying to re-integrate from the retail end, but offering both publishing and manufacturing services. But there’s no question that even if that is a better model, it just wouldn’t work for most publishers. If we had to own our own printing presses and our own stores, there would be a lot fewer of us.

    It could well be that Yahoo! will suffer long term if they don’t own their own ad engine. But hey, how many companies on the net do? Not very many.

    FWIW, the smartest thing that Microsoft did in competing with Google on search was to buy FAST. That’s a play to provide search that is controlled by the content provider, not the outside search vendor. It isn’t an ad play, but I think it will turn out to be very profitable for Microsoft and very good for keeping search honest in the industry.

  • http://www.gamboling.co.uk Alex Andronov

    Three things.

    1) Great post. Very true as well. And from the comments I would like to echo a sense that mobile is to the internet, what the internet was to desktops. The reason for the iPhone and Android is because people have woken up to the realization that more people have mobile phones than televisions. Competition is far from over in this space.

    2) I wonder how many of your RSS readers first came from search. Your figures will be distorted by this. You are looking at visitors today and dividing up the pie. But each RSS reader found your blog somehow.

    3) On the Google / Apple deals Mobile Me does seem to be Apple tilting at Google’s space. They could have just licensed Google Mail and Calendar. I think the largest weakness in Google’s Apps is the lack of focus on Contacts. And although Apple gives a tab to contacts in Mobile Me you could see them missing the real trick in the demo. They didn’t tie the meeting to the person you were meeting with. Somebody needs to solve Personal CRM and Apple so easily could with the combination of Mobile Me / iPhone. If they aren’t careful they will leave that prize to Android and their hard work will be in vein.

  • KwangErn

    Right on the spot. Just as I have been thinking as well.

    That said, I believe it’s a good time for Yahoo to really sit down and rethink what’s going on in the Internet world, and technological lifestyle at large. They have the userbase, they have the experience, they have the products and services. What they need now is to ensure what they have on their basket are polished and repositioned.

    Sticking to what they do best, which I never believe is search, is the way forward for Yahoo IMHO.

  • http://martalyall.typepad.com terra210

    Great conversation. Only one small thing comes to mind regarding competition and search.

    In this current landscape (of Web 2.0 ;)), can’t competition be effectively fought by a dominant player through the use of their search algorithms and the results they produce? Doesn’t filtering play a role these days in the battle for eyeballs? So, if Google has established a dominant position, and can govern what eyes see, what tools/approaches will an upcoming competitor have to use to establish position? This type of operating system war, is occurring in a very different environment than the one fought by IBM and MSFT. It isn’t just about the quality of the competing product, it seems it is also about having the means to bypass the filters.

  • http://tim.oreilly.com Tim O'Reilly

    Alex Andronov – You hit the nail on the head. You completely understand my argument and have expressed a number of the nuances very well.

    terra210 – I agree that there is huge potential for abuse by Google. For example, at the D conference, one of the questions I asked of Murdoch were his plans for technology in the social search space. Social search is a space where Murdoch has a strong play, and where there isn’t a dominant competitor (although Facebook is working hard at that.)

    So yes, I see the vulnerability of existing players to potential abuse by Google. But I continue to maintain that the best way to compete with them is to outflank them, rather than wasting resources on a head on attack.

  • orderofmagnitude

    @aaron wall. Right on. Google’s increasing share of search is driven as much or more by distribution as by googley goodness. Firefox is a great example–Google is default search engine. Google also won major distribution deals from Yahoo by outbidding them. When you install pdf reader on your PC, they install Google toolbar along with it–used to be Yahoo toolbar–and reset default browser search engine to Google. Stuff like that. Tons of users don’t care which engine they use. They use whichever toolbar is set at the top of their browser. They use the default search engine that pops up when they type in an unrevolvable address in their browse address bar. Richer MSFT could have helped Yahoo win those deals when they come up again, then claim awesomeness from the resulting inevitable gain in search share.

  • http://tim.oreilly.com Tim O'Reilly

    orderofmagnitude –

    Good point about all those deals. But to be clear, Microsoft and Yahoo! also competed for those deals, and Google won them by offering to pay more or by demonstrating that the yield would be better.

    This is not the same as what Microsoft did in the PC era, which was tying — that is, if you want our operating system, we must be the only choice.

    One is a competitive action, the other is an anti-competitive action.

    Let’s not “pre-punish” google for anti-competitive actions that they *might* do because of the history of what someone else did do.

  • SB

    Tim said:

    > Ask yourself this: why is Google gaining share?
    > Answer: because they do a better job. That is,
    > they are out-competing Yahoo! and Microsoft.
    > This
    > is NOT the same as Microsoft gaining dominant
    > share by sharp business deals that required
    > distribution of Microsoft software. In fact,
    > Google has achieved its dominant position *in
    > spite of* such deals. So that tells me that, as
    > of
    > now, Google is creating value better than the
    > competition.

    If you say Google is gaining share because they are doing a good job, then you are either not seeing what is happening in the market or ignoring it. The conditions in the search market currently is very similar to the OS market, and having lesser choices in search is as bad as having lesser choices in OS.

    The momentum that Windows has built over the years in usage means that no matter how good the competition is, consumers still play it safe by buying whatever most others are using. Good competition dies therefore, leading the dominant OS to be almost the only one choice for consumers. This has led to the crap that is Vista. Therefore,consumers lose.

    Similarly, the momentum that Google has built over these years means that no matter how good Yahoo search becomes, people are still not going to bother having shootouts every time they need to search, and therefore keep using what they (and others) have been using all the time.

    Even though several independent tests have found not too much of a difference between Google search and Yahoo search [1] [2], Google keeps increasing their shares steadily. Is this just because they are doing a much better job? I don’t think so. It is just the “monopoly momentum” that is very similar to what predated the desktop dominance of Microsoft.

    Reducing the options people have to search *might* have the same effect on search that it has had on the desktop market. I use the word “might” here just because the track record of Google over the years is much better than Microsoft in creating (and preserving) consumer value. But such feeling of trust cannot be used to make rules in the market, can it?

    - SB

  • http://martalyall.typepad.com terra210

    What would an example of “outflanking them” be? For some reason I am having a hard time understanding this. (Probably just Sunday morning head…)

    You wrote:
    So yes, I see the vulnerability of existing players to potential abuse by Google. But I continue to maintain that the best way to compete with them is to outflank them, rather than wasting resources on a head on attack.

  • Jim B

    This deal will do for Yahoo Search what previous deals did for AOL Search: destroy it. Trade short term gain for loss of long term audience share.

    AOL gets >90% of the revenue from the Google deal. Theyre heavily incented to put more ads on a page. AOL corporate and TW say, “put more ads on the page”.

    So many ads that the audience flees in large numbers. On top of the core erosion in the subscription base.

    It was a great move by Google, knowing how shortsighted AOL management is and taking adsvantage of it.

    With all the pressure on Y! from the Street same will happen here.

  • Victor

    The whole idea of monopolies and busting them is totally bogus. I recommend everyone who’s interested read Joseph Schumpeter’s classic essay “Creative Destruction” to disabuse yourself of the classic fallacies associated with the big-bad monopoly

  • http://tim.oreilly.com Tim O'Reilly

    Jim B -

    If Yahoo! is dumb enough to do that with Google, they are dumb enough to do it without Google. Google has done well because they aren’t dumb, and do keep the user in mind.

    Remember: create more value than you capture. Google creates more value for its advertising clients than Yahoo! and Microsoft. It’s as simple as that.

    If you’re short sighted, you lose in the long term.

  • http://martalyall.typepad.com terra210

    regarding my question below. I should have said, how can outflanking occur, if they control the visibility, as they can, (if they want to…of course), filter search results? And I agree, head on attacks would never be successful.

    my former question:
    What would an example of “outflanking them” be? For some reason I am having a hard time understanding this. (Probably just Sunday morning head…)

    You wrote:
    So yes, I see the vulnerability of existing players to potential abuse by Google. But I continue to maintain that the best way to compete with them is to outflank them, rather than wasting resources on a head on attack.

  • gregory

    search will become personal search, following one’s personal meme, the cloud tailored for the user, big monolithic search will be more for corporate use, just one of many resouces, all niches unique, and requiring unique services

  • http://pacificgatepost.blogspot.com/ PacificGatePost

    YAHOO’S SHAREHOLDERS LOSE ON MORE THAN ONE FRONT

    Great to see that cool heads have finally prevailed at Microsoft. Nevertheless, it was a seriously missed opportunity by Yahoo shareholders.

    http://pacificgatepost.blogspot.com/2008/05/yahoos-board-and-its-shareholders.html

    They should have been more vocal. Now it’s too late. Their board did not serve them well.

  • http://webandlife.blogspot.com Andy Wong

    Yes, Google has brought us hopes and prosperity. And I love Google. However, “Absolute power corrupts absolutely”, in politic, or in commerce. Google is on its way of total dominant , however, I won’t be cheerful for this.

  • Falafulu Fisi

    Tim O’Reilly said…
    In fact, Google has achieved its dominant position *in spite of* such deals…. That is, they are out-competing Yahoo! and Microsoft. This is NOT the same as Microsoft gaining dominant share by sharp business deals that required distribution of Microsoft software.

    Tim you’re right about Google but wrong about Microsoft. Google earned its dominant position by voluntary action of consumers that they choose to use its services. Microsoft also earned its dominant by again thru voluntary actions of consumers in that they choose to buy Microsoft products, such as their desktop softwares. If either Google or Microsoft had used physical threat & coercion to achieve their dominant positions, then their being monopolistic in their respective markets are unearned.

    The points that I am making here, is summed up nicely in the following excellent article, which I had posted it previously on another thread here at O’Reilly Radar.

    Drop the antitrust case against Microsoft

    The article covers the definition of non-coercive, non-violence earned dominant position in the market place (ala Google, Microsoft, and others) and the coercive, physical threat and violent earned dominant position (Government approved businesses & services, underground businesses by mobs).

  • http://www.jasonkolb.com Jason Kolb

    @Tim -

    I have read that post, and I’m sorry to say it did not change my opinion much. Here’s what I took away from it as your definition of Web 2.0:

    - An attitude not a technology
    - The long tail
    - Data as the “Intel Inside”
    - The perpetual beta
    - Hackability
    - Software that gets better the more people use it
    - The right to remix
    - User behavior not predetermined
    - Granular addressability of content
    - Rich user experience
    - Web as components (mashups I assume)
    - Tags, not taxonomies
    - Users as contributors
    - Participation, not publishing
    - Radical decentralization

    Now, I ask you again, what does Web 2.0 NOT mean to you? Simply anything that is the opposite of those items?

    The only reason I brought it up is because after hearing this term so much for so long, it has become meaningless. Saying that “Web 2.0 is much bigger than search” is akin to saying that “The Internet is much bigger than search”, simply adding a layer of obfuscation, no?

    Sorry if I am misunderstanding your intent here, could very well be my thickheadedness preventing me from understanding what you’re really trying to say.

  • http://tim.oreilly.com Tim O'Reilly

    @Jason –

    To me, the fundamental idea of Web 2.0 has always been this: that the internet, not the PC, is becoming the software platform. All of the key points from my paper that you listed above are ways that the “internet as platform” is *different* from what went before.

    The whole point is that if you don’t think in that way, you lose.

    The connection between the “internet and platform” meme and Web 2.0 was that after the dotcom bust, we (at O’Reilly) were trying to tell a story that would re-ignite enthusiasm and confidence in the computer industry by distinguishing the companies that had survived the bust from those that had failed, and would help people to see the potential in new companies that were coming along that took these principles even further.

    Yes, it’s a broad definition. But so was “personal computer,” and sure enough, “personal computer” had much in common with the previous era of computing, but there were unique characteristics that distinguished it (chief among them the shift of financial leverage from hardware to software, just as Web 2.0 represents a shift of financial leverage from software to data and algorithms.)

    You ask if there’s anything Web 2.0 doesn’t mean to me? Yes, of course. Take for example companies that have lots of dynamic data but don’t build useful consumer services against that data. Banks, credit card companies, and phone companies are great examples of companies with lots of Web 2.0 potential that are just beginning to exploit it.

    Similarly, software sold for a price, that doesn’t have a data back-end created or enhanced by shared user activity, isn’t web 2.0. (i.e. Windows, Microsoft Office.) Google Apps is Web 2.0 both because it lives in the cloud (on the internet as platform) and because sharing is its fundamental value proposition.

  • http://tim.oreilly.com Tim O'Reilly

    terra210 – I already gave several examples of outflanking google. Amazon has done with with Amazon web services. Believe me, Google execs are envious, and feeling a bit like Microsoft does about search — how did we miss this? Apple, with cloud services tied to the phone. (Don’t you see the Google Android vision and Apple’s iPhone vision on a collision course, with Google the one playing catchup?) And of course, lots of startups: Facebook, twitter — not to mention ones that have already been acquired, some by Google, some by Yahoo!, some by Microsoft, some by IAC or FIN. Flickr outmaneuvered Google in photos, YouTube in video, creating real value rather than chasing Google’s taillights and sucking their exhaust.

  • http://www.internetinc.com/ eric shannon

    loved your commentary on creating more value than you capture and blogged about its implications for job boards – http://internetinc.com/free-creates-value-for-jobs-boards

    thanks Tim!

  • http://tim.oreilly.com Tim O'Reilly

    SB -

    After reading your comment, I thought: I really ought to give Yahoo! search another try, to see if there’s anything to that argument. (I’ve heard citations of those same studies many times, but they didn’t seem to match my experience.)

    So I reconfigured my browser to start using Yahoo! search instead of Google. Big mistake. First search was for an article by John Flinn in the Chronicle, which I read about seven years ago, and was telling a friend about. She is going to Turkey, and I suggested that she might want to arrange a gullet boat trip. I couldn’t remember more details than that, so I went to the net.

    Here’s what Yahoo turned up for a search for “gullet boat Turkey Flinn” (surely enough data to find that article). Here are the first three results. I kid you not:

    Digitization Projects Philologic Results
    Israel Ludlow, James Flinn, John S. Gano, and Gresham Guard. ... boats descending the Cumberland River, killing John Curtis, and three young men named Seviers. ...
    lincoln.lib.niu.edu/cgi-bin/philologic/getobject.pl?c.998:19.lincoln - 301k - Cached
    

    Possumblog ... toaster, coffeemaker, blender, oven, bread machine, mixer, skillet, turkey ... Pumbaa's gullet to trigger the other spoken phrases he utters when you feed him ... possumblog.blogspot.com/2004_08_22_possumblog_archive.html - 390k - Cached

    www.fiziwig.com/crypto/pword.txt ... bear mean saul gate fort mans wise boat hour pray ways john send army sail walk ... acree aimee atlee bratt buell crass cress cribb diann flinn gloss grill guinn ... www.fiziwig.com/crypto/pword.txt - 544k - Cached

    Not only did the search not find the John Flinn article, it didn’t produce any useful results for gullet boat trips in Turkey (at least on the same page.)

    So I turned back to google. First result: the article I was looking for. Many other results for similar material. Advertisements from companies offering gullet boat trips in Turkey…

    In other words, exactly what I wanted.

    So yes, I say that Google is winning share because they deliver a better product.

    The only thing I can say about Yahoo! search and the deal they just made with Google after this brief experiment is that their deal obviously didn’t go far enough! They should have outsourced their entire search operation to Google, not just some of the ad placement!

    Meanwhile, in areas where Google doesn’t have better results, e.g in maps and directions, they’ve made some headway (largely through the mashup phenomenon that they inspired), but mapquest is still the leader, followed by Yahoo!

    I’m not saying that the Firefox deal didn’t help Google, but I don’t think it’s the major determinant.

  • http://www.thesearchworks.com Gareth

    Nice one Tim, I’m tempted to agree on the majority of points and I’d like to add that alongside Yahoo’s actual search results not being that great, from an agency point of view their customer service has frequently been way below-par. They have leaked money here due to poor turnaround times, plus their new system has reduced conversion rates while increasing CPCs in most markets – which in turn has reduced the budgets people are willing to spend on the engine.

    I have to ask you about Mobile though – you say that Google have a potential headstart here with local search, but surely that pales into insignificance next to the potential of android which – in theory at least – could allow full interaction with internet (and phone through Skype or a similar system, perhaps?) for FREE in exchange for accepting all contextually-targetted ads and search results (plus any other future developments) served to you by Google? It’s a very profitable looking area – especially if they were to then introduce ‘premium’ paid-for services further down the line.

    I’ve strayed from the ‘search monopoly’ point of the original post a little – so to return to it; it seems to me that because Google control this area so much and because it is SO profitable, they can put more resource towards other activities that it will in fact be difficult for anyone to ever compete with them in any future developments?

  • http://tim.oreilly.com Tim O'Reilly

    Gareth — I agree that Android is extremely promising, and that Google’s cash from search gives them freedom to explore new markets. But that isn’t anti-competitive! And the fact that Google has to push so hard in these new areas indicates how competitive the market still is.

  • http://tim.oreilly.com Tim O'Reilly

    terra210 -

    Looking at your question again, I realized I didn’t answer the bit about “how can outflanking occur, if they control the visibility, as they can, (if they want to…of course), filter search results?”

    I think it’s a flawed assumption that search is the only way that people access information online. It’s certainly important, but far from the kind of “monopoly” access that everyone seems to be worried about.

    Contrast Microsoft, where they literally had control over 95% of the world’s PCs. So if search is 40% of access, as I mentioned as an example for radar, does filtering and producing limited results create problems?

    It seems to me that search is important, but becoming less so.

    I use Google as one of a suite of tools to find information, and they are far from the first stop for many of my information acquisition needs.

    Ask yourself: when you’re looking for videos, do you go to Google or to YouTube (leaving out the fact that Google was smart enough to buy YouTube)? When you’re looking for restaurant recommendations, do you use Google or Yelp? When you want to buy a book do you start at Google or Amazon? When you want to buy the latest song for your iPod, do you start at Google, or right on your iPod? When you want tech news, do you go to Google, or Techmeme? (For that matter, how much of your information access is driven by links sent in email, twitter, or other social services?) When you want to find hotels, restaurants or other businesses near your driving destination, do you use MapQuest or maps.yahoo.com, maps.msn.com or maps.google.com? (Google is far from a monopoly there.) When you want to buy or sell a couch, or rent an apartment, do you start with Google, or Craigslist?

    So if someone outflanks Google, they get their own customer base. It’s a very competitive marketplace out there.

  • Kurt Cagle

    Tim,

    My take on this:

    I think it’s noteworthy that Yahoo! has seen its executive management structure collapse in the last year, a process which began well before Microsoft appeared on the radar but that has certainly accelerated in the face of the buyout proposal.

    As a business, Yahoo had been ham-strung by a series of bad decisions and investments that were high profile but not necessarily solid revenue producers (Flickr comes to mind) that left them vulnerable from any direction, something that has no doubt been obvious from within the organization (and no doubt accounts for no small proportion of the major exodus of senior execs from the Yahoo fold).

    From a purely business standpoint, Yahoo would have been an obvious candidate for Microsoft to pick up, though in all honesty what Microsoft would have been purchasing would have been market presence, rather than technology, and then only if they had managed to execute the transition effectively without destroying what brand loyalty still existed, something that is not altogether a given (and, if previous history is any good, is actually fairly unlikely).

    Google has not purchased Yahoo … not yet, and frankly it’s unlikely that it will. Had Microsoft acquired Yahoo, it would have eviscerated the company, because there would have been comparatively little need for the people in that organization to stay. The executives who’ve been leaving in most cases would have profited from stock option sales or swaps if the MS deal had been consumated, but are left instead with stocks that are likely to be worth far less in the long term.

    That’s one of the reasons why I think that the question of Search here is something of a red herring. What Google has done is to set up Yahoo as a proxy pawn to block Microsoft’s advancements into its core revenue area, has gained a venue for entry into other areas that Microsoft has had marginally more success in without necessarily diverting their own internal focus significantly (and while, perhaps, keeping the antitrust hawks at bay while doing so).

    At comparatively little cost, Google has turned Yahoo into a vassal company that still retains a certain degree of autonomy; its possible that Yahoo will be able to shift its own focus into areas that may prove more lucrative long term while conceding the immediate “loss” of indexed search revenue, which is I suspect what Yahoo’s board recognized when they made the deal.

    Of course, I’m not a big fan of tech mergers, not at that scale. They represent shareholder payouts that get investors salivating, but usually end up proving to be disastrous not only for the acquired company but for the acquiring company as well, with the short term buyout coming at the expense of long term shareholder loss. There is also the effectively loss of market competition that in turn drives up costs to consumers that enters into the equation.

    Yahoo is in a tailspin now, one that it may or may not be able to recover from. I think this was pretty much inevitable, regardless of what happened, and Jerry Yang will no doubt be given his walking papers because the largest shareholders were not able to profit effectively from Yahoo’s dissolution (with justification, no doubt).

    However, it also may turn out that this becomes the opportunity for Yahoo to turn their organization around, shed the layers of acquired former CEOs (which often add considerable overhead to an organization without typically giving commensurate value) and may give them the opportunity to clean house and re-establish themselves in those markets where they are strongest.

  • http://www.siyonizm.net Kabala

    Tim, I like your thoughts, but I must agree with Michael here. The business will follow the profits and if Google is absorbing most of the profits as search is substantially more profitable than display, then they will aggregate the rest. As your business is not solely based on advertising this may not be as great of a concern for you, but for others this may become a big deal.

  • http://tim.oreilly.com Tim O'Reilly

    Kabala -

    Not sure why you think Google is absorbing all of the profits. I am aware of the arguments that by its nature search engine pricing will reach the level that is optimal for the search engine rather than the advertisers (see for example Jakob Nielsen’s Search Engines as Leeches on the Web), but even if this is true, the value created by search engines is so much greater than the advertising value.

    Go look at the traffic logs for virtually any web page, and you’ll see that most of the traffic is delivered by Google. How the destination site chooses to monetize that traffic is up to them. For many sites it may indeed be advertising – and there, adsense and equivalents do share some of the revenue, but there are other options. At O’Reilly, most of our monetization comes through e-commerce: helping people find our books, conferences, and services like Safari Books Online and the O’Reilly School of Technology. And for this purpose, search engines only deliver value. They don’t take away any value from us at all.