Internet Outsider

The Ask Test, Part 2: Will Mossberg Switch?

Walt Mossberg's Google-Ask taste test concludes that Ask sometimes produces cooler features and better results.  So here we have an ideal test-case of Google's ability to protect its market dominance, and Ask et al's ability to ever claw back serious market share. 

Question 1, for Walt Mossberg: So now that you have concluded that Ask is sometimes better, how are your searching habits going to change?  Are you going to try both engines every time you search?  Are you going to switch over completely to Ask?  Or are you going to say, "Well, yes, Ask tastes better, but I've always been a Google man, so I'm going to stick with that."  The answer here is important, because Google is protected not only by its search service but inertia: most searchers probably don't care enough to switch unless/until the competing product is vastly superior.

Question 2, for Google: So now that Walt has implicitly dissed your service and engineering team, how are you going to respond?  How long before we see those cool site-preview binoculars on Google?  How long before searches for people turn up photos, bios, etc.?  Are you going to respond, or--like Yahoo! in the late 90s--are you so focused on Mars mapping, Google Base, and other projects that you're going to take your crown jewel for granted?

Question 3, for Yahoo:  Where are you in all of this?  Why doesn't Walt hold a higher opinion of your search service?  Are you going to introduce the above features, too?

Question 4, for searchers everywhere: So now that Walt has said Ask might be a little better, are you going to try it?  If you try it, are you going to switch?  If not, what would make you switch?  (Be honest).  If so, what would make you switch back?

I'm encouraged that Ask has been able to beat Google at the search game, at least in the opinion of one market commentator.  I am still skeptical, however, that temporary feature- or results-based superiority will lead to a vast shift in market share.  Could it?  Yes--Yahoo!'s fall from grace is proof of that?  Will it?  Not unless Google and Yahoo! are asleep at the switch.

Of course, Ask's goal need not be to dethrone Google.  If it merely doubles its market share, from 6% to 12%, it will have succeeded in spades.

And another takeaway from Walt's exercise is that Yahoo! has once again failed show any real competitive or innovative spark.  If Ask can win plaudits and develop superior features after only a year or so of intense work, what has happened to Yahoo!'s innovation engine?  Is this like Finance, where Yahoo!'s team fell into a coma?   

UPDATE:

Walt was kind enough to weigh in here, very articulately.   Several other smart comments, too.

Google Deal Another Good Sign for Q1

Q1 is all but done.  If the results are disappointing (below expectations), Google's stock will tank, a point that presumably hasn't been missed inside the Googleplex.  Companies that issue stock just before they report disappointing results get bombarded with lawsuits (as do their underwriters), another point that presumably hasn't been missed inside the Googleplex (or Goldman Sachs).  Given that this stock offering is obviously optional, Google probably wouldn't have done the deal if it expected its Q1 results to be disappointing.  And it especially wouldn't have positioned the deal as a gift to mom-and-pop-owned index funds.

So this deal joins Google's official reaction to Three-Alarm George's demolishment of the stock last month in New York (George hallucinated) as positive signs for Q1. 

Google Needs Another $2 Billion Because...

It must want to buy something.  No other explanation jumps to mind for why a cash-gushing monster with an $8 billion war chest would toss away another 5 million shares in tonight's shelf filing.

Scheduled 2006 big ticket items are $1 billion to AOL for the search deal, $1 billion (rumored) to Dell for the Google Pack deal, and $1-$2 billion for capex, all offset by an estimated $2-$3 billion of positive cash flow.  Add that together and you get a net 2006 cash outflow of maybe $1 billion, leaving $7 billion on the balance sheet--more than enough to compete with anyone except...

Yes, but if the point is to get into a "mine's bigger" war with Microsoft, then why not raise $20 billion?  No, $7 billion is plenty, unless you want to buy something.

Bets?

Facebook?  MySpace (for cash and stock, giving News Corp. a big Google stake)?  The rest of AOL?  Tellme?  Keep 'em coming...    After reading Battelle, my money's on Facebook.

UPDATE:

A Google press release confirms the deal and notes that Goldman was the sole underwriter (lucky them).  The press release also implies that one reason for doing the deal was to make sure there is enough stock available for all the index funds that have to load up on it between now and Friday. 

Translation: We didn't want the stock to soar and then crater, subjecting us to another round of mercilous pounding at the hands of the press, investors, and blogosphere.  How's that for not being evil?  (And how's that for not being altogether straightforward?).

UPDATE 2:

This "index-fund offering" justification seems to have gained instant credibility, with Safa and others deeming it the height of mundanity and common sense.  If so, it's the first I've heard of the practice.

UPDATE 3:

Another common theory on the acquisition side is Asia expansion--perhaps China specifically, where Google is getting its clock cleaned.  Cash vs. stock would be very helpful here.

Analyzing Search Share Data

Third-hand search share data via Battelle, Bear Stearns, and Comscore shows that Google is still gaining U.S. share and everyone else is losing it (don't let that tiny blip up in Ask's share distract you--it's irrelevant).  A few thoughts:

Google is now at 42% of U.S. search, up from 36% a year ago.  In a market without monopoly characteristics, it is rare for a leader to have 50% of the market, but Google appears to be headed there.  The company's rate of share gain, therefore, can probably continue for a while.  Importantly, Google's rate of search query growth is decelerating rapidly, despite the share gain--from 38% in Q205 to 25% in Q405--although it appears to have recovered slightly in the first two months of this year.

Yahoo!'s continued share declines (31% to 28% Y/Y) are bad news.  Even as it falls farther behind Google, Yahoo! should still be gaining share from the likes of AOL, Ask, and MSN.  Worse, Yahoo!'s query growth has smashed into a wall: 42% growth in Q205 and -2% shrinkage in Q405.  Per CFO Sue Decker, Yahoo! has already given up on trying to be No. 1 in search.  With these numbers, however, even its scaled back goal--"maintain our current market share"--looks dreamy.

MSN's continued share declines (16% to 14% Y/Y) are really bad news.  Last week's post about the Microsoft re-org prompted many smart comments about how Microsoft has finally gotten it right and how Yahoo! and Google are now toast.  I realize that search isn't everything, but I would love to hear Microsoft optimists explain when, how, and why Microsoft's search share is going to stop declining and start growing and how big it is eventually going to get.  Because the actual numbers from the field suggest that MSN search is getting more irrelevant by the day.

Ask (6%, up 0.5%) and AOL (8%) are still--and in my opinion, will always be--fighting over scraps.  According to the "Rule of Three," most markets support three major generalists with an aggregate 70% share of the market and a handful of specialists with less than 5% each.  Companies with 5%-10% of the market are neither fish nor fowl, and fall into the "ditch."  The way out is usually to specialize, but Ask, at least, still has dreams of joining the generalist big boys.  For many reasons, this will likely be much easier said than done. 

S&P Times Google--And Pats Self on Back

So much for the fiction that the S&P 500 is an un-managed index.  Committee Chairman David Blitzer sounded like a veritable hedge-fund manager when he explained to the WSJ why the Committee took until now to make this obvious decision:

S&P Index Committee Chairman David Blitzer said a big reason why S&P didn't add Google to its index late in 2005 is because the stock was surging – setting it up for a big decline. "There were a couple of spots last fall, when [the stock] went straight up, and when something goes straight up it gives one pause because it'll also go straight down," he said.

So does this mean that we index-fund owners can sue S&P for not booting stocks before they plummet?  Perhaps Blitzer just wants to erase the nightmares of S&P's having top-ticked Yahoo!, AOL, et al (and blaming those disasters on being oblivious to price).

In any case, now that the freebie Google catalyst is out of the way, it's back to business: How to generate that hefty $3 billion in 2006 free cash flow that Wall Street's looking for. 

Microsoft Doubles Down, Swallows MSN

For a few years, Microsoft has been standing at a fork in the road: Spin off its web and consumer businesses or integrate them deeply into the fabric of the company. The latest re-org suggests that, despite getting its head handed to it in the online business for the last 11 years, Microsoft has chosen the deep integration path once and for all.  Given what is at stake, this amounts to doubling down. 

Henceforth, MSN, et al, will be part of the "Online Businesses Group" which, itself, will be one of eight divisions within a massive Platforms and Services Group.  Yusuf Mehdi also seems to have finally been put out to pasture with the ceremonial title of chief advertising strategist, perhaps to make way for new blood.

As I've argued, I think this is the wrong route for Microsoft, at least if the company is serious about challenging Google in the search and advertising-driven web services business.  The more MSN is subsumed within the Microsoft whale, in my opinion, the more the web efforts will exist just to protect a dying Windows monopoly.  Integrating the Internet with Windows has done little to help Microsoft dominate the online business: Despite 11 years of effort, tens of billions in cash, a browser monopoly, a desktop monopoly, and thousands upon thousands of brilliant engineers, the best the company has ever been able to do is run a distant third.  I don't see anything in the latest re-org that begin to change this; instead, I think it will exacerbate it.

I also remain skeptical that a company that dominates the world of corporate IT (enterprise scale corporate software and productivity tools sold to Fortune 500 CTOs) can also dominate a media business, which is what search and portals services are and will remain.  The differences between the two businesses (and customer bases) are vast, and the conflicts will forever force compromise.

This isn't the end of Microsoft: the company's position in enterprise IT (and on some desktops) should be secure for decades.  It could, however, be the beginning of the end for MSN.

Yahoo The Fossilized Old Media Company

Please read this depressing take on the ossification of Yahoo! Finance from Jeremy Zawodny, who used to work in the division and still works at the company.  Kudos to Yahoo for letting Zawodny be depressed about his employer in public--this alone suggests that there is still life somewhere in the company.  But shame on Yahoo! for letting the fire die.

One expects to hear stories like Zawodny's when talking to employees of Time Warner, Viacom, and other fat, happy dinosaurs.  But Yahoo!?  Forgive me, a shareholder, for hallucinating that somewhere in one of my favorite companies there were managers and employees who still wanted to win.

It is way, way too early for Internet oligarchs like Yahoo to hit cruise control.  Google exists because senior management at Yahoo! took their eyes off the search ball--the core competency that transformed the tiny start-up into a global behemoth.  And now it appears that despite this disaster Yahoo! has taken its eyes off another core cash generation machine: Finance. And once again, Google has found the abandoned treasure.    

I hear tales from within Yahoo! of chagrin that the company fumbled away $100 billion in market cap by blowing its search lead.  I must confess I was hoping that this chagrin would serve as a kick in the ass--a stark lesson in what happens when you get rich, arrogant, and distracted.  Given Zawodny's description of the pathetic inertia that has infected Finance over the last few years, however, I wonder. 

Perhaps the enormous success the company achieved in its first five years has infiltrated its DNA.  Perhaps the first thing every Yahoo thinks when he or she wakes up every morning is "I am a Yahoo!  I am rich, brilliant, and cool.  Now, where shall I have today's four-hour lunch?"  Perhaps what motivates Yahoos these days is dreams of more visits from such inspirational business leaders as Tom Cruise ("My manager told me that next year Terry's working on Tom Hanks!").  Perhaps the secret fantasy of many Yahoos is that, someday, they'll finally be cool enough to be invited to the Oscars.

[Note to Yahoo!: Larry and Sergey could buy the Oscars, along with every dime-a-dozen studio and production company in town.]

Well, wake up Yahoo!  You're only 12 years old. Take the armchair-rockers off the porch and get back in the fight. 

UPDATE

Jeremy responds (as I hoped he or someone else might) and says that the Finance woes should not be extrapolated to the whole company.  I'm relieved, I guess, although I'd still like to see some evidence of Jack Welch-style butt-kicking, at least within Yahoo! Finance.

Google Finance: Yawn (Updated: Wow)

So Google finally launched the much-ballyhooed Google Finance.  Two months ago, before the bloom fell off the Google rose, this move would have been greeted with near-universal conviction that Yahoo! Finance et al had minutes to live.  Now, the reaction seems appropriately reasonable and subdued: "Nice concept, now show us how you're going to do it better."

The answer to this question, unfortunately, is not evident on the site.  The Google Finance beta landing page couldn't be less revolutionary: Market quotes and business news.  Some writers tell of stock charts with embedded explanations of price-moving events, but if so, these are nowhere in evidence.  In fact, the beta page is so spartan that, upon viewing it, a curious Yahoo! Finance user could be forgiven for wondering if his or her browser failed to load properly.  Even Google fanatics will probably scratch their heads and think, "Years in the making, and this is the best they could do?"

Which isn't to say that, eventually, Google won't figure out some cool gizmos that put Yahoo! et al to shame.  If they do, this will be good for Yahoo! users, as Yahoo! will be forced to implement them.  Whether the gizmos entice Yahoo! users to switch sites, however--and reprogram their stock portfolios, news screens, and other customized features in the process--is another question.  Based on the current beta, the answer for most Yahoo! users would probably be "no."

Bottom line, it will likely be far more difficult for Google to steal share in personal finance than it was in search.  And given Google's enormous revenue base, anything less than total market domination in personal finance would barely register on the revenue scale.  So it's not surprising that, having seen this latest beta, investors aren't falling all over themselves to get back on the Google bandwagon.

UPDATE:

After reading the first few comments here, I tried the beta again, this time typing in a couple of stock symbols.  Verdict?  Very cool charts.  Let us hope that Yahoo! has learned its lesson from the search wars and realizes that it has the equivalent of a few minutes to fix this before the finance industry switches to Google.  The beta entry page still has miles to go, as does the section's user-friendliness, but the company pages are good and the charts are great.

Terry?  David?  Jerry?  You folks listening?  Get your chart people on this immediately, or your richest, most valuable finance user base (Wall Street) will vaporize, even if the average My Yahoo user doesn't.

Sergey?  Larry?  Eric?  You folks listening?  Time to take the tiny step of adding some helpful text to your new pages.  How about welcoming the new user, helping them out a bit?  If you're going to care enough to brief the media and bloggers about your new products, how about briefing your users?  This wouldn't be selling out.

UPDATE 2:

That little "blog post" feature in Google Finance is a traffic firehose.  Here I am, bashing away (initially), and suddenly the traffic starts gushing in from the Google Finance Google page.  Business bloggers are going to love this. 

UPDATE 3:

Reader "Ben," a Wall Street analyst, weighs in with several positive thoughts about the beta, along with an explanation about why he and his colleagues are about to switch.  If folks in the Yahoo! Finance department aren't buzzing around figuring out how soon they can duplicate all this, they'd better start buzzing.  One glance at some of the charts, blog-links, etc., and you both cheer for the consumer-benefits of capitalism and wonder how on earth Yahoo!'s team could be so asleep at the switch.  It's not as though they haven't had 6-12 months of warning.

The Real Problem With Click Fraud

Reader "Anon" posted a link to today's Washington Post story on click fraud.  The story tells a familiar tale--a company hired a fraud-detection firm to audit its clickstreams and found that an estimated one-third of the clicks were bogus.  The story also describes the latest bot-clicking technology ("You, too, can deplete your competition's keyword budget in ten minutes!!!").  As usual, no hard numbers, just estimates from various fraud-detection firms that 20%-40% of clicks are fake.

The story also highlights, indirectly, the real problem here: The expense and hassle required to monitor and audit your clickstreams and then make a compelling enough case to the search engines to get a refund.  The engines don't have access to post-click sale data that advertisers do, so there will likely always be disagreements about what is and isn't a bogus click.  Also, the necessity of having to track, audit, and complain will add a layer of cost and effort to search advertising that is not currently factored into keyword pricing, especially if click fraud is an escalating problem.

Because advertisers can assess their ROIs with all fraud included, click-fraud deniers have a point when they say "It's just a cost of doing business."  This said, all else being equal, if click fraud is increasing as a percentage of total clicks, the price companies are willing to pay for keywords is going to have to fall--or ROIs will decrease.  [If someone knows for sure whether click-fraud is increasing, I and about 10 million others would be grateful if you could send some confidential evidence to share@internetoutsider.com.] And if most companies decide that they have to pay to track and audit their click-streams or risk throwing money away, this will add to the cost of search marketing programs and put further pressure on ROIs. 

And then, of course, there's the PR issue.  Google's recent stock plunge and communication gaffes have already tarnished the once-gleaming reputation of search engine marketing in general and the company in particular.  Imagine if Google deals with an increasing number of refund requests (stimulated by an increasing number of click-fraud audit firms) by saying, effectively, "If our rocket scientists said it was a valid click, it's a valid click.  So get lost."  Whether or not advertisers are still generating positive ROIs, frequent anecdotes about such snubs won't win Google many admirers, especially when it is generating a 50%-plus operating profit margin.  Armed with independent verification of their suspicions, moreover, such advertisers will be even more annoyed next time Google dismisses their concerns as "not material."

In my mind, regardless of whether one thinks click fraud is a big problem, it is hard to avoid the conclusion that it will add a layer of additional cost to search engine marketing--probably on both the advertiser and search engine side.  This may not be terrible, but it's hard to dismiss as irrelevant.  It's also hard to reconcile with a theory of ever-increasing profit margins.

What Google's Thinking?

As several readers have suggested, I suppose another possible rationale for Writely, Gmail, and the dozens of other revenue-less, storage-gulping products Google is developing is simply a portal strategy: Get people to spend most of their time on Google properties, and they'll be more likely to use the omnipresent Google search window when they get around to searching for something.

This strategy is different than assuming that you will one day figure out a way to insert advertising into word-processing documents (or in the word-processor itself).  It also happens to be Yahoo!'s biggest competitive weapon in search: Based on some of the studies I've seen, the main reason Yahoo! search users search on Yahoo! is that they are already on Yahoo! anyway.

So maybe the point here isn't to "kill Microsoft" or "diversify revenue," but simply to protect and grow the main revenue stream.  This would reduce any impact on Microsoft to the status of (gleefully induced) collateral damage.

If this is the strategy, it still suggests gradual margin compression over time: Writely has only a handful of employees now, but if it were ever adopted at scale, it's hard to believe it would generate enough incremental searching to offset its costs, especially when Google already has 50%-plus search market share.  Too much of this, moreover, and Google would run the risk of reducing the Google=Search brand association, the same way Yahoo! did when it decided to be all things to all people (and, thus, opened the door for a dorm-room start-up called Google). This said, Google's most valuable product by far is its own search window (7X more valuable than Google-powered partner search).  Anything that induces web users to use this search window as opposed to another, therefore (even a Google partner's), is a smart long-term strategic move.