Internet Outsider: Analyzing Search Share Data

March 29, 2006

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.

Posted by Henry Blodget on March 29, 2006 at 09:21 AM | Permalink

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Comments

Henry,

one number you forgot to mention:
goog is now over 388....no matter
what the reason is (S&P inclusion),
this most important number for investors
is improving...quickly and
dramatically. There just might be
a few shorts in severe agony as well.

Posted by: Robert | March 29, 2006 at 10:49 AM

Henry, since you have so kindly asked us (the commentors on your MSFT Doubles Down post) to comment again, I want to disect your analyses above.

>> I think this is a mistake. The fact that Ask is moving up is evermore evidence of a future growth. One should never ignore a company that is growing. It is a sign, a positive one.

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.

>> I agree. If Yahoo is REALLY giving up, then they deserve to be severely punished. Yet, I do not think they gave up. I wish to add to this that a CFO (with alllllll duuuuueee respect) often just counts numbers. They see numbers, ratios, values, growth and decline. They think in abstracts. They think in quarters (if public) and in annual terms. They DO NOT necessary share the vision and they do NOT necessarily even share the dream. They are - how can I say it respectfully- number crunchers.

>> I was the first commentor, and I have been cheerleading (kind of) for MSFT. As far as I can rememebr, nobody said GOOG is toast, We only analyzed a bit further than you did. While you did a remarkable job. you made some confusing comments, which were only pointed out by the likes of myself in terms of potential gains for MSN/MSFT. I can guarantee you that MSN will be the number 1 search engine. Mark my words. It is not that I am paid for saying this (I wished!) but it is just a realistic look ahead. The one-trick ponies will have a hard time coping with this MSFT circus.

>> As I started above in this comment, ASK is going to show us some really big gains in the near future. You can underestimate the teams, but never underestimate the visionaries behind these companies. In the case of Ask it is Barry Diller. This guy is dead set on becoming a force to reckon with. And I agree.

Posted by: Neal Lachman | March 29, 2006 at 10:50 AM

Robert... phewww I am glad I didn't short GOOG ;-)

Posted by: Neal Lachman | March 29, 2006 at 11:02 AM

Hi :D

Posted by: Online Pharmacy | March 29, 2006 at 12:51 PM

How Microsoft Might Gain Share (You Asked for The Specifics)

1) adCenter's release in U.S. quickly gains advertisers because the volume of queries is large and the bid prices will initially be low until bid density and coverage increase (from more advertiser participation;

2) adCenter's unique capabilities for demographics and dayparting absorb more budget from advertisers - likely a mix of incremental spend and spend shifted from competitors

3) adCenter's ramp allows Microsoft to move aggressively into growing query share by striking partnerships (which MSFT does not have today) - likely a mix of incremental partners (MSFT's hare of new new entrants) and those won from competitors (zero sum shift)

4) Microsoft gets more aggressive in acquiring vs. renting query share. A Yahoo acquisition/merger which would have been out of the question from a regulatory standpoint a few years back, would turn this into a two party game, which every advertiser would have to be part of, overnight and a Yahoo/MSFT combo would be THE place for brand advertisers to spend. With little overlap in audiences on the portal/category side, virtually each major vertical (just think of the combo of Yahoo Finance and MSN Money) becomes #1 in audience size, page views, time spent, etc. The companies operate seprate brands/sites (since there is little overlap) and gain efficiencies on licensing fees, G&A reductions, network costs (over time) and get premium ad rates due to the leadership position.

4) Microsoft is in this game for the long-haul. The core business may not be a growth story, but it's strong cash flow is going to sustain wave after wave of R&D spend and improvements - close to $5B per year. Breakthroughs in search methodologies than change the game have an increased cjhance of happening within this pool of talent. Thus, in many ways, the next 5 years is about an engineering battle between two large bodies of talent (at MSFT and GOOG) - and which parties can soak up ideas created on the outside, faster and more effectively.

In conclusion, if you look at this from a very short time horizon, Google prevails but the growth slows, but if you embrace a bolder Microsoft that is prepared to go at this for years, you can see how it "can" play out accepting reasonable assumptions.

Either way, it means tougher long haul for GOOG shareholders and only upside for MSFT shareholders.

Posted by: Bruce Hamm | March 29, 2006 at 02:26 PM

Bruce,

I totally agree with your points. The MSFT/YHOO combo idea is freighteningly cool!

I also want to point out that analizing markets or businesses on facts that we KNOW is nothing more than high-tea gossip or clearvoyant speech. For example, if I would have shorted Google, I'd be one of the stupidiest investors, because i could know it is a yoyo game. It is like taking a walk on a minefield, although some may think of it as fieldtrip.

On what should we then base our future estimates or projections? Most investors know that the solution to any problem starts with the exact description and formulation of it.

Thus, when we conclude that MSFT's obvious analyses and formulation of this dillemma is (or was):

"GOOG has a market lead; they are going on strong; we are losing market share; there are others to face and compete with; there is a lot of money to be lost which we by the way haven't earned yet (businessmen see lost opportunities as lost money); we are facing stagnant revenues in our core business."

Now, what the heck do we think Gates and Ballmer have been thinking of as a solution? Take a guess.

Posted by: Neal Lachman | March 29, 2006 at 02:58 PM

Just to be clear here, I am pretty sure that GOOG is "toast" in the long term. Product share in this stage of the market is meaningless.

Apparently GOOG thinks so too, as they have apparently made an unprecedented proactive move to call the government in to save them from certain slaughter:

EU pressures Microsoft over new Vista system

I've been around a lot of high-tech Silly Valley companies. The day you call the government for help is the day the engineers and business people know that they are no longer the driving force of the company. The entire company's fate now hangs on the lawyers and the lobbyists, and the product you build has little to do with it.

And why do I take the "extreme" position of saying they are "toast"?

It has to do with the delicate fabric that holds a company like GOOG together. It's about the engineers, the business people, the energy across the company, the company's perception from the outside, the company's brand, and finally, the stock, which drives all of those things in a publically traded "rocketship to riches" company like GOOG.

With today's move GOOG can no longer claim that they are dedicated to staying on the leading edge. So much for the "we're the people smartest in the world" angle. Now the only thing GOOG employees and business partners have to be proud of is the money they are going to make.

As such, MSFT doesn't have to "zero out" GOOG revenues to cause the company to tumble, they just need to make them miss their profit targets. Then the stock price will tumble, all of the good people will leave, customers will open up their options, and the rest will take care of itself.

Posted by: Still Inside | March 29, 2006 at 04:51 PM

"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."

1. When: within one year of Vista's launch. Specifically, by early 2008, Windows Live search market share will have increased to match Yahoo's. Google will still be in the lead but will have stopped growing.

2. How: Vista is going to have new desktop search capability built into the OS (almost identical to the MSN Search Toolbar functionality today). So post-Vista launch, Microsoft will release one or more "OS updates" that add built-in links to online Windows Live services and integrate those links into the Windows UI. (This is the reasoning behind some of the recent reorg.) Heck, they could even deliver these updates through Automatic Update, which is turned on by default for security reasons, so everybody gets them.

As part of these updates, the search interface in Vista will suddenly return Web search results from Windows Live Search alongside local desktop results. Blurring the difference between Web search and search in general.

Assuming a PC runrate of 200m per year, suddenly Windows Live search is very accessible to a whole lot of people. Someday, we'll look back at typing "google.com" into our browser window as an anachronism.

3. Why. You might correctly point out that MSFT hasn't been able to capitalize on IE defaulting to MSN Search, but this would be quite different. Nobody uses the "Search" bar inside IE becuase they've already got the browser open and they know to type in google.com.

But imagine: there's a search box at the bottom of your screen no matter which application you're using. And instead of opening your Web browser, you get Web search results alongside desktop search results in any application you're using. (That sure would be useful looking up Windows error codes!)

And you don't have to download anything--no toolbars to install. It's just...there.

4. How big will Microsoft's share eventually get? Too hard to predict. I think Google will have its own responses to this (e.g., bundling deal with Dell), and MSFT could still very easily fail to execute on this plan. But I do see MSFT and YHOO becoming equals with GOOG no longer growing market share by 2008. Beyond that...who knows?

SIDE NOTE: Bruce's analysis of adCenter is spot-on. This is how MSFT sucks money out of the paid search market in the short-term. Just enough to hurt the competitition and put to rest to those silly rumors about GOOG getting into desktop productivity suites and enterprise software sales and all that other nonsense. And to stop any possible talent drain--nobody wants to be on the downside of that stock option price curve.

Posted by: MattyDread | March 29, 2006 at 05:58 PM

How about this? You select a text on any application, right-click and one of the options is search, which returns results from MSN. And if the results are as good as Google's why bother going to Google for search?

Posted by: Suat Alaybeyoglu | March 30, 2006 at 07:47 AM

Any comments on Nielsen//NetRatings report? Thanks,

http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/03-30-2006/0004330469&EDATE=

Posted by: mike | March 31, 2006 at 04:56 PM

How MSN search can go after Google? There is no way in sight. Google is there because: search algorithm, agnostic and ever expanding architecture and business model.

Since MSFT seems so intent on pushing Vista even as far as the new generation TabletPC, why would I believe they would be less dogmatic when it comes about building a huge server farm to index everything on the Internet? Some may well say that MSFT's using a non-MSFT infrastructural piece in HotMail (FreeBSD), but that's to say nothing is impossible, and I agree. How possible it is though, it's a whole different story. More on this, here: http://chircu.blogspot.com/2006/01/can-search-follow-browser.html

At a different level, one may argue that search is/should not be the only way to get from A to B on the internet. If MSFT comes up with an alternative to search by which we can get to where we want they have a chance.

In the end, it is its own culture that inhibits MSFT from achieving several of its legitimate goals. MSFT has gone for too long unreformed--just consider the 50-million lines of code in Vista!

Posted by: chircu@com | April 05, 2006 at 11:59 PM

Still Inside(er), you wrote:

And you don't have to download anything--no toolbars to install. It's just...there.

Oh my friend, I can see the reaction of EU regulators (and possibly DOJ) on this one: unless MSFT opens up that little window to any search provider (yeah, it still has to be user or OEM activated...) MSFT will face their wrath anew!

Posted by: chircu.com | April 06, 2006 at 12:06 AM