The Bad News About Google's 70% Search Share

Rich Skrenta (via Searchblog) analyzed the source of traffic for ten big sites and illustrated what "everyone in the web business already knows," which is that Google has a heck of a lot more than 40% share of the search market.  The analysis covers only a small sample, but it certainly seems plausible that, as Skrenta concludes, Google already has 70% share.

For Google bulls, this is good news and bad news.  The good news is that their predictions have already come true.  The bad news is that, if Skrenta's estimate is accurate, Google only has another 30% market share to gain.

In the past three years, Google's growth has been driven by increases in 1) revenue per search, and 2) number of searches.  The second factor, increasing searches, has been driven by growth in global market share and, to a lesser extent, growth of the Internet.  If and when Google's market-share gains slow or stop, this will act as a major drag on its revenue growth.

Can Google gain that last 30% share?  Yes, possibly, if Yahoo, Microsoft, Ask, et al, reach new heights of search patheticness.  Will it?  Unlikely.  As synonymous as Google has become with search, the network effects in this business are not as strong as they are in, say, auctions, and they are probably not strong enough to warrant 90%-100% market share. 

It would be a mistake to make too much out of a small sample, and pinpointing the likely ceiling on Google's search share is difficult at best.  It does, however, seem reasonable to note that at some point Google will no longer be able to gain share and that this will have a "material adverse impact" on its revenue growth.

Comments

[Piyush]

This is only a problem if the market stops growing.

How can maintaining a static 70% share of a rapidly growing market have an adverse impact ?

You keep repeating variations on the same old point in all your posts - IF the market slows then it will have an impact on google ( or generally if bad things happen, then google can suffer) . The point is so obvious that it barely needs mentioning and it holds for any company on the planet !
What you never provide is any indication of why bad things are about to happen to google.

Also, the search advertising market is something that google has effectively created on its own. And it will create newer markets in the future.

[a]

I agree this is a problem is share growth stops. But I think there is a network effect. Probably not the right term. More like a natural monopoly. I think the infrastructure needed to index everything and do it quicker than the next guy keeps Yahoo and MSFT at a disadvantage. They're behind. Google just needs to increase their indexing and speed at the same rate Yahoo and MSFT do and they ultimately have a better product.

[TallTroll]

>> the search advertising market is something that google has effectively created on its own.

Really? I think goto.com (>> Overture >> YSM) would have a comment to make there.

Also, Googles had about 70% for a couple of years now (just because "conventional wisdom" hasn't caught up with that factoid doesn't make it less true), but their traffic sucks in terms of comparative quality. Since there's just so goddamn much of it, everybody still wants it though

>> Can Google gain that last 30% share?

I rather doubt it. Y and MSN pull most of their traffic from sources that are currently unavailable to Google, but if they do truly portalise, and release a Google operating system, all bets are off

2007 may see a correction in Yahoo's favour, as the Panama project makes it easier to give Y money (currently their biggest barrier to growth), and possibly MSN, but to be honest, everyone I've spoken to about it still hates their interface, so barring a HUGE improvement, they'll go into the slot that Yahoo used to occupy, "nice traffic, shame it's unecomonic to actually use them"

Also, if the YPN team actually got off their collective asses and went after a few high profile AdSense publishers (and I DON'T mean corporates - I mean Jennifer Slegg et al), they could take chunks out of AdSense

[Victor]

Patheticness? Nice neologism Henry.

How about this for an advantage: The larger Google's market share, the less advertisers need to bother with Yahoo or MSN. Google already has a far greater number of advertisers than all of its competitors combined, and each of them will soon have access to advertising in a whole slew of formats - text, audio (radio) and video.

Seems to me that even if Google runs out of market share to take, there's a big advantage in being the one-stop-shop to do targetted advertising.

[Victor]

http://www.nytimes.com/2006/12/20/technology/20checkout.html?em&ex=1166763600&en=94ad1dd61e72ec48&ei=5087%0A

very interesting article from the New York Times on Google's encroachment onto Paypal's territory. I agree with the guy from Stifel, Checkout could be a game changer.

[Steve Nash]

This blog is silly.

Henry u are trully the master of the obvious. How could u not write a blurb on eBay's strategic moves in China but u called this info on Google news worthy!?

This guy Victor always writes the same ridiculous comments following up your blurbs. Hey Victor, u know there are other forms of advertising that are not text based. If you haven't looked lately, Yahoo still has a lot of traffic on their website, it may not be search but I am sure advertisers still care. I can almost guarantee that u were one of the guys during the bubble investing in sites like pets.com.

Any form of advertising gradually loses its ROI as the markets becomes flooded with it...a la direct mail. How about writing an article about the effectiveness of text based advertising. How about doing some consumer discovery. When was the last time u bought something using a Google text based Ad!

Lets write an internet blog on something that we can all discuss. For instance, do you think Sirius will be able to capture a large share of the internet radio market as cars gradually become internet equipped? Or do you think that companies like Comcast should be developing "internet tv" portals of their own. I think it would be interesting for Comcast to buy programming from companies like Fox, NBC etc and then sell memebership and advertising. U could sign up for the Comcast/time warner cable packages and for an additional 20 bucks u can accesss a lot of the same programming through Comcast's portal.

Lets discuss.

[walker]

piyush is right-- this blog for a while was incredibly insightful but once the "study shows google's market share is ___, this could be bad because their ROI will decrease and their revenue growth will slow" articles became piecemeal it really lost its value. Please write something we DON'T KNOW. Monthly updates about how google's market share is doing, while interesting, are not insightful.

[Henry Blodget]

Thanks. Post should have been shorter. Would have been enough to point out that, with regard to future instead of past, overwhelming market share is not all positive.

[Neal S. Lachman]

Henry, that was a funny reply. I prefer your longer posts instead the one-liners.

I must say, I was also worried about the "Google" average on your blog, but it is not all that bad. If I remember well you have written about quite some other events in the last month... Yahoo, AOL, YouTube competition... so it is all good. Personally, I still like to read your blog, and most commentors have quite interesting views/replies.

Considering Google's marketvalue and -position, and given their clout, presence, and their ever-growing portfolio of companies it is only normal that the company is gaining much attention and coverage/analysis.

I guess you are still busy with your book. How is that progressing?

[sigma]

Here is a fifty pound monkey wrench into the Ferrari gearbox of your description of Google:

Why do you believe that the search technology of Google and its competitors with similar technology is anywhere near the best 'search' that can be done?

And, even more to the point, why do you believe that Google's ad targeting from Google searches is anywhere near the best that can be done?

Here is a negative 1 G lurch from that monkey wrench (sorry the steering wheel gave you a bloody nose): You go to Google and type in

finance stochastic Shiryaev "Doob decomposition"

and I do the same. Then, first-cut, we get the same results. Doesn't something bother you about that?

Similarly for the ads. If I were paying for the ads, then I would be bothered by that.

Next, suppose you don't like your current screen saver and want some new ones. Maybe you want an ocean scene. So at Google you type in

"screen saver" ocean

and get back "about 961,000" results.

Doesn't something bother you about this?

And, if you were paying for the ads, then you want to get charged when the first screen shows 50 results when what the user is really looking for may be anywhere in those 961,000 and that result may have nothing to do with what you are selling?

Your mention of "network effect" is a clever strain. It is true that the more Web pages Google 'crawls', the better their search results will be. Similarly for the Google competitors with similar technology.

But, a more significant network effect would be that the more users a search site has the better the search results would be so that, then, the more users they would have, etc. That is closer to a 'natural monopoly'.

The main question is how to make such improvements. Yes, people have proceeded with intuitive and heuristic methods, 'clustering', speech recognition, image processing, 'data mining', Bayesian networks, and 'artificial intelligence', struggled with 'sparsity' and 'over-fitting', etc., and with such efforts your conclusions about Google should remain correct. But, maybe more can be done!

[sufiy]

I can not post my usual format now so you have to make some work, few notes:
- after last post on Daily GOOG slipped under MA50which is now became resistance;
- on Weekly GOOG developed SELL with MACD crossover;
- stock is just above support of previous tops of shoulders in FIRST TOP in Jan 2006 and Second Top in Triangle at 450.72;
- Point-and-Figure chart is pointing to Reversal with TP of 416, which will be only temporary resistance on its way back in my opinion.
http://sufiy.blogspot.com/2006/12/google-update-tenke-mining-chart-tnr.html

[Best regards]

Check this:

[gray williams]

(sigh)

Here's what we know: Internet ad spend of $12B in 2005 jumps 33% to +16B in 2006.

In Britain its growing at 40%, where it accounts for 14% of overall ad spending (US is half that). So, just catching up to Britain, the US internet ad spend (of which Google sees 50-70%) could double. And its not like Intl. emerging markets are sitting still.

Or, that Google's move to expand offline into traditional ad venues and non search related venues (e.g. placement) to offer more of an integrated, comprehensive, one-stop solution to the client will fall flat.

Who gives a hoot if they can't get more than 70% of flipping search. Its the wrong metric to follow. The right metrics are total ad spend trends (TAM), trends on the (ever increasing) subset Google addresses (SAM), and what percent of SAM Google is getting.

- Gray