Internet Outsider

The (Big) Problem For Hakia, Powerset, Mahalo, and Other Google-Killers

The "highlighter" feature that search-engine Hakia announced yesterday wasn't worth a press release, but it did get me to try the company's "semantic search" service, which is actually pretty cool.  As instructed, I asked Hakia three English-language questions:

Why did the stock market crash?
Where do I get good bagels in Brooklyn?
Who invented the Internet?

As promised, I got intelligent results for all (even the last one, which was a trick question).  For example, Hakia understood that, when I asked "why," I would be interested in results with the words "reason for"--and produced some relevant ones.  If I'm ever in the mood to ask an English language question--and I remember that Hakia exists while reaching for the keys--I might use the engine again.

But therein lies the problem--indeed, the problem for Hakia, Mahalo, Powerset, and the dozens of other companies that are pursuing next-generation search.  Contrary to the premise upon which most of these companies are based, I don't agree that current search sucks.  On the contrary, I almost always find satisfactory results immediately, conveniently, and with minimal frustration.  I also don't find myself wanting to ask the Internet English language questions all that often: It's usually easier to just type keywords.  The results (and display) could always be improved, of course, and maybe I'm always missing out on fantastic sites that have just the info I'm looking for, but ignorance is bliss.

On the questions I asked, Hakia certainly delivered nice results. But I'm used to using Google and Yahoo, and Google and Yahoo usually get the job done, and I almost never wonder whether I'm getting "the best possible results."  So unless Hakia, et al, focus on tight, defensible verticals--or sell their technology to Google/Yahoo/Microsoft--I don't think their future is promising. 

Don't believe me?  Check out Hakia's modest traffic over the past year. Or just ask the guys at IAC's Ask, who, despite being widely viewed as having the "best search on the web", despite massive advertising, and despite the brilliant Barry Diller, haven't budged off of 2% market share.

Calacanis's Mahalo Off to Solid Start

Jason Calacanis's new human-powered search engine, Mahalo, appears to be off to a solid start.  According to Jason, the site is currently serving about 50,000 pageviews a day (1mm a month).

Mahalo also recently launched a new "Greenhouse" program that addresses the primary business concern about the company--namely that the cost of hand-building SERPs will be so high that Mahalo will never survive.  The Greenhouse program allows the public to apply for part-time paid work building Mahalo search-results pages (SERPs).  According to Jason, Greenhouse received 800 applications in two weeks.  The company has hired 150 people as Part-Time-Guides (PTGs) so far and hopes to have 500 by year end. 

Greenhouse PTGs create SERPs based on the company's "Most Wanted" list, and Mahalo's full-time editors then accept or reject them. Mahalo is giving the first 100 PTGs to hit 100 accepted SERPs an iPhone. 

The Greenhouse program is currently producing 10-20 SERPs per day, at a cost to the company of approximately $10-$15 each. The company expects its PTGs to be producing 100 SERPs a day by the end of the year.

For most search queries, a human-edited SERP will be superior to one generated solely by an algorithm.  Here, Mahalo's ability to prioritize SERP-building is the key to success.  If the company had to compete with Google on speed or breadth, it would fail.  Assuming search requests follow standard distribution laws, however (e.g., 20% of terms account for 80% of searches), Mahalo ought to be able to invest its resources in building only the most popular and profitable SERPs, with links to Google for the rest. 

Assuming Revenue Per Search (RPS) of, say, $0.05 to $0.10, Mahalo would have to generate 100-300 queries per SERP to generate a positive gross margin.  It's not clear how long a shelf-life each individual SERP has (presumably minutes for some and years for others), but given the traffic the site is already generating, this doesn't seem a high hurdle for the company to meet.   

Search Share: Google Gains, Everyone Else Loses (Again)

Bob Peck of Bear Stearns offers a detailed analysis of Comscore's domestic search share numbers for April.  Search is by far the largest category of online advertising, and number of queries is the primary revenue driver.  So query share is crucial. 

Bob's full note is available at Searchblog.  Here are the key points:

• Google's share of US queries jumped another 140 basis points to nearly 50%, up 27% year over year.  This is a continued deceleration of the y/y growth rate, but it's still impressive--especially relative to the rest of the industry.

• Yahoo lost 70 basis points to 27% and grew only 6% year over year.  Yahoo is doing better than the other major players, but this ain't saying much.  It is important to note that Panama, even if wildly successful, won't help increase query share.

• MSN dropped 60 basis points to 10%.  Given how much time, effort, and money Microsoft has invested in search over the years, this is, in a word, pathetic. (But not surprising).  Importantly, the $6 billion Microsoft is spending on aQuantive won't help this trend.

• Ask Network was flat at about 5% and Ask.com was flat at a dismal 2%.  Search is not TV, and Ask's massive advertising push has had no effect on the site's market share.  There is no reason to expect this will ever change.

 

Click Fraud Getting Worse, Especially on Content Networks

Click Forensics, a Texas-based company that tracks click fraud using detailed campaign data from more than 3,500 marketers, reported that industry-wide click fraud increased modestly in Q1 to its highest level ever: about 15% of all clicks, versus 14% in Q4 2006.

More ominously, click fraud on "content networks"--the third-party advertising solutions that support an ecosystem of thousands of small content companies--increased a more significant 3 points, to 22%, from 19% in Q4.  This trend is dangerous for small content providers in addition to search engines.  A continuation of this trend will soon result in more than a quarter of all content-network clicks being considered fraudulent, a level that could begin to cut significantly into the revenue of smaller content providers.

Also significant: Fraud on high-priced keywords--those over $2 a click--rose to 22% from 21% in Q4, confirming the theory that higher priced keywords are more susceptible to fraud than average- and low-priced keywords.

From the release:

“It appears that click fraud perpetrators are becoming more sophisticated even as search providers step up their efforts to fight click fraud,” said Tom Cuthbert, president and CEO of Click Forensics, Inc. “Click fraud seems to be following a similar path as other online fraud schemes such as spam and phishing - the problem is growing as fraudsters fine tune their methods.”

UK Online Ads Pass Newspapers; U.S. Online Ad Spending to Triple?

According to IAB, online advertising spending in the UK in 2006 exceeded newspaper advertising spending.  This amazing fact received less attention in the U.S. than it should have.

One of the big mysteries of the past few years, for those who follow U.S. media, is how and why U.S. newspapers have been able to maintain as much share of the advertising market as they have.  Yes, business sucks for newspapers, but it doesn't suck as much as it should when one considers that the vast majority of the product is printed on wood pulp, shipped around the country in gas-guzzling trucks, and then tossed into recycling bins before it is even glanced at. 

According to Morgan Stanley figures for 2005, U.S. newspapers still generate about $49 billion in advertising revenue (including classifieds).  This compares to about $16 billion last year for Internet, $45 billion for broadcast television, and another $19 billion for cable TV.

Unless there is something structurally different about the UK market--please weigh in on this if you know--the UK statistic suggests that 1) the US online advertising market still has massive growth ahead of it, and 2) U.S. newspapers have not yet begun to feel the pain. 

Two scenarios jump to mind:  1) Online advertising triples over the next 5-10 years, to $50 billion, and/or 2) Online advertising doubles and newspapers advertising gets cut in half.  And then, of course, there's 3) Online advertising triples AND newspaper advertising gets cut in half.

UPDATE: Paul Durham weighs in:

There is something very different about the UK newspaper market - the number and importance of national newspapers. The IAB data shows internet advertising overtaking NATIONAL newspaper advertising. Regional newspapers is a separate category, and took £2.8 billion of ad revenue. So the internet still lags well behind total newspaper advertising in the UK.

Posted by: Paul Durman | April 03, 2007 at 11:15 AM

So, ignore some of what I said above.

Attention Web 2.0 Start-Ups: Party May Be Ending

Who says Wall Street firms are always bullish?  According to Reuters, Merrill Lynch published a report today suggesting that housing market woes could drag the economy into a recession and that, if it does, investors can expect a drop in the S&P 500 of at least 30% from the peak.  Even if there is no recession, and the market just does a head-fake, we should expect a drop of about 20%.

How will a public-market stumble affect Web 2.0 start-ups?  The same way the market crash in the fall of 2000 did, albeit to a lesser extent:

• Money will get harder to raise.  (Because VCs will be feeling pressure from their clients, and exit valuations will be lower).

• Financing and exit valuations will be lower.  Because the stocks of acquirers and comparably public-market companies will be lower.

• Investors will get impatient for start-ups to develop businesses instead of "products" and "communities."

• The growth rate of online advertising will slow dramatically.  In tough times, advertising is one of the first expense lines to get cut (by big businesses and small).  What's more, some start-ups that are currently buying advertising will cut back or cease to exist. 

In short, being a Web 2.0 entrepreneur or employee may soon get more difficult and less fun.  Hit the bids while you can!

UPDATE

Oh, well.  Merrill Lynch's economist David Rosenberg just blasted Bloomberg for mischaracterizing his report and said he is merely suggesting that we could have a "growth recession," meaning that the economy's growth rate could slow, and this only if the Fed doesn't cut interest rates.  So that's still bullish.  For what it's worth, I am calling for a real recession, in which the economy shrinks and the stock market tanks, regardless of what the Fed does. 

Privacy Summary: Consumers Don't Care--If You Tell Them

The Open Data morning session ended with a general consensus that consumers would be surprised and outraged by the amount of online data that is being collected, stored, and sold--and that sooner or later some smart journalist will "discover" this secret and trigger a consumer firestorm.

Most attendees agreed that consumers are happy to trade privacy for convenience and that, ultimately, if they like the product, they'll say "whatever" about the data collection.  Most people also agreed, however, that to get to "whatever," consumers have to know that everything they do is tracked, analyzed, and sold--and that the last time anyone read a User License Agreement was 1972.  So the industry has to figure out some way to get the story to consumers before some journalist does.  Because the latter will lead to Congressional hearings, new bureaucracy, and higher legal, compliance, and PR bills...  And who wants that?

You Own Your Attention! And Google's Cashing In On It...

At the Open Data 2007 conference in New York.  Will post some tidbits.

Right now, AttentionTrust.org CEO Seth Goldstein is reminding everyone that we Internet users are what we look at (click on) and that a host of companies are storing that "attention" (and cashing in on it) without our permission. 

Seth believes that we own our attention.  And that we should be able to control how it is used.  And that companies shouldn't be able to store it or use it without our permission.  (As a horror story, Seth invokes the "anonymous" AOL searcher who conducted dozens of searches about her dog's urinary problems--and was quickly outed by a New York Times reporter.)

In addition to being a successful entrepreneur, Seth's an intellectual, and this conference is about brainstorming, so Seth turned over the floor without presuming to solve the problem.  But he turned it over to the guy who stored (and released) all that search data at AOL: Abdur Chowdhury.

Asked immediately what he would have done differently if he had it to do all over again, Mr. Chowdhury from AOL said he...

• Would have moved more cautiously
• Would have established licensing agreements so the data could only be used for research.

The silver lining, he says, is that the incident raised awareness of the issue--and spawned conferences like this.  Esther Dyson challenges this: Do people really know how much data is being collected?  No, says Mr. Chowdhury.  Then why release it, someone else asks?  The goal, Mr. Chowdhury says, is to help people.  Did it help people?  An executive from Root Markets says he immediately tried to use the AOL data to spot patterns in mortgage searches, but that there weren't many patterns, so the exercise "quickly descended into voyeurism."

Were there any benefits from the release?  Mr. Chowdhury suggests that awareness is good (because we can start thinking about how to solve the privacy problem) and that many companies are now exploring the possibility of licensing data from AOL, Yahoo, etc.  Skeptical protests and grumbles: Everyone's giving up their privacy!  Everyone's being tracked!  Mr. Chowdhury on his heels, but Seth gets up and reminds everyone that nothing is black and white.  Esther says the key is selectivity, awareness, and control.  We as an industry have to do better!  Mr. Chowdhury leaves to applause.

Yahoo-AT&T Renegotiation = Capitalism at Work

The WSJ reports that Yahoo and AT&T are renegotiating their broadband access partnership on terms far more favorable to AT&T.  According to the article, this is a result of three factors:

1. Yahoo's reduced stature and buzz (thanks to Google)
2. A reversal in the market dynamic in which search engines are now paying for carriage (thanks to Google).
3. AT&T's newfound prowess in broadband access (7 million subs).

No. 2, a reversal in who's-paying-who, is a profound change, one ushered in by Google's deal with Dell in which it agreed to pay $1 billion to be preloaded on Dell PCs.  Paid search is so profitable that Google can afford such deals, but the changing dynamic illustrates that search, like other businesses, is subject to the laws of capitalism (attractive returns draw new competition which reduces returns).

Google and Yahoo won't soon be forced to hand over most of their profits for carriage--most of their traffic, presumably, goes direct, and users usually demonstrate significant loyalty/habits about who they search with.  Like the massive increases in CAPEX at both companies, however, increased distribution and CAPEX costs will probably continue to weigh on both companies' bottom lines.

In Yahoo's case, according to the WSJ, a new AT&T deal could significantly reduce the $200-$250 million in revenue the company earns from the deal (approx 5% of overall revenue).  This revenue is probably at least as profitable as the rest of Yahoo's business, so it might feel an even greater impact on the bottom line.   

Yahoo! Fizzles; Implications for Google, et al.

The good news, such as it was, was that Yahoo! managed to stretch and claw its way to its numbers.  The bad news was that it did this by slowing hiring and postponing advertising spending.  Why is this bad news?  Because when times get tough, advertising and hiring are usually the first expenses to go (suggesting that times are getting tough), and, more importantly, because Yahoo! lives on advertising spending. 

And then there was the stoppage in registered user growth (flat q-to-q) and the postponement of the new search-ad system.  Of these two downers, the ad-system is, in one sense, the less worrisome, as the delay should (let us pray) be temporary.  But one does begin to wonder whether Yahoo! will ever get its act together in this regard.

So what does this mean for Google?  Unfortunately, for the intermediate-term, it's mostly bad news. 

Yes, on Thursday, Google's relative performance should once again look (and be) amazing.  Yes, Google should gain some more share.  Yes, Google will once again demonstrate that what it does is far more difficult than it looks and that its leadership position is defensible.  Yes, Google will have the option of using its strong currency and cash flow to snap up companies, invest in R&D, and explore strategies that Yahoo can no longer afford (a long-term advantage).  But over the intermediate-term, the Yahoo! news is more ominous. 

A significant chunk of Google's growth is coming from market-share gains, and Google already has more than 50% of the world search market.  If Yahoo! and Microsoft continue to sputter (likely), Google will probably coast to 70%-80% of the world search market over the next year or two.  After that, however, there won't be much more share to gain.

Also, assuming any of Yahoo!'s issues are market-related--and, more broadly, assuming they are indicative of a slowdown in search or ad-spending--Google will not be able to dodge this bullet forever.  Given its dominance, it will survive unscathed for a quarter or two longer than most, but, eventually, in the event of a broader slowdown, it will feel the pain.