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- rfgdxm/Robert F. Golaszewski
July 16, 2003, 3:37 pm
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Rising Clout of Google Prompts
Rush by Internet Rivals to Adapt
As More Users Go There First, Its Wider Power
On the Web Threatens Microsoft and Yahoo
By MYLENE MANGALINDAN, NICK WINGFIELD and ROBERT A. GUTH
Staff Reporters of THE WALL STREET JOURNAL
Google, a clever online search service with a silly name, has already
transformed the way people use the Internet. Now it's shaking up the
strategies of companies all over the Web business, from Microsoft Corp.
to Yahoo Inc.
To its rivals, Google is gaining a strategic position that could give it
too much influence over Internet commerce. Its dominance of online
searches means it can reach Web users from the moment they start
browsing, and steer them to anyone with a product to sell or advertise.
Of roughly four billion Internet searches conducted in May, 32% were
conducted directly through Google, compared with 25% for Yahoo and 19%
from AOL Time Warner Inc., according to comScore Networks, an Internet
Google long ago realized something that is only dawning on many other
companies: Searching isn't a Web sideline -- it's the Web's strategic
heart. While Amazon and other sites try to position themselves as the
central place for online shopping, thousands of shoppers are simply
Googling for sandals or curtains and whatever else they want.
This week Yahoo fired a loud shot back at Google by agreeing to buy
Overture Services Inc., a company that pioneered the concept of letting
advertisers bid for higher placement in the pages of Web-search results.
Google has developed a similar service, though it is better known for
search results that aren't influenced by advertising.
Yahoo agreed to pay $1.63 billion in cash and stock for Overture, months
after buying another search-technology specialist, Inktomi, for $235
million. The moves will let Yahoo reduce its dependence on Google,
currently the primary search engine for Yahoo searches.
Microsoft is also waking up to the power of Google and racing to protect
its turf. The Yahoo deal has ripples for Microsoft, since the software
giant has been a big Overture customer. Yahoo says it will continue
serving other Overture customers, and Microsoft says the deal won't
immediately change its relationship with Overture.
But early this year Microsoft's MSN online group launched a project to
develop its own search engine, with the goal of using search to increase
MSN subscribers and advertisers. That could be a big threat to Google,
given Microsoft's history of patiently eyeing new markets, then using
its grip on PC software to dominate them.
"Each of these guys is trying to own a bigger and bigger part of the
start positions for e-commerce, that's the battle," says Venky
Harinarayan, a venture capitalist who once sold a shopping search-engine
company to Amazon. "Anyone who gets between you and the consumer can
control the start point."
What worries other companies is that Google has wedged itself into that
"start" position and could prove very hard to dislodge. Google ranks the
Web sites users see after searches, based on how many other Web sites
provide links to the sites. It's a novel concept that delivers fast and
relevant results, though Google has to be vigilant against attempts to
game its system.
Google increasingly collects fees for delivering short text ads -- with
links to the advertisers' Web sites -- that appear when users search for
certain words or terms. Google won't let advertisers affect how it lists
search results, though it does give some ads choice real estate above
the results list.
The system has proved a good way for many online businesses to draw
customers to their sites. It also has become a big business. Google,
which doesn't disclose its finances, is expected to have almost $1
billion in revenue this year and is profitable, according to people
familiar with the matter. There's been much speculation about an initial
public offering by Google, but it says it hasn't any immediate plans for
Some industry executives think its technological lead is precarious,
vulnerable to moves into its turf by the likes of Microsoft and Yahoo.
Dominant market positions in technology tend to endure only if customers
face a high cost of switching products, as with Microsoft's operating
systems and Intel Corp.'s microprocessor chips. But Web users, while
they do tend to stay with favorites, can switch about as easily as
changing channels on television.
Google declined to comment on its growing clout or what its rivals are
up to. People at the company have privately acknowledged the competition
from other Internet companies, including Microsoft, Yahoo and eBay.
Some rivals, particularly Yahoo, can blame themselves for helping Google
take off. Three years ago, Yahoo picked Google's search engine to
provide search results on Yahoo's network of Web sites, replacing a
service by Inktomi.
Yahoo had started by providing Internet searchers with information from
its own directory, functioning like a giant Yellow Pages to the Internet
organized largely by human editors. If this couldn't provide the
information, Yahoo would use Google's search technology. Increasingly,
though, users went directly to Google's Web site for results.
It was a classic case of underestimating a high-tech jewel and giving it
away, similar to when International Business Machines Corp. gave the
business of supplying PC operating systems to a little-known company
called Microsoft. Although IBM thought it was just subcontracting a part
of the PC, Microsoft's Bill Gates saw that operating systems would
someday control the lion's share of profits and strategic influence in
Executives at Yahoo gradually realized they were losing their leadership
in Internet search. The Google threat to other Yahoo businesses didn't
sink in until last year, when Google unveiled a Web site that
automatically collected summaries and headlines of top news stories from
the Web and displayed them.
Google News shook Yahoo. On the day it appeared, Yahoo Chief Operating
Officer Dan Rosensweig grilled employees about what it meant for Yahoo,
says someone familiar with the matter. Worried Yahoo executives began
calling industry contacts to see if they thought Google News signified a
threat, say two people who received calls.
In contrast to the editorial team of up to 16 who supported Yahoo News,
Google had built its news site with three people. It was one employee's
personal project, built over a weekend on a whim, according to the
company. After a test version wowed employees, the brass set up a team
to develop it for the public.
Last fall, Yahoo restructured the deal with Google to let Yahoo have
partnerships with other companies. And in a step many believe will lead
to the end of its ties to Google, Yahoo bought Inktomi.
Acquiring Overture could give Yahoo another lift. Overture's paid
listing service is highly profitable. Overture has been on a buying
spree of its own, snapping up search pioneer AltaVista and the Web
search unit of Norway-based Fast Search and Transfer.
Though he declined to comment directly about the company's competition
with Google, Yahoo Chief Executive Terry Semel said, "Simply put, search
is an important aspect of what we do."
As for Microsoft, it for years largely ignored Google and the search
business, offloading the search function on its growing MSN online
service to Overture, Inktomi and LookSmart. But in a broad study of
Internet usage by the MSN group over the past year, Microsoft discovered
that search was just behind e-mail and instant messaging as the
most-performed task on the Internet.
Google was also becoming a central point connecting Internet users with
online merchants and services, a role that Microsoft wanted MSN to fill.
Microsoft saw that Google and others were proving that search could draw
huge amounts of traffic to a Web site, which in turn could attract
advertisers, says Lisa Gurry, group product manager at the MSN unit. At
a February meeting of the MSN group last in Arizona, managers hashed out
"every range of option" for building a "complete search" service for
MSN, said Yusuf Mehdi, a Microsoft vice president, in an interview
earlier this year.
Soon after, Microsoft decided to kick off its own search-engine
development, getting final budget approval for the project in June.
Around then, MSN launched an Internet "crawler" that collects Web-site
addresses that will be used with Microsoft's future search engine. Ms.
Gurry calls the search-engine development a long-term project and won't
say when the service will begin.
Mr. Mehdi downplayed any looming head-to-head competition with Google.
He said Microsoft saw a strong search engine as one of a key set of
features essential for MSN's long-term growth. One possible use of
search: to drive growth of subscription services. As Ms. Gurry explains,
a search on "Madonna," for instance, could direct the Internet user to a
Microsoft online music service.
But search is also shaping up to be a central piece of Microsoft's next
version of Windows, code-named Longhorn. Slated to be available on PCs
from 2005, Longhorn is expected to enable PC users to search for
information across all of their PC applications, such as Word and
Outlook, as well as the Internet. A search engine built into Longhorn
could pose a strong challenge to Google. Microsoft won't comment on
plans for Longhorn.
AOL Time Warner's America Online has also helped Google become big.
After two years of using Overture's paid search results, AOL switched to
Google's service for its U.S. customers 14 months ago. AOL says the
relationship has paid off in greater customer satisfaction with search
results and a one-third rise in search traffic.
Certainly, AOL has treated Google well. Google is the only outside brand
name AOL displays on its Welcome Screen, And unlike Microsoft, AOL
hasn't moved to develop its own search technology.
With Yahoo and Overture linking up, AOL may be more dependent on its
relationship with Google. In a "multi-polar" world with a Yahoo camp, a
Microsoft camp and a Google camp, says AOL spokesman John Buckley, "For
America Online to be aligned in the Google camp is a very good place to
But analyst Youssef Squali at First Albany Corp. sees Google's growing
importance as a potential threat to AOL. The reason: As search revenues
become a core part of AOL's business, AOL won't be able to afford to
have those revenues controlled by a third party. At some point, he says,
"AOL will have to make a move."
According to someone familiar with the matter, America Online chief
Jonathan Miller has mused about buying Google but hasn't seriously
considered it because AOL couldn't afford it. At the same time, AOL is
loath to antagonize Google by working with a competitor, given that
revenue from Google is about the only bright spot in America Online's ad
Meanwhile, Google is starting to move onto the turf of online shopping
companies such as Amazon and eBay Inc. Google has already begun testing
a more formal online shopping site. Late last year, it created a Web
site called Froogle, which lets users search for books, apparel and
virtually any other product for sale online. Google's software
automatically identifies Web pages that offer merchandise for sale, and
Froogle searches the pages when users enter the items they want to find.
The ex-CEO of PayPal, an electronic payment service that was acquired by
eBay, says Google and eBay are now competing for many of the same
customers. "They're not totally head-on competing, but there are a lot
of areas where there is overlap," says the executive, Peter Thiel, now
managing member of investment firm Clarium Capital. He says competition
from Google is "probably the main thing that's kept a constraint on eBay
raising prices." An eBay spokesman says Google hasn't affected the
company's ability to raise prices, which it has done several times in
Amazon, too, could see trouble from Google. Best known for selling books
and other items, Amazon is becoming a virtual marketplace for goods sold
by other merchants -- from used CDs listed by individuals to jeans from
Gap Inc. Analysts believe this is one of the most profitable areas of
Amazon's business. Google, as a central starting place for shopping,
could cut into Amazon's traffic.
Like eBay, Amazon has chosen to work with Google. Amazon recently began
letting users do Google searches directly through the Amazon site. If
looking for something Amazon doesn't sell, such as concert tickets,
people can click on links provided by Google to other merchants. So "at
this point we see Google as a very valuable partner," an Amazon
But Amazon may be hedging its bets. It has hired a number of specialists
in developing sophisticated calculations, or algorithms, used in search
software. Among them is Udi Manber, a former Yahoo executive and
professor from the University of Arizona, who joined Amazon last year as
"chief algorithms officer."
Write to Mylene Mangalindan at email@example.com, Nick
Wingfield at firstname.lastname@example.org, and Robert A. Guth at
Updated July 16, 2003
Re: WSJ: "Rising Clout of Google Prompts Rush by Internet Rivals to Adapt"
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