Google Will Eat You Alive

Google (Nasdaq: GOOG  ) remained at the top of the search engine heap last month, according to Nielsen Online, serving the majority of the country's nearly 8 billion search queries. That isn't necessarily "stop the presses" kind of news. We all know that Big G is the top dog. What is surprising, though, is how quickly it is gaining market share, particularly at the expense of Yahoo! (Nasdaq: YHOO  ) and Microsoft (Nasdaq: MSFT  ) .

In a nutshell, as the chart below shows, Google is pulling away from its three nearest competitors. IAC's (Nasdaq: IACI  ) Ask.com and Comcast (Nasdaq: CMCSA  ) -- yes, even Comcast -- have grown nicely over the past year, but they don't pose much of a threat to Google, or even the three fading engines ranked above them in the near-term.

July

% Search

YOY Growth

Google

60.2%

16%

Yahoo!

17.4%

(11%)

MSN/Live

11.9%

(10%)

AOL Search

4.6%

(9%)

Ask.com

2%

13%

Comcast

0.6%

22%

Source: Nielsen Online

Google's secret sauce
Is Google that adept or is it just lucky? It's probably a little bit of both. Listen to the conference calls of any of its search rivals, and they will be quick to single out their technological advances. Ask.com even wrapped an entire marketing campaign around its allegedly superior algorithms.

It doesn't seem to matter. Google works. You don't need to worry about better mousetraps if your mousetrap still catches the rodent. Besides, since so much of this battle is subjective, we may never have a universal victor in terms of quality. Google owns the quantity game and that's what counts.

If that last comment sounded gluttonous, as if Google is the Golden Corral of search engines, it probably isn't far from the mark. Google's search engine is convenient, accessible, and never far away. That is by design.

If you're looking for Google's secret sauce, it actually rests in its success in selling ads against its queries. As the runaway champ in paid search, Google attracts the thickest pool of sponsors. That not only gives Google the biggest incentives to rule this space, but it also encourages third-party publishers to promote Google by joining its AdSense program, where viral magic populates the Web with "Ads by Google" marketing blocks and Google search boxes.

If the search engine industry was a NASCAR race, nearly every car would be draped in glossy Google bodywork.

The race for second place
With Yahoo! and Microsoft fading, it's starting to become clear that Microhoo would have only delayed the inevitable. Gradual irrelevance is the name of the game there. When even a Google partner like AOL is falling further behind, it proves that keeping your friends close and your Google closer is no elixir to obsolescence.

Don't read too much into the baby steps at Ask.com and Comcast. If they continue to improve, Google will smoke 'em too.

The only material upside to Google's competitors is that the company's pie-chomping growth will eventually limit its non-organic growth. For players with fat pockets like Yahoo! and particular Microsoft and Comcast, now is the time to work some consolidation magic, because Google will be hard-pressed to clear regulatory hurdles on any potential acquisition in the future.

"Shop until you drop" isn't much of a growth strategy, but it'll do in a pinch. A lot of beefy companies like CNET Networks and aQuantive have been snapped up over the past year, and we're really just counting the days until the search portal heavies buy up companies like Marchex (Nasdaq: MCHX  ) and ValueClick (Nasdaq: VCLK  ) .

Google keeps getting bigger, so competition has little choice but to settle for niches as fringe players or bulk up.

Come to think of it, is it too late for Microhoo?

Searching for more? Check out these recent headlines:

Microsoft is an Inside Value recommendation. Google is a Rule Breakers newsletter pick. Try sampling any or all of the newsletters with a free 30-day trial subscription.

Longtime Fool contributor Rick Munarriz is a huge fan of Google and it would be his homepage if it weren't for Fool.com taking up that piece of real estate. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 20, 2008, at 12:23 PM, pondee619 wrote:

    I don't get Google. Someone please help me understand.

    I use Google for almost all of my online searching. So what? I pay nothing for the service, rarely, if ever, look at those ads on the right side of my screen, and scroll down through the various "hits" looking for something that approaches my request; clicking only on those that appear to fit my needs. How does this give Google money? Are they just the electronic yellow pages? I Google my name and find some stuff on me. I didn't pay anything for it to be there.

    It can't be the quality of the ads, full page, half page, quarter page ala yellow pages. Is it just sheer volumn? A company will pay Google for hits whether it brings business or not? How does Google profit if my search is just for information: How many rooms in the Vatican?

    I don't get Google. As a result, I don't have Google Refused to buy it at its IPO @ about $100. Refused to buy it along the way. How does it make money? Please help.

  • Report this Comment On August 20, 2008, at 4:23 PM, dividendgrowth wrote:

    Well, GOOG's advertising mechanism is many times more efficient for advertisers than stuffing junk mails all over the country.

  • Report this Comment On August 20, 2008, at 5:28 PM, jackdaniels08 wrote:

    I LOVE using Google. It is so automatic for me, and Google is getting better and better all the time. I love the Google Experience. I wish I had a device where I could Google where ever I am at anytime because I ALWAYS have questions.

  • Report this Comment On August 21, 2008, at 6:23 PM, 4044fella wrote:

    Rick,

    Great commentary and information on Google. They're far and away the leader and when you think of it, the internet advertising market is still on the ground floor.

    We've done some work around their organic growth which you referenced which I wanted to share as it might be of interest. (warning: highly quantitative so probably most interesting to the geekiest of Fools)

    We’ve benchmarked and analyzed the entire S&P 500 (of which Google is a member) on organic revenue generation and efficiency over the period from 2003-2007, and our #s reveal a picture which is still is very positive.

    We would agree with a recent Citi analysis that the organic revenue as a % of total revenue for Google as well as a % of total revenue growth is declining. As compared to Yahoo (the closest comparable to Google if there is one), we have seen that Google is destroying their peer from an organic revenue perspective.Our analysis goes beyond just organic revenue and looks at the efficiency of generating this organic growth, e.g., how much are companies like Google, Yahoo, etc spending to achieve organic revenue growth. We call this efficiency ratio the Organic Growth Multiplier (OGM). The logic behind the OGM is that if one company can spend $1 to get $3 of revenue and another can spend $1 to get $5 of revenue, the latter company is healthier and has more momentum in its business and thus more valuable.

    When we look at the OGM of Google versus Yahoo and versus the larger S&P500 tech financials category, the picture is actually quite pretty for Google. They’re tops as it relates to OGM which means a dollar of investment into their core business generates more revenue than the average tech sector company. They also outshine Yahoo on this count as well.

    The indexed OGM for Yahoo and Google over the period from 2003-2007 are 50.9 and 312.84, respectively. Without getting into the quantitative models that underlie this, the point is that Google’s organic revenue efficiency is far superior to Yahoo.

    Most importantly from all this work is that we’ve seen that higher OGM and total shareholder return are positively correlated. So having the ability to generate organic growth efficiently is a good indicator of shareholder returns.

    While the assertion that their organic revenue is declining does remain true, the news is not as dire as folks might want to believe. Yes, if they can turn one of their acquisitions into a money maker, this will obviously supplement some of the organic revenue deceleration that might be evident in their historical core adsense business, but on the whole Google is still a star when it comes to organic revenue generation and efficiency. The fact that Citi retains its buy rating despite the slowing organic picture is testament to this.

    A bit on the methodology.

    There are some notable differences from the Citi analysis which I refer to which despite the similar conclusions do make our analysis more robust.

    1. We’ve looked at a more extensive time period (2003-2007)

    2. We strip out market growth for each company. In essence, if the market is growing at 10% and your company grows at 10%, we don’t give you credit for this. This is rising tide growth and is not due to management’s actions and investments in the core business. Organic revenue, therefore, in our models is only the growth we can attribute to management’s prowess (or lack thereof).

    3. In our Organic Growth Multiplier, we also look at the efficiency of generating organic revenue by determining how much is spent by each company to achieve its organic revenue. This gives a truer sense for the efficiency of the company’s organic revenue capabilities.

    Regards,

    Anand Sanwal

    www.brilliont.com

    Investile Dysfunction blog

    www.brilliont.com/blogs/id

  • Report this Comment On August 21, 2008, at 11:00 PM, jaypaul71 wrote:

    What attracts users to Google?

    Simplicity! A minimal home page that loads rapidly allows users to rapidly start a search. An uncluttered results page makes finding the answer you want easier. In a hectic world simplicity makes life easier.

    Openness! Google's open API allows outside developers extend Google products thus making them more useful to everyone.

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