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Why Google Inc Is More Concerned About Amazon Than Microsoft

By Evan Niu, CFA - Oct 14, 2014 at 8:31PM

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Most people probably think Google's biggest competitive threat is other search engines. They're wrong: it's Amazon.

Like Microsoft (MSFT 3.42%) before it, Google (GOOG 5.20%)(GOOGL 5.11%) is in hot regulatory water with the European Commission. After agreeing to a settlement in February, European antitrust regulators made the surprise move of reopening the investigation last month following continued pushback from Google's competitors.

Google Chairman Eric Schmidt spoke in Berlin yesterday, discussing the company's competition. While Schmidt wasn't addressing regulators directly, he knows they're listening. Interestingly, Schmidt considers Amazon (AMZN 3.58%) a bigger threat to its search business than Microsoft, despite the fact that Microsoft's Bing search engine continues to gain market share in the U.S. (Microsoft estimated its U.S. search share at 19.2% last quarter.)

Here's why.

The root of the question
While Amazon doesn't operate an actual search engine like Microsoft or Yahoo!, Schmidt is considering the final destination. Specifically, when a user is interested in buying something, they're more likely to head straight to Amazon to shop around.

Schmidt says that a third of users interesting in buying something will start on Amazon, which is more than twice the number of people that go to Google to start shopping. According to Schmidt:

Many people think our main competition is Bing or Yahoo. But, really, our biggest search competitor is Amazon. People don't think of Amazon as search, but if you are looking for something to buy, you are more often than not looking for it on Amazon. They are obviously more focused on the commerce side of the equation, but, at their roots, they are answering users' questions and searches, just as we are.

Of course, this is just one aspect of Internet search, but also likely one of Google's most effective and lucrative types of ads. The whole reason why search ads are so effective in the first place is because you're telling Google exactly what you're looking for, and it can pitch relevant ads accordingly.

There are other areas, such as travel information or local restaurant recommendations, that are also important to Google's business where it faces competition, but it's still interesting for Schmidt to characterize Amazon as the company's "biggest search competitor."

This doesn't appear to be Google downplaying the threat that Microsoft represents, like Microsoft has downplayed Google's threat to Office in the past. Rather, Schmidt is providing a broader frame of reference beyond explicit search queries. The traffic that Schmidt is concerned about isn't ever going to a search engine in the first place, and as such isn't reflected in search market share estimates.

Just in the nick of time
Coinciding with Schmidt's speech, Google just announced a new Amazon Prime competitor. The search giant launched Google Shopping Express early last year as a free trial, a service that offers same-day delivery from local stores. Google has added a handful of cities to the mix since.

Now, Google has rebranded it as simply Google Express, added even more cities and stores, and introduced a $95 annual membership (or $10 per month). That's comparable to Amazon's $99 Prime membership fee, although Prime includes other benefits, such as Prime Music, Instant Video, and a Kindle Library. While Google Express is unlikely to present a viable threat to Prime, the move is symbolic of the competition that Schmidt is referring to.

The thing is that Google can probably never supplant Amazon as the go-to e-commerce site, much like Amazon can't displace Google as the dominant search engine in the world. Neither company is going anywhere anytime soon.

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Alphabet Inc. Stock Quote
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Microsoft Corporation Stock Quote
Microsoft Corporation
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Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
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Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
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