The alliance agai t Google
Aug 10th 2006 | SAN FRANCISCO
From The Economist print edition
What today's internet firms can learn from 19th-century history
PRINCE KLEME VON METTERNICH, foreign minister of the Austrian Empire during the Napoleonic era and its aftermath, would have no trouble recognising Google. To him, the world's most popular web-search engine would closely resemble the Napoleonic France that in his youth humiliated Austria and Europe's other powers. Its rivals—Yahoo!, the largest of the traditional web gateways, eBay, the biggest online auction and trading site, and Microsoft, a software empire that ow M , a struggling web portal—would look a lot like Ru ia, Pru ia, and Austria. Metternich re onded by forging an alliance among those three monarchies to create a “balance of power” agai t France. Google's enemies, he might say, ought now to do the same thing.
Google a ounced two new conquests on August 7th. It struck a deal with Viacom, an “old” media firm, under which it will syndicate video cli from Viacom brands such as MTV and Nickelodeon to other we ites, and integrate advertisements into them. This makes Google the clear leader in the fledgling but promising market for web-video advertising. It also a ounced a deal with News Corporation, another media giant, under which it will provide all the search and text-advertising technology on News Corporation's we ites, including My ace, an enormously popular social-networking site.
These are hard blows for Yahoo! and M , which had also been negotiating with News Corporation. Both firms have been losing market share in web search to Google over the past year—Google now has half the market. They have also fallen further behind in their advertising technologies and networks, so that both make le money than Google does from the same number of searches. Safa Rashtchy, an analyst at Piper Jaffray, a securities firm, estimates that for every advertising dollar that Google makes on a search query, Yahoo! makes only 60-70 cents. Last month Yahoo! said that a new advertising algorithm that it had designed to close the gap in profitability will be delayed, and its share price fell by 22%, its biggest-ever one-day drop.
M is further behind Google than Yahoo! in search, and its parent, Microsoft, faces an even more fundamental threat from the expa ionist new power. Many of Google's new ventures beyond web search enable users to do things free of charge through their web browsers that they now do using Microsoft software on their personal computers. Google offers a rudimentary but free online word proce or and readsheet, for i tance.
The smaller eBay, on the other hand, might in one se e claim Google as an ally. Google's search results send a lot of traffic to eBay's auction site, and eBay is one of the biggest advertisers on Google's network. But the relatio hip is imbalanced. An influential recent study from Berkeley's Haas School of Busine estimated that about 12% of eBay's revenues come indirectly from Google, whereas Google gets only 3% of its revenues from eBay. Worst of all for eBay, Google is starting to undercut its core busine . Sellers are setting up their own we ites and buying text advertisements from Google, and buyers are using its search rather than eBay to co ect with sellers directly. As a result, “eBay would be wise to strike a deep partnership with Yahoo! or Microsoft in order to regain a balance of power in the industry,” said the study's authors, Julien Decot and Steve Lee, sounding like diplomats at the Congre of Vie a in 1814.
The alliances are already being struck. Last year Yahoo! and Microsoft a ounced that they would co ect their i tant-me aging systems—both of which are much more popular than Google's alternative—and in July they said that they would extend this co-operation to “voice chat” (formerly known as “calling”). In May, Yahoo! and eBay struck an alliance in which eBay will use technology from Yahoo! to place advertisements on its auction site. On the other side of the bargain, Yahoo! will use PayPal, eBay's online payment mechanism, for tra actio from Yahoo!'s pages. (Google recently launched a rival payment system of its own.)
The strongest alliance, of course, would be a merger or takeover. M and Yahoo! both wanted to buy some or all of AOL, a big, troubled internet-acce company owned by Time Warner, a media conglomerate. But Google pre-empted its rivals last winter and bought a defe ive stake in AOL. It still has its search and advertising technology stationed on AOL's site. Google may also make its i tant-me aging service interoperable with AOL's, the most popular in the world.
