The latest search numbers were recently released and it appears that for the month of August once again Microsoft and Yahoo lost market share to Google. What’s worse is that not only are they losing market share in a growing market, but they are actually losing the number of raw searches done on their properties.
It’s one thing for Yahoo and Microsoft to claim that although Google is growing at a faster rate, the overall search market is growing and their search volume has actually been increasing (which has been a case in the past). It is a whole other issue to have to proclaim that not only are they losing market share in an expanding market, but the number of searches being done on their sites is decreasing as well.
Looking at the latest data from Compete, which aggregates all of Microsoft’s search properties (Live, MSN, etc); the picture looks bad for both Microsoft and Yahoo.
At the end of the day, the numbers and results do not lie. With Microsoft and Yahoo putting a lot of spin on their search stories of late, the bottom line remains that neither has a compelling enough product to stop Google.
For Yahoo, they’ve been talking up their new ad platform called APEX, which focuses on content and display ads. While APEX actually has very little to do with search, this may be the right direction for Yahoo. They are still the leading content site on the web and display ads are something they can compete and win in. Google has traditionally had a hard time winning with display ads, and the DoubleClick deal has yet to pay off. Google does not allow display ads on Google.com and publishers have consistently found display ads from Yahoo and other ad networks to be better and more profitable than similar offerings by Google Adsense.
If Yahoo’s recent actions are any indication, then they are slowly giving up on Cost Per Click (CPC) ads and going to let Google monetize text ads on Yahoo search properties. If the Department of Justice were not in the way, I could imagine Yahoo letting Google power all of its search technology as well as search ads. That would enable Yahoo’s Jerry Yang to instantly remove the huge overhead of a search organization, and make more money via Google powering its search ads. In addition, it would give Yahoo the time, capital, and manpower needed to maintain its lead as the number one content portal and content ad network on the web. Furthermore, it would give Yahoo the resources needed to take its portal to the next level by integrating all of Yahoo’s various web properties into a cohesive and unified consumer experience. Realistically, Yahoo can remain successful without search. There is enough demand for content and content ads in the world that Yahoo could thrive by just focusing on its portal and letting Google take care of the rest. Jerry Yang could do shareholders well by saying that Yahoo will rule the world of content, media and display ads and let Google tackle search technology and text ads.
For Microsoft, its focus of late has been touting their Cash Back program and natural language processing via the PowerSet acquisition. Neither focus has resulted in any significant change, as Microsoft search properties actually did 40 million less searches in the month of August than in July (Google had nearly 100 million more searches over the same period). If I were Steve Ballmer, this would make me flip and throw a chair at my search team. Unlike Yahoo, Microsoft does not have the luxury of handing over their search to Google. Maybe Ballmer should stop saying "I am a PC" and start saying "I am going to learn the Internet and I love Search."
Without search, Microsoft does not have a platform from which to win the web. It’s ad network, which is still smaller in comparison to Google and Yahoo, cannot afford to keep losing search share, as fewer and fewer advertisers will consider going to Microsoft AdCenter. A Microsoft executive once told me how worried he was at Live Search share going below 10%. If it dropped to that point, he figured a drove of advertisers would leave and not waste their ad spend on a network with such low traffic. For Microsoft this is not a good sign, as Live search share is now at 7%.
Many tech writers like Garett Rogers of ZDNET say that Microsoft should forget about search and focus on its core products like Windows and Office and sign a deal with Google. I believe this to be a recipe for disaster. Many people do not understand just how core search and the web are to Microsoft’s future. In order to remain relevant, Microsoft has to compete in search, it has to compete in online advertising, and it has to compete in enabling online utilities like e-mail, spreadsheet, word, and PowerPoint. They cannot afford to allow Google to obtain 90% of the search engine market share, and become THE operating system of the web. Should that happen, every developer and site will be designed to rank on Google and nothing else (as they are starting to do anyways). The amount of commerce that would flow through Google via ads, SEO, and organic clicks would rival that of most countries. If the leading way people get to your site is through Google.com and Google Chrome, you can bet everyone will design their site and spend their dollars on Google. Ultimately Google has similar opportunity to do what Microsoft did in the 80s and 90s when every developer and application went through Windows.
The reality is that Microsoft cannot be left out of online advertising. The market is too big and growing too fast for Microsoft to just stand by and watch others make billions on the Internet. With consumers less willing to spend money on software online, and becoming used to "free" software on the web, online advertising may become the primary way for companies like Microsoft to make money on the web. Even more important, Microsoft cannot let Google Apps replace Microsoft Office. There are already stories of small businesses using Google Apps to power their email and collaboration and canceling their licenses to Microsoft Exchange and Microsoft Office. If you’re wondering why Microsoft is so concerned about Google, and Ballmer so determined to win the search battle, it is exactly because Google threatens Microsoft’s future and its historic cash cow in more ways than one. At this point, Google is by far Microsoft’s toughest competitor. They have the market share, brains, and capital to give Microsoft a run for its money.
Ultimately Microsoft has to be competitive with Google in search, online advertising, and web utilities offered. It doesn’t need to be the leader in this space, but must remain relevant. Similar to how Pepsi is a good counter to Coke, Microsoft’s future depends on it being strong presence in the search industry and an alternative to Google.