Facebook, Zynga Backer Peter Thiel on Billion-Dollar Search "Monopoly"

One of Silicon Valley's top investors says you can talk about new algorithms all you want, but until you bring down the costs of the search business--which Thiel pegs at $5-10 billion a year per company--it's going to remain a one-horse industry.

 

servers

Gather a bunch of super-smart techies to talk about the future of search, and they’ll point to everything from natural language processing to systems that can anticipate your every want (so you’ll never need to perform an actual search again). But the real problem that needs to be solved in the search industry, says uber-investor Peter Thiel (Facebook, Zynga), is comparatively banal.

It’s not about coming up with “cool new technologies,” he said at Big Think’s Farsight 2011 search confab this week; it’s about figuring out how to reduce the massive fixed costs currently baked into the business. Unless that issue is resolved, Thiel said, search will remain a “natural monopoly business.”

To the average user, search seems a fairly lightweight proposition. You pull up your engine of choice (Google, Bing, Ask, etc.), drop in your search term, and, boom, you’ve got an answer.

But the computing power that goes into making that possible probably costs search companies between $5-10 billion a year--each. Unless those costs are brought down, he said, the market will be effectively closed to new entrants, because it will take at least a 30 percent market share just to break even. Google’s market share is currently around 67 percent. Bing’s is in the mid-20s.

“If we’re going to have a real transformation in search,” Thiel said, “you have to try to be building technologies that will enable you to take something like 10,000 servers that are used for search today and do it with one hundred servers.”

Thiel knows of what he speaks. He was an investor in Powerset, a search engine focused on natural language processing, which Microsoft snatched up in 2008. Based on what he learned in that experience, Thiel says his investments in this space will focus companies that are tackling the cost side of the equation.

“We had badly underestimated that problem in 2007, 2008,” he said. “That is a mistake I intend not to make twice.”

“Until you solve the fixed cost problem, you have a monopoly,” Thiel said. “That’s why it’s a very difficult thing for a startup company to create a new search product. Microsoft is probably the only company that has the capital resources that can compete with Google at this point.”

Follow Fast Company on Twitter.

E.B. Boyd is FastCompany.com’s Silicon Valley reporter. Email.

 

 

Add New Comment

2 Comments

  • Greg Gentschev

    The fixed costs Thiel mentioned aren't really fixed. Imputing costs from current market leaders is always a mistake, especially in high-tech industries. Just look at companies like Blekko. They're spending orders of magnitude less than $5-10 billion per year.

  • supermarkt

    that why google founded google energy and was also granted to buy cheap energy last year. if i remember correctly, the also bought some kind of deep drilling company quite a while ago.