Posts by David Schatsky from May 07, 2008

David Schatsky | May 07, 2008, 02:38 PM
Why There Are No Credible Competitors to Google

Continuing my attempt to apply Michael Porter to the Internet search business, we left off talking about barriers to entry.

Porter says that if profit potential is high enough (it sure is) and entry barriers are surmountable (the subject of this post), then a market will attract new entrants, and this will depress profits. The barriers to entry in the Internet search market are distinctive, and they have given Microsoft a run for its money.

Porter identifies 7 main barriers to entry:

1. Supply-side economies of scale. There are obviously economies of scale in Internet search. These are an advantage to incumbents like Google but should be easy enough for global competitors like Microsoft to exploit. After all, Microsoft attracts over 100 million monthly visitors in the US to its Web sites. But as my colleague Emily Riley pointed out to me in an e-mail, "Simply having access to 100mm is not enough to change consumers' search behavior. Yahoo has the largest email product and is still miles behind Google in searches." There is scale and there is SCALE, however; Microsoft cited scale benefits of a merger with Yahoo! that could have produced $1B in infrastructure savings annually.
2. Demand-side benefits of scale (network effects). The kind of benefits that accrue to incumbent market makers like eBay are somewhat weaker in search. After all, a lack of advertisers shouldn’t necessarily make a search engine less appealing to users, who are more sensitive to organic results and performance. Emily points out, though, that the relevance of Google's organic results may benefit in part by all of the SEO benefits that focus on them--a level of focus they attract because of their market leadership.
3. Customer switching costs. Negligible here. Search is the quintessential market where competition is “just a click away.”
4. Capital requirements. There is no question that massive capital is required to build out the massive infrastructure required by any search capability that hoped to compete with Google. Microsoft is one company that with the cash on hand and access to capital that would help it hurdle this barrier.
5. Incumbency advantages independent of size. This is a catch-all that could include access to proprietary technology; establish brand identity; cumulative experience that allows an incumbent to learn to produce more efficiently; and more. Clearly Google’s proprietary technology is a major asset. And three times as many online users cite Google as a favorite online brand than cite Microsoft. (An impressive 7 times as many 18-24 year-olds do.)
6. Unequal access to distribution channels. A classic dimension of strategy off-line, this has been largely irrelevant online, though the multi-year deals Google has been striking with high-traffic online partners have the potential of creating a barrier here.
7. Restrictive government policy. Not relevant, unless you believe that Microsoft’s competitive options are limited because it may attract greater anti-trust scrutiny than other companies.

Most of these barriers are not relevant or could theoretically be easily overcome by Microsoft, who has indeed entered this space and is attempting to compete vigorously. But the company nonetheless sought to acquire Yahoo! believing that its own assets and efforts inadequate to the task of establishing a strategically advantaged position online.

My next post on this topic will look a bit more at the scale issue and why Microsoft hasn't been able to exploit it to field credible competition to Google.