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Google's Gaggle of Problems

By Alex Salkever In the past three years, Google has rocketed from tiny startup to the top of the Internet search heap, beloved by both the public and its many partners for its superior search results. By some estimates, Google serves 75% of all Web search queries, and it has become one of the most powerful Web companies in the world. Now, it may be facing one of the oldest maxims in business: Once you make it to the top, it can be mighty hard to stay there.

No question, Google founders Larry Page and Sergei Brinn figured out early that the best way to get good search results was to look at the Web as a popularity contest. If a site has lots of other sites linking to it, it will rise in Google's search results. If the linking sites are judged to be of high quality, it will rise even further. That, plus dozens of other complementary search algorithms have made Google the search engine to beat. The proof? Competitors AltaVista, Inktomi (INKT), WiseNut, and Teoma all now mimic Google's popularity-placement methodology.

UNOBTRUSIVE ADS. Advertisers love Google, too. They supply two-thirds of its revenue by purchasing keywords on and Google's network of affiliates, including America Online. Owning a keyword allows the advertiser to place simple text spots on pages returned for searches containing that keyword. The ads on are unobtrusive. No Flash player or screen effects are allowed, and ads are confined to a small box on the side of the screen and a handful of slots at the very top. Still, according to Google, the barebones format is effective enough to drive click-through rates several times those of standard Web ads.

As the third leg of its stool, last year Google launched a hardware appliance designed to give companies an easy and cheap tool for searching internal corporate networks. This trio of business lines netted the privately held Google an undisclosed profit in the eight-digit range, according to search-industry analysts. They figure it has profit margins of more than 30%, which is about what competitor Overture (OVER) pulls in for its paid-search business.

Google doesn't release financial information, but in 2002, revenues tallied between $50 million and $100 million, with a minuscule marketing budget, according to those who follow the company. The ultimate evidence of Google's success? The name has become a verb in common conversation, like Xerox or Hoover.

NONEXCLUSIVE DEAL. For Google, though, the honeymoon may be over. A customer rebellion seems to be brewing. More Web giants are concluding that buying search results from Google is no bargain if is competing with them as a Web destination. Meanwhile, in the corporate-search market, sector leader Verity (VRTY) is turning up the heat. Finally, in the paid search-listings business, Overture appears to have slowed Google's momentum. All told, 2003 could be the toughest year yet for the world's favorite search engine. Company executives declined interview requests.

The cracks in Google's armor first appeared in October, 2002. That's when Yahoo! (YHOO) was set to renew a deal paying Google to provide Web search results to the portal's surfers. In 2001, Yahoo paid Google $7.1 million to be its exclusive Web-search results provider. Yahoo has renewed its deal with Google, agreeing to pay a defined rate per number of search queries served by the search engine -- but it dropped the "exclusive" part of the contract. That means Yahoo can use any other search provider if it chooses.

In November and December, the cracks widened when Overture won a series of key contracts in the paid-advertising technology area. The most notable was its deal to be the exclusive results provider to CNN and CNN's various online properties, which receive more than 30 million unique visitors each month, on paid searches.

"A BIG THREAT." Then on Dec. 18, Verity, which has 1,700 customers, announced a deal to purchase the corporate-search assets of Inktomi for $25 million. Verity makes sophisticated search and classification software targeted at the higher end of the market -- well above Google's primary niche as a simple install-and-forget search appliance.

The purchase gave Verity some territory at the low-end of the market, as well as Inktomi's 2,500 customers and $22 million in annual revenue. Verity CEO Anthony Bettencourt believes the deal will allow it to move customers over time from simpler Inktomi search products, now renamed Verity Ultraseek, to more feature-rich and expensive offering. More important, it signaled that Verity had drawn a bull's-eye on Google's back. "We weren't servicing the lower end of the marketplace," says Bettencourt. "This makes us a big threat to their existence in that space."

But the real bombshell came on Dec. 23, when Yahoo announced it was spending $235 million to buy Inktomi's Web-search business. That move clearly showed that Yahoo's October move to sign a nonexclusive deal with Google presaged a break for independence from the Web's biggest search engine. In 2000, when Google had the clear lead in search technology, Yahoo had jilted Inktomi after two years to make Google its third-party search-results provider.

"The portals have started to get fed up"

According to sources close to the deal, Yahoo believed it could better tie Web search to its other sources of information if it owned the code. Those same sources say Yahoo has grown tired of's popularity and may soon cut its tie to the company. "The portals have started to get fed up. Over the last three years, Google has stolen 40% of the search market directly at the expense of AOL, MSN, and Yahoo," says Jason Kellerman, CEO of search-technology company LookSmart (LOOK), which has a deal with MSN.

THIRD-PARTY SQUEEZE. Other potential problems for Google abound. While it remains the leader in producing quality search results, a host of other search engines, including WiseNut, Teoma, and FAST, produce searches that are almost as good -- and in certain categories maybe even a bit better, according to users. These upstarts are already putting pressure on Google's business as a third-party search-results supplier, a business that brought in approximately one-third of its revenues in 2002.

Further, Google will have trouble competing with other search providers that are willing to sell far more of their page space either for advertisements or "paid inclusion listings." That term refers to the growing practice of asking businesses to pay to be included in Web search results, although those results do not guarantee any specific placement or ranking in the results. refuses to dedicate more than the three top sponsored links and six or seven links on the right side of the page to advertisers, which limits its revenue potential. And its refusal to use paid inclusion technology with could hurt it's position with Yahoo. "Twenty out of the 30 links Yahoo! is presenting on each search page is not earning them money. That's an ad break of only 33%," points out Danny Sullivan, editor of newsletter SearchEngine Watch.

That may be fine as long as Google remains a private company, but it's under increasing pressure to go public -- two of its key shareholders are Silicon Valley venture-capital firms Kleiner Perkins and Sequoia Partners -- and shareholders would likely want more bang for their buck.

"LIKE IBM." On the corporate-search side, Google is heading into unexplored territory. Building and maintaining a Web search engine doesn't require much in the way of customer support or a sales staff. But it's not clear whether Google is ready to do the grunt work needed to build a volume business selling low-end search appliances. "Building a channel at the low end is miserable. You have to send people to trade shows where there's no carpet and extension chords are snaking across the floor," says Whit Andrews, an analyst with tech consultancy Gartner.

None of this means Google is in mortal danger. Its strong relationship with America Online (AOL) remains intact. Google provides most of the portal's Web-search capabilities. And AOL is included in Google's AdWords advertising network, so anyone who buys a keyword at will be included in the paid search results on the right side of the screen on AOL, as well.

"Our members like to search with Google, and what we have done is make it easier for them to search with Google," says Gerry Campbell, director of search and navigation for AOL. According to October, 2002, measurements by Web traffic tracker Nielsen NetRatings, AOL and together get six times the search traffic of Yahoo, the closest competitor.

CLOSE TO HOME. In the corporate-search sector, too, Google is extending its strong brand into cheap and quick search capabilities. "It's going to be like IBM. No one will ever get in trouble for buying search from Google for now," says Andrews. And the sector continues to grow robustly, at a high double-digit rate, so plenty of room exists for several players to make lots of money.

Google appears convinced it's on the right course. And it's introducing new features that could increase traffic even more. In October, Google launched a service that allows users to search through 4,000 news sources, updated and indexed several times each day. Dubbed Google News, it also creates an automated virtual newspaper of links to the most important stories of the day. It has gotten a strong user response, but for AOL, Yahoo, and the many media customers who use Google and who also rely on their news sections to draw visitors, the service hits close to home.

Ditto for Froogle, a service Google launched in December that allows users to type in shopping search terms and receive rankings based on prices. AOL and Yahoo both rely heavily on revenue derived from their online malls.

Both of these new moves underscore a fact that's becoming more apparent: "The bulk of Google's business these days is built around," says Sullivan of SearchEngine Watch. If partners continue to grumble, the pendulum could swing -- and Google may end up facing a mutiny and a world full of hostile competitors, each seeking a piece of the king of search. Sometimes it gets rough at the summit. Salkever is Technology editor for BusinessWeek Online

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