Friday, November 11, 2005
Yahoo, Google, and 1.0 vs 2.0 vs 0.0
Today, a lot of discussion kicked off about Google becoming Yahoo 2.0, aka the next portal.
It's an interesting discussion (and I think Michael has the best summary), but I think it misses the point.
This is a product-centric discussion, centered in part around this matrix.
While that's certainly informative, let's take a step back from the product-level view of the world. Just because two firms make the same products, it does not necessarily mean they're competing with one another.
What's really happening in this space? Google has become one of the world's hyperefficient market makers. All these products are just ways to create goods (aka "inventory") to sell on that market, and, by doing so, to raise switching costs on both sides of the market).
Yahoo is not nearly such an efficient market maker. It has struggled to build a market like Google; while it's had some significant wins recently, these have been premised largely on price competition - the fact that Yahoo is a bit cheaper, not that it's market is more efficient.
What backs up the above? Google's market cap is twice Yahoo's, on roughly equal earnings. That means the market is expecting to Google to create twice as much value in the long run than it's expecting from Yahoo.
Why? The best indicators we have right now are growth and profitability. Not only is Google growing faster, but it's significantly more profitable.
Now, this is an interesting thing the market is telling us. Why is the market so favorable to Google? Is it irrational?
I don't think so. I think the market's valuation reflects the relative hyperefficiency of Google's market-making competence. It also reflects the fact that most of these product markets are dominated by first-mover advantage (as I've demonstrated). The first-mover ends up owning a dominant share of the market.
This implies something pretty important. While Google and Yahoo may continue to release similar products, Google is likely to not be worried about being Yahoo 2.0. What it's really going to do is much bigger, as we discussed last week, is index "all the world's information" - that's much broader than 1.0 or 2.0 portal style services, although this information could certainly be delivered through a portal - so it effectively becomes the world's information monopolist. That is, the single matchmaker between buyers (consumers) and sellers (advertisers, content creators, publishers, etc) of information.
Think about Google's recent moves to unbundle and sell print advertising. This requires a competence in what I've termed plasticity; it has little to do with Yahoo style portal plays.
Now, this leaves a very interesting market space for Yahoo to target, which it continually refuses to do: to be the world's attention monopolist. For Google, a world of hyperefficiently allocated attention is costly, because clicks get vaporized. Yahoo's not in this trap, and it has a huge, rich gap to exploit...
...but don't ask me why they don't do it :)
PS I know I am as (more) guilty of it than you guys, but let's please not say anything .0 for a while.
NB: I am posting this for MP, because I think he posted it to the wrong place.
Good post, Umair...
Would you think Yahoo! is "less efficient" because they have a lot more robust array of services whereas Google is still trying to get into the game beyond search?
And what happens as Google gets hundreds of millions of users into each of the services like mail, IM, etc.
Does their marketplace become less efficient because the points of intersections have to occur in a lot more vertical service silos?
Those are very interesting questions.
I think the notion of efficiency is fundamentally about liquidity.
This is interesting, because Yahoo has way) more users than Google.
But Google's market is simply more liquid, because it's more microchunked: it has more queries, and a wider network of microcontent, so more inventory on both counts. I think these are really the crucial leverage points.
Think abut it this way: as queries/user decline, liquidity falls disproportionately.
That is, there is a liquidity premium. Now, this also implies that this premium will grow in users (verticals, etc) because it's those that make the market liquid for advertisers.
Now, you said, as the number of verticals explodes - what I call microniches, essentially - transaction costs for both advertisers and consumers begin to rise.
But I think it's exactly microchunking that enables these to emerge. That is, it's the fact that these costs *don't* exist that lets the Google market trade microniches.
Think about it this way: in the real world, these microniches wouldn't be liquid enough to transact with. But because Google can aggregate them frictionlessly, they become very, very valuable.
So I think Google's competences - what I call edge competences - are in exactly this: microchunking stuff so it becomes liquid. Once it's liquid, it's tradable - and Google can take a cut.
I'd be surprised if this hurt Google; if anything, it should *help* Google (but hurt Yahoo, because they distinctly are not developing this competence).
I hope this made kind of sense, I am struggling to express this stuff as I develop it sometimes :)
Could you unpack this statement a bit further? "For Google, a world ofhyperefficiently allocated attention is costly, because clicks get vaporized."
Google is very profitable now, because the majority of their profits come from search... search is going to grow primarily (as a function of total searches) in the East over the next 10 years, so those investing in Google must be assuming that Google will lead searching in China, India, E. Europe and other developing search markets.
But what I wonder about is that for Google to keep growing, it will need to dominate markets which are much less profitable then search. Their margins will have to shrink a lot as they expand into other markets, but how much?
All this stuff (Print, Base, etc) creates huge amounts of new inventory to put behind the search model. I don't think search revenues are going to run out of steam any time soon.
It may be a huge new inventory, but does it represent the same level of interest by the consumer?
Look what people are searching for-- and look even closer at the things they are searching for which create high value clicks-- the vast majority of it is not to be found in books.
Base is something else, but it's hard to say if it will succeed, and if it will contain the type of information people are actively looking for.
I'm not convinced that Google has a huge new area to expand when it comes to finding things people are looking for that coincides with the type of customer marketers are looking for.
That's a good comment.
But it's also exactly why Google is disrupting marketing.
The entire point of 1.0 style marketing is find out "what people are looking for".
They spend endless amounts of money on focus groups and other cheezy techniques which don't really work, and give us nice things like Lunchables.
Google's playing a different game, IMHO.
By making stuff plastic and liquid, they're unlocking value by exposing information they can sell to the highest bidder.
In fact, if you think about it, the 1.0 style cheeze only happens because info *isn't* plastic and liquid.
So right now, it's difficult to tell if books are "high-value clicks"; we can't really search inside them too well (barring Amazon's attempt).
Even then, perhaps they won't be the highest-value stuff.
But as long as those clicks are more valuable than the the marginal cost of indexing those books, Google wins. Now, this is probably a good bet.
And note, this is a first-order analysis. It doesn't take into account how Print raises switching costs, increases liquidity for advertisers, b-model apart from PPC, etc, etc.
So, in sum, I think it's more important to look at this from the edge competence POV than the clicks POV.
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