We discussed in this blog the search wars and how things are going to shape up in the future. We also discussed Google's first quarter earnings and Yahoo!'s first quarter earnings. We looked at Microsoft's third quarter earnings as well.
We had some news yesterday about the different players making deals. First we got the news of Google striking a deal to bundle its software on every PC shipped by Dell. This deal probably involves pointer the browser to Google's website by default in addition to putting Google's desktop search software on the windows OS. This deal is significant only because the majority of users dont change their browser defaults and it deprives Microsoft of getting free web traffic. It is likely that this deal cost Google a good amount.
Another deal was struck between Yahoo! and EBay. This deal has EBay using Yahoo to provide ads on its site. EBay site is used by millions of people. Although the details of the deal were not disclosed, it is likely EBay gets to keep the lions share of the revenues obtained through this deal.
As a baseball fan might say, we are in the 2nd inning of this nine inning match. If one remembers the search wars of the nineties, the search wars lasted for about five years before netscape threw in the towel. This search war is probably going to be a bit different. The search wars are likely to last for another ten years and it is going to be difficult to predict the winners right off the bat. Unlike netscape, the current players are monetizing search and have a revenue stream to bank on.
The unknown here is the margins. Warren Buffett famously said that competition is not good for a business. In such an environment, it is the customer that wins, not the business owners. This scenario is likely repeat in the search wars. First the big content providers will use the different search engines to bid against each other to keep the maximum share of the revenues for themselves. The the second unknown is the cost for each advertising keyword is likely drop or remain the same for each advertiser unless a clear winner emerges in the search wars. The third factor is the operating costs which will likely increase at a faster pace than inflation. The search war participants are lured by more advertising moving online at 25-30% year over year rates for the next five years. It needs to be mentioned that competition can do strange things to such markets over longer periods of time. The next couple of years will be very interesting.
It is possible for all the three market participants to do well in the process if they manage the capital expenditure carefully. As is the case in many market feeding frenzies, it is more likely than not that some of the market players will go overboard. Microsoft has already shown this tendency and Google is likely to follow suit. Microsoft's MSN division hasn't done well even after sinking billions of dollars into the division. Google is immensely profitable but has to manage ploughing money to new divisions to compete with Yahoo! and Microsoft. Yahoo! seems sobre at the moment and focusing more on monetizing its content. This strategy makes the most sense and it remains to be seen if this strategy will pan out in the long term.
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