Rising Clout of Google Prompts Rush by Internet Rivals to Adapt

Walter Lippmann walterlx at enet.cu
Wed Jul 16 01:42:59 MDT 2003

July 16, 2003

Rising Clout of Google Prompts
Rush by Internet Rivals to Adapt

As More Users Go There First, Its Wider Power
On the Web Threatens Microsoft and Yahoo

Google, a clever online search service with a silly name, has
already transformed the way people use the Internet. Now it's
shaking up the strategies of companies all over the Web
business, from Microsoft Corp. to Yahoo Inc.

To its rivals, Google is gaining a strategic position that
could give it too much influence over Internet commerce. Its
dominance of online searches means it can reach Web users from
the moment they start browsing, and steer them to anyone with
a product to sell or advertise. Of roughly four billion
Internet searches conducted in May, 32% were conducted
directly through Google, compared with 25% for Yahoo and 19%
from AOL Time Warner Inc., according to comScore Networks, an
Internet market-research firm.

Google long ago realized something that is only dawning on
many other companies: Searching isn't a Web sideline -- it's
the Web's strategic heart. While Amazon and other sites try to
position themselves as the central place for online shopping,
thousands of shoppers are simply Googling for sandals or
curtains and whatever else they want.

This week Yahoo fired a loud shot back at Google by agreeing
to buy Overture Services Inc., a company that pioneered the
concept of letting advertisers bid for higher placement in the
pages of Web-search results. Google has developed a similar
service, though it is better known for search results that
aren't influenced by advertising.

Yahoo agreed to pay $1.63 billion1 in cash and stock for
Overture, months after buying another search-technology
specialist, Inktomi, for $235 million. The moves will let
Yahoo reduce its dependence on Google, currently the primary
search engine for Yahoo searches.

Microsoft is also waking up to the power of Google and racing
to protect its turf. The Yahoo deal has ripples for Microsoft,
since the software giant has been a big Overture customer.
Yahoo says it will continue serving other Overture customers,
and Microsoft says the deal won't immediately change its
relationship with Overture.

But early this year Microsoft's MSN online group launched a
project to develop its own search engine, with the goal of
using search to increase MSN subscribers and advertisers. That
could be a big threat to Google, given Microsoft's history of
patiently eyeing new markets, then using its grip on PC
software to dominate them.

"Each of these guys is trying to own a bigger and bigger part
of the start positions for e-commerce, that's the battle,"
says Venky Harinarayan, a venture capitalist who once sold a
shopping search-engine company to Amazon. "Anyone who gets
between you and the consumer can control the start point."

What worries other companies is that Google has wedged itself
into that "start" position and could prove very hard to
dislodge. Google ranks the Web sites users see after searches,
based on how many other Web sites provide links to the sites.
It's a novel concept that delivers fast and relevant results,
though Google has to be vigilant against attempts to game its

Google increasingly collects fees for delivering short text
ads -- with links to the advertisers' Web sites -- that appear
when users search for certain words or terms. Google won't let
advertisers affect how it lists search results, though it does
give some ads choice real estate above the results list.

The system has proved a good way for many online businesses to
draw customers to their sites. It also has become a big
business. Google, which doesn't disclose its finances, is
expected to have almost $1 billion in revenue this year and is
profitable, according to people familiar with the matter.
There's been much speculation about an initial public offering
by Google, but it says it hasn't any immediate plans for one.

Some industry executives think its technological lead is
precarious, vulnerable to moves into its turf by the likes of
Microsoft and Yahoo. Dominant market positions in technology
tend to endure only if customers face a high cost of switching
products, as with Microsoft's operating systems and Intel
Corp.'s microprocessor chips. But Web users, while they do
tend to stay with favorites, can switch about as easily as
changing channels on television.

Google declined to comment on its growing clout or what its
rivals are up to. People at the company have privately
acknowledged the competition from other Internet companies,
including Microsoft, Yahoo and eBay.

Some rivals, particularly Yahoo, can blame themselves for
helping Google take off. Three years ago, Yahoo picked
Google's search engine to provide search results on Yahoo's
network of Web sites, replacing a service by Inktomi.

Yahoo had started by providing Internet searchers with
information from its own directory, functioning like a giant
Yellow Pages to the Internet organized largely by human
editors. If this couldn't provide the information, Yahoo would
use Google's search technology. Increasingly, though, users
went directly to Google's Web site for results.

It was a classic case of underestimating a high-tech jewel and
giving it away, similar to when International Business
Machines Corp. gave the business of supplying PC operating
systems to a little-known company called Microsoft. Although
IBM thought it was just subcontracting a part of the PC,
Microsoft's Bill Gates saw that operating systems would
someday control the lion's share of profits and strategic
influence in PCs.

Executives at Yahoo gradually realized they were losing their
leadership in Internet search. The Google threat to other
Yahoo businesses didn't sink in until last year, when Google
unveiled a Web site2 that automatically collected summaries
and headlines of top news stories from the Web and displayed

Google News shook Yahoo. On the day it appeared, Yahoo Chief
Operating Officer Dan Rosensweig grilled employees about what
it meant for Yahoo, says someone familiar with the matter.
Worried Yahoo executives began calling industry contacts to
see if they thought Google News signified a threat, say two
people who received calls.

In contrast to the editorial team of up to 16 who supported
Yahoo News, Google had built its news site with three people.
It was one employee's personal project, built over a weekend
on a whim, according to the company. After a test version
wowed employees, the brass set up a team to develop it for the

Last fall, Yahoo restructured the deal with Google to let
Yahoo have partnerships with other companies. And in a step
many believe will lead to the end of its ties to Google, Yahoo
bought Inktomi.

Acquiring Overture could give Yahoo another lift. Overture's
paid listing service is highly profitable. Overture has been
on a buying spree of its own, snapping up search pioneer
AltaVista and the Web search unit of Norway-based Fast Search
and Transfer.

Though he declined to comment directly about the company's
competition with Google, Yahoo Chief Executive Terry Semel
said, "Simply put, search is an important aspect of what we

As for Microsoft, it for years largely ignored Google and the
search business, offloading the search function on its growing
MSN online service to Overture, Inktomi and LookSmart. But in
a broad study of Internet usage by the MSN group over the past
year, Microsoft discovered that search was just behind e-mail
and instant messaging as the most-performed task on the

Google was also becoming a central point connecting Internet
users with online merchants and services, a role that
Microsoft wanted MSN to fill. Microsoft saw that Google and
others were proving that search could draw huge amounts of
traffic to a Web site, which in turn could attract
advertisers, says Lisa Gurry, group product manager at the MSN
unit. At a February meeting of the MSN group last in Arizona,
managers hashed out "every range of option" for building a
"complete search" service for MSN, said Yusuf Mehdi, a
Microsoft vice president, in an interview earlier this year.

Soon after, Microsoft decided to kick off its own
search-engine development, getting final budget approval for
the project in June. Around then, MSN launched an Internet
"crawler" that collects Web-site addresses that will be used
with Microsoft's future search engine. Ms. Gurry calls the
search-engine development a long-term project and won't say
when the service will begin.

Mr. Mehdi downplayed any looming head-to-head competition with
Google. He said Microsoft saw a strong search engine as one of
a key set of features essential for MSN's long-term growth.
One possible use of search: to drive growth of subscription
services. As Ms. Gurry explains, a search on "Madonna," for
instance, could direct the Internet user to a Microsoft online
music service.

But search is also shaping up to be a central piece of
Microsoft's next version of Windows, code-named Longhorn.
Slated to be available on PCs from 2005, Longhorn is expected
to enable PC users to search for information across all of
their PC applications, such as Word and Outlook, as well as
the Internet. A search engine built into Longhorn could pose a
strong challenge to Google. Microsoft won't comment on plans
for Longhorn.

AOL Time Warner's America Online has also helped Google become
big. After two years of using Overture's paid search results,
AOL switched to Google's service for its U.S. customers 14
months ago. AOL says the relationship has paid off in greater
customer satisfaction with search results and a one-third rise
in search traffic.

Certainly, AOL has treated Google well. Google is the only
outside brand name AOL displays on its Welcome Screen, And
unlike Microsoft, AOL hasn't moved to develop its own search

With Yahoo and Overture linking up, AOL may be more dependent
on its relationship with Google. In a "multi-polar" world with
a Yahoo camp, a Microsoft camp and a Google camp, says AOL
spokesman John Buckley, "For America Online to be aligned in
the Google camp is a very good place to be."

But analyst Youssef Squali at First Albany Corp. sees Google's
growing importance as a potential threat to AOL. The reason:
As search revenues become a core part of AOL's business, AOL
won't be able to afford to have those revenues controlled by a
third party. At some point, he says, "AOL will have to make a

According to someone familiar with the matter, America Online
chief Jonathan Miller has mused about buying Google but hasn't
seriously considered it because AOL couldn't afford it. At the
same time, AOL is loath to antagonize Google by working with a
competitor, given that revenue from Google is about the only
bright spot in America Online's ad picture.

Meanwhile, Google is starting to move onto the turf of online
shopping companies such as Amazon and eBay Inc. Google has
already begun testing a more formal online shopping site. Late
last year, it created a Web site called Froogle, which lets
users search for books, apparel and virtually any other
product for sale online. Google's software automatically
identifies Web pages that offer merchandise for sale, and
Froogle searches the pages when users enter the items they
want to find.

The ex-CEO of PayPal, an electronic payment service that was
acquired by eBay, says Google and eBay are now competing for
many of the same customers. "They're not totally head-on
competing, but there are a lot of areas where there is
overlap," says the executive, Peter Thiel, now managing member
of investment firm Clarium Capital. He says competition from
Google is "probably the main thing that's kept a constraint on
eBay raising prices." An eBay spokesman says Google hasn't
affected the company's ability to raise prices, which it has
done several times in the past.

Amazon, too, could see trouble from Google. Best known for
selling books and other items, Amazon is becoming a virtual
marketplace for goods sold by other merchants -- from used CDs
 listed by individuals to jeans from Gap Inc. Analysts believe
this is one of the most profitable areas of Amazon's business.
Google, as a central starting place for shopping, could cut
into Amazon's traffic.

Like eBay, Amazon has chosen to work with Google. Amazon
recently began letting users do Google searches directly
through the Amazon site. If looking for something Amazon
doesn't sell, such as concert tickets, people can click on
links provided by Google to other merchants. So "at this point
we see Google as a very valuable partner," an Amazon
spokeswoman says.

But Amazon may be hedging its bets. It has hired a number of
specialists in developing sophisticated calculations, or
algorithms, used in search software. Among them is Udi Manber,
a former Yahoo executive and professor from the University of
Arizona, who joined Amazon last year as "chief algorithms

Write to Mylene Mangalindan at mylene.mangalindan at wsj.com7,
Nick Wingfield at nick.wingfield at wsj.com8, and Robert A. Guth
at rob.guth at wsj.com9

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