Google has a competitive advantage. In fact, one might even say
it has a franchise in web search. I wouldn't say that. I mean,
Google does have a franchise; but, it doesn't have a monopoly on
web search and never will. There are real problems with Google's
model that are often overlooked. It does a poor job of finding
certain sites that are difficult to describe in keywords. For
this reason, there may still be a market for web search in the
form of specialized niche directories and in some of these
"social search engines" (e.g., Stumble Upon) for many years to
come.
I'm not suggesting any of these services will be as successful as
Google; I'm sure they won't be. I am simply pointing out that
there is a difference between a need and the means by which that
need is satisfied. Even as the dominant search player, Google
will only have a franchise on the means (keyword search); it will
not have a franchise on the need (finding stuff on the web).
Also, Google can not, at present, rightly be called the dominant
search player. There is no dominant player in search. Google is
the leading search player. It is also the catalyst for many
changes in search. But, it is not yet the dominant player in
search the way McCormick (MKC) is the dominant U.S. spice
producer.
Looking at McCormick's franchise is actually a pretty good way
of evaluating Google's. Why do I say McCormick is the dominant
player (domestically) in spice, but Google is not yet the
dominant player in search? There are a few reasons.
McCormick has a 45% share of the U.S. retail spice market. Its
closest competitor has a 12% market share. We may differ about
exactly how the web search pie is carved up. But, I think we can
agree that Google's share of the market is less than 45%, and
that at least two of its competitors have a share of the market
greater than 12%. So, Google's position differs from McCormick's
in two material respects (already). Google has a smaller slice of
the pie, and the search market is less fragmented than the spice
market.
The spice market is an upside down funnel. The few producers are
at the top. They feed their products through three distribution
paths: retail, industry, and restaurants. In each case, the shape
of the upside down funnel remains intact, because the widening
happens at the very end. The ultimate consumer of McCormick's
product doesn't get to choose from all available spices. His
choice is always indirect. He picks a grocery store, a food
product, or a restaurant. Then, must choose from the spices that
particular supermarket chooses to carry, or the restaurant he
frequents chooses to use (and/or make available).
In search the story's a little different. There is still
something of an upside down funnel shape in search. Although, it
is less pronounced than it was a few years ago. Search results
are fed through dependent sites that searchers visit. But, it is
the searcher who chooses the dependent sites. A few of these
dependent sites account for a large part of all searches. That
is very different from the spice market, where no supermarket
or restaurant chain accounts for a large part of all spice
consumption – none even comes close. So, the searcher has a much
bigger role in choosing his search provider than the spice
consumer has in choosing his spice provider. Even though it is
true you are sometimes searching without knowing Google is the
search provider, the situation is nothing like it is at
McCormick. When eating a meal you aren't thinking about
McCormick. Quite often, however, you are using a McCormick
product. Whether it was in that package of spices you used to
cook a meal at home, or in that manufactured food product, or
in the dish you ordered at the restaurant, you are a consuming
a McCormick product.
What matters as far as the investor is concerned is that the
ultimate consumer of McCormick's product rarely makes an active,
unfettered choice to consume that product over all other
competing products (or even many competing products). The closest
he comes to making such a choice is at the supermarket; though
even there, the decision of how much shelf space to allocate to
each company's products was made for him. To use Google, the
first time searcher must make an active, unfettered choice.
Finally, there is the matter of infrastructure. This consists of
two parts: production and distribution. McCormick has an existing
production infrastructure which is helpful as far as costs are
concerned, but isn't especially valuable. It could be duplicated
by a new entrant with deep pockets. McCormick's distribution
infrastructure is almost impossible to duplicate. It is worth far
more than it cost McCormick to create it. Prying McCormick's
customers (situated at the narrow of that inverted funnel) away
from the company's products would not be easy. This distribution
infrastructure gives solidity to McCormick's spice franchise in
the U.S. In some instances, it will also help McCormick aboard
(as some of the company's customers are expanding globally and
will be inclined to stick with McCormick in their overseas
operations).
Google's production infrastructure (the algorithm and the index)
is easy to duplicate and will become even easier to duplicate in
the future. There isn't much of a barrier to entry here. Google
may currently offer the best search service around, but there is
no reason to believe this will always be the case. Distribution
is very often the most valuable part of any franchise (it is
usually the part that is hardest to duplicate).
So, the natural question is: in the world of search, if you build
it will they come? Will the best search engine always attract the
most searchers? Probably not. That's good for Google, because it
won't always be the best search engine. Google has a great brand.
Whatever value is in Google comes from that brand. That brand is
what will keep searchers from flocking to the inevitable newer,
better search engine.
All of Google's revenues are ultimately dependant upon attracting
searches. Getting those searches requires two things. First,
millions of people must make the active, unfettered choice to
search Google. Then, those millions of people must keep searching
with Google. The brand is the key to step one. The service is the
key to step two. Search customers are sticky. But, they probably
aren't as sticky as we think. It's very easy to take immediate
action on the web (just click a link). Switching away from Google
isn't like switching away from Windows.
That leaves the brand. True, when you think search, you think
Google. But, is that brand worth $120 billion? No – and neither
is Google.
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