Search Engine Wars Heating Up

Two news stories last week really helped to bring home just how much of a high stakes battle the search engine wars have become. A complaint from Google was quickly followed by rumors of talks between Yahoo and Microsoft. Who knows what will happen next?

The focus of the war is advertising money, of course, and that means a lot to all three major search engines. It means even more to Google than to the other two, perhaps, because practically all of its revenue comes from advertising. It must have been the need to protect that income that inspired the search engine giant to complain informally to antitrust regulators in both the United States and the European Union.

The focus of Google’s complaint is Microsoft. Specifically, Google is very unhappy with the upcoming version of Internet Explorer. The release is currently available in a test version. As with most newer web browsers these days, the latest version of IE 7 features a box in which users can enter text to automatically do a web search without leaving their current web page. Users can set the search engine, but Google argues that it’s currently, and unfairly, set up to preferentially use Microsoft’s own engine.

That’s not all, though. According to Google, the software giant has set up IE 7 so that it is difficult to change to a different search engine in that box. Microsoft disputes this claim, and says that it’s easy to change the search engine used in that box. Gary Schare, director of product management for IE, stated that “MSN has a certain amount of (market) share. This is not designed to change this. This is designed to essentially keep the status quo.”

Keeping the status quo, though, would be doing much better than Microsoft has done lately on the search engine front. MSN Search’s share of search queries fielded has slipped by several percentage points over the past year, while Google and Yahoo! have both gained market share. So why is Google worried?

Microsoft has a long history as a monopolist. In particular it has been frequently accused (often rightly so) of using its monopoly in one area to gain a monopoly in another area. In one long-running battle the company stood accused of trying to wipe out competition in the web browser market by bundling its own web browser for free with its Windows operating system. The browser market has never been the same. Now Google thinks that Microsoft will use its near-monopoly in the browser market to try to gain leverage over the search engine market.

Before I even knew what search engine optimization was, I spent several years covering Microsoft. I watched and reported as the antitrust lawsuit brought against the software giant by the U.S. Department of Justice dragged out seemingly forever – at times apparently putting the judge himself to sleep. I know full well that Microsoft is capable of repeating its old tactics. Nevertheless, I’m not entirely sympathetic to Google’s informal complaint.

Other web browsers have been slowly gaining market share on Internet Explorer. Firefox in particular has put in a strong showing, with Opera a somewhat distant but respectable third. Both of those browsers have search boxes, and both of them default to Google. Indeed, Google recently did the unthinkable: it put an ad on its normally pristine home page promoting Firefox. While the ad is no longer there as of this writing, it was up for at least a week.

Google is the dominant search engine. If search engine users weren’t totally free to use whatever search engine they wanted, this move would look suspiciously like a monopolist attempting to gain control outside of its own area of influence, since Firefox and Google are known to have a friendly relationship. Could the pot be calling the kettle black?

I’m not the only one who thinks so, or finds it interesting that Google has started to complain about Microsoft’s tactics. Analyst Rob Enderle thinks this signals a more aggressive approach to competing on Google’s part. He thinks Google’s position makes it very tricky for the search engine giant to level these kinds of accusations, however. “Once you start raising unfairness questions, and you’re the dominant player, then it would be very easy for somebody to use those arguments against you,” he noted in an interview.

If Google is worried about Microsoft, the feeling is clearly mutual. With email, desktop search and calendaring applications, Google had been encroaching on what Microsoft has long considered its own turf. It’s clearly war, and when there’s a war on, you seek allies. Hence the article appearing in the Wall Street Journal should not, perhaps, have been too surprising.

According to the article, Microsoft and Yahoo have been talking over the past year about the possibility of the software giant buying a large stake in the venerable search engine. Indeed, rumors have circulated that Microsoft was interested in buying the search engine outright. At first glance, it looks outrageous; Yahoo would be much too expensive even for Microsoft to purchase. Even if it wasn’t, co-founder and Chief Yahoo Jerry Yang (yes, that’s his actual title) would have to go along with the deal, and that’s questionable. It’s even more questionable whether he’d be able to convince Yahoo’s stockholders to go along with the deal.

But as is sometimes true with outrageous ideas, it doesn’t look quite so crazy if you examine it more closely. As Danny Sullivan argues, in order to challenge Google, you need a really good core search technology, and an excellent paid search ad service. You also need plenty of traffic, or as the Wall Street Journal article describes it, you need “a mass of consumers and a universe of different advertisers.” Microsoft has not managed to create a search engine that quite matches Google’s (though Amazon might beg to differ, given that it recently switched to Windows Live to power its search engine). Yahoo’s ad service is not up to Google’s standards; even the Panama upgrade is at best putting it on a par with Google’s.

On the other hand, let’s look at each company’s strengths. Yahoo’s search technology has always been very good. Microsoft’s new AdCenter has been getting good reviews. And both companies have a strong user base for their various web services (the “mass of consumers”). And despite the weaknesses in Yahoo’s ad service, it does have “a universe of different advertisers.” Joining forces in an effort to beat Google sounds much less harebrained than other schemes that have actually gone forward…such as the AOL-Time Warner merger.

Speaking of that merger, it’s worth mentioning that Google’s recent billion-dollar deal for a five percent stake of AOL had one major competitor when it came right down to the wire: Microsoft. (Yahoo was also interested, but pulled out). So it seems clear that Microsoft is looking for allies in this battle. A deal with Yahoo would make more sense for Microsoft than the failed AOL deal, argues Sullivan, because AOL doesn’t bring what Microsoft needs most to the table: the really good core search technology.

One thing is certain: if Microsoft and Yahoo want to continue being players, they need to take action – Microsoft more than Yahoo, perhaps. The software giant’s earnings outlook fell short of what Wall Street expected…and that’s rare enough to startle any stock broker. Rather than tighten its belt, though, the company unveiled plans to spend an additional $2 billion in its upcoming fiscal year, which starts July 1.

It’s most likely that the company will spend that money building up AdCenter. It has a long way to go to match Google if it goes it alone. The service is just starting; Yahoo, with an established ad business, isn’t near matching Google’s advertiser base. Most observers figure Google’s advertiser base is larger than 400,000, and that’s twice the base that Yahoo boasts.

On the other hand, Microsoft has some interesting things going for it right now. In a surprise move, it hired Steve Berkowitz, who until recently was CEO of Ask.com. Assuming all goes according to plans, Berkowitz starts his new job as head of MSN on May 8. He must be having an interesting first day, dealing with the two factions within Microsoft that the Journal article mentioned: one bent on producing the search technology needed from within, the other of the opinion that the company would be better off acquiring it from outside.

Microsoft also has a lot of demographic information about its users, more than Google and more even than Yahoo. If ad relevance makes a difference – and history shows that it does, or Google wouldn’t have managed to out compete Yahoo in this area – then Microsoft has the tools to make its search ads very relevant indeed. What could it do if it had the appropriate search technology behind it? If Microsoft’s move with IE 7 stems the tide of users away from using the company’s search engine long enough for it to find some way to catch up with Google’s search technology – either by buying it or making it – we may yet find out.

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