The Importance Of A Competitive Search Market

The online advertising space is still growing rapidly; there are estimates that it will grow to $80 billion by 2010. If Google continues its dominance of search, they may surpass Microsoft in revenues, and certainly in profitability, in the next few years. The fact that Microsoft won't be able to count on fat desktop software profits forever only makes the problem worse.

Search and Advertising are effectively mirrors of each other. To say that it's ok for there to be one player in search is saying that it's ok if there is a monopoly in advertising.

We've already seen what happens if there is a dominant player in search - little effort is put into innovation, and the not enough revenue flows to companies that add value to the system. The risk of the entire ecosystem is put at risk.

For example, the CPC (cost per click) model is flawed, but in Google's favor because it puts fraud risk inefficiently on the advertisers, who have no way of controlling it at the search engine level. CPA (cost per action) models work much better, but Google has done little more than test them. The current system is great for Google and bad for advertisers. But advertisers have nowhere else to go since Google has 60+% of the search market (and perhaps as much as 90% of search revenue), so they have to live with it. Microsoft's recent Live Search Cashback initiative shows that competition can and will create more efficient systems.

On the publisher side things are even worse. Google doesn't share enough revenue with content sites that show their ads. The only thing keeping them even close to honest is the fact that Yahoo and Microsoft will occasionally compete for those partners. Take that away, and Google will go back to keeping the majority of advertising revenue generated at those sites (their only competition will be other types of advertising, which generate far less revenue). That is a terrible outcome when you look at it from the perspective of the health of the Internet.

Microsoft can't ignore the online advertising market, it's just too big and important. And we need to be behind them in this effort, because if Microsoft and Yahoo lose interest, we'll be stuck with a monopoly, and the Internet will suffer. Competition drive innovation. Competition drives prices down. To wish this away is irresponsible.

Update: See Tim's video response from the comments below, and his follow up post here: