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Why Microsoft could be Google's best bet

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The New York Times reports that Google and Microsoft have been discussing 'a range of options' over the past two months, without reaching any conclusions. This is hardly surprising, as in this industry even the bitterest rivals regularly meet, even if it's for a round of golf. While an acquisition remains highly unlikely, a partnership between the two could be the best option for ensuring Google's long-term survival.

To understand why, you have to understand how Google makes money, and remarkably few reports have pinpointed how. It's said to be in the 'search engine business' - but unless you take the term at its most literal, to encompass comparison shopping sites, or pay-to-play engines - there is no public search engine business.

Google is an advertising business. It's an intermediary between media buyers and sites who want to see some advertising revenue: it's simply an old-fashioned media agency. Some of the property, the 'billboards' if you like, in the sense of the word that ClearChannel understands it, Google owns and operates itself. Advertisements show up on the search results, in Usenet groups and of course on its prime 'content' advertising space at the moment, Blogger.com. Google's main rival is Overture, which was recently acquired by Yahoo!. In this business model, Google doesn't 'own' the properties but acts a broker in the classic sense.

But Google started late in this business and it isn't in the lead: a report by Jupiter this week advises that Overture represents better value for marketers.

And unlike Microsoft and Yahoo!, Google has few other revenue sources. Microsoft and Yahoo! boast personals, pay for email and web hosting, job ads and dozens of other services they provide with commercial partners. Microsoft has an important travel business.

Back at the Googleplex, we've seen a hardware appliance launched to little interest, and some licensing of the technology to other web sites, but these surely represent an inconsequential fraction of Google's revenues. A focus on corporate search will have to wait for the future: an early entry would pitch PageRank™ which is the best Google has got right now, against far clever Bayesian technologies such as Autonomy's enterprise search. These don't require prefabricated taxonomies, and can start matching patterns with no 'seed' data. Autonomy has had years to add metadata and XML support, and knows what corporates need in infrastructure terms. And it's hard to imagine any IS department tolerating kludges such as this.

Build it or sell it

So apart from Blogger.com, Google doesn't own its own billboards. It can pursue either one of two strategies, or more likely a combination of both, to remedy this. Firstly, it can buy or develop more of its own billboards: features which make Google's own pages more 'sticky'. By definition, Google's search results aren't sticky: you're on your way somewhere else. Email, a dating service (Google reportedly bid the bubblicious Friendster.com the San Jose Mercury reports today) and beta services such as Froogle could all come into play, turning Google into a mini-portal. Or, Google could focus on ensuring that it's the most pervasive media buyer on the Internet. Free of such encumbrances as it now is, this could work to Google's advantage. But it needs partners.

Since Yahoo! acquired Overture in July, MSN has been dependent on two of its rival's services for its search. (Inktomi provides MSN's main search). And Overture is dependent on MSN and its parent for two thirds of its own revenues. So a Google-partnership represents a terrific opportunity for Microsoft to deal Yahoo! a severe blow.

It's safe to rule out acquisition for now. Microsoft wants a good search engine, but it never pays for a company unless it can bring its own technology to market cheaper. Even with $40 billion in cash, MSFT shareholders would question the wisdom of spending more than a small fraction on a search engine, which can be developed in house for far less. Microsoft is surely aware that Google search engine has been suffering of late. (Of course, by floating the idea, Microsoft may be popping the bubble so it can acquire Google on the cheap. But it's still cheaper to roll its own search and broker business.)

Google's trademark childlike advertising has successfully obscured how it makes money. But that's going to be counter-productive, now. If it can claim to be the leading destination for media buyers - one that uniquely isn't compromised by the disease of portalitis - then it would be wise to start shouting about it.

So we can reach two perhaps surprising conclusions. Microsoft makes an excellent partner for Google. And Google's marque search engine matters much less to Google than you might think. It's not really in that business - because there isn't a "search engine business".

It simply wants to get ahead in advertising. ®

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