AS
MORE and more of the world's business is conducted online, a
battle royal is taking shape. The struggle is to decide
which company will become the primary gateway to the
internet. Three firms, Google, Microsoft and Yahoo!, are
aiming to establish the world's leading internet portal—the
site that most internet users rely on for everything from
searching the web to sending e-mail and catching up on the
news. All three firms are hoping to strike some sort of deal
with AOL—the fourth player in the
battle of the portals.
It is
highly convenient for Time Warner, the world's biggest media
company, that its struggling web portal, AOL,
is suddenly at the receiving end of competing bids from all
three of the other internet giants. Microsoft, the world's
biggest software company, was the first to start haggling,
via its portal, MSN. Then Google, the
world's most popular search engine and nowadays Microsoft's
archest arch-enemy, came running, with Comcast, America's
biggest cable company, as a prospective co-bidder. And now
Yahoo!, the biggest web portal and determined runner-up to
Google in internet search, has also entered the bidding.
Lest
anybody pick the wrong metaphor, it is not the case that
AOL is “the prettiest girl at the
dance”, says Safa Rashtchy, an analyst at Piper Jaffray, a
bank. Instead, he says, AOL “is big
open real estate and you don't want your competitor to get
it.” That is because the vaguely defined and fast-changing
“web-portal” industry, though still young enough to be the
fastest-growing advertising medium, is also showing the
early signs of maturity. That would suggest that this
industry, like many others, will evolve towards three large
generalist players and several small niche firms, a
phenomenon that Jagdish Sheth and Rajendra Sisodia, two
academics, call “the rule of three” in a book of the same
title. The big question is which three emerge and in what
combination.
Analysing how the four portals currently measure up is
surprisingly hard. Conventional wisdom says that Google is
the one to beat. That is because it is the clear leader in
internet search—the most technologically exciting and
profitable end of the business. Yahoo! is a strong second in
search and MSN a poor third, whereas
AOL does not compete in search at
all. Instead, it uses Google's technology to generate search
results and to make money out of them (by placing the
hyperlinks of advertisers near related search results).
But
when the criterion is not the number of searches but the
number of site visitors in America, Yahoo! is the clear
leader, with MSN in second place,
AOL in third and Google last. Terry
Semel, Yahoo!'s boss, used this fact to make a barbed joke
when speaking at an internet conference in San Francisco
last week: “Gosh, it's starting to look more and more like a
portal,” he said of Google, whom he is suspected of envying,
and “as a portal it would probably be rated number four.”
Yahoo!'s web mail service, he added, has ten times as many
users as Google's alternative.
If
instant-messaging (IM) technology is
the measure, AOL is the clear leader,
with Yahoo! and MSN competing for
second place (and, last week, linking their technologies in
a partnership), while Google is again last. Instant
messaging is currently hard to make money out of, but
potentially crucial since it is one vehicle for free
internet telephony and tends to make its users fiercely
loyal.
By
the more conventional measures of advertising revenues and
operating profit, Google is still the clear leader and
MSN the big loser, says Henry Blodget,
the president of Cherry Hill Research (Mr Blodget became
notorious as an equity analyst at Merrill Lynch for his role
in inflating the dotcom bubble, which led to his being
banned from the securities industry for life). After making
losses for about a decade, MSN is now
expected to make an operating profit of about $500m this
year, a sharp contrast with an estimated $2.4 billion for
Google. “The web war is over,” argues Mr Blodget, “and
Microsoft lost.”
This
might suggest that a combination of AOL
with MSN makes the most sense. Both
are unhappy step-children of parents that live in other
industries (Microsoft in software, Time Warner in
traditional—ie, offline—media), whereas Yahoo! and Google
remain the pure internet businesses they have been since
their inception. For MSN, switching
AOL away from Google's search
technology and towards MSN's might
offer a last chance of staying in the search competition.
And both MSN and AOL
still have lucrative but fast-shrinking side businesses in
dial-up internet access, which Google and Yahoo! scoff at as
holdovers from the narrowband stone age.
By
contrast, Google would at first glance seem to be the least
likely partner. It is run by technology purists—proud geeks
who preach that computer algorithms, not human editors, will
change the world. On the other hand, as confident as Google
currently is, AOL is its single
largest customer, accounting for 11% of its revenues in the
first half of this year. Google would prefer not to lose
this to MSN, so its bid appears to be
defensive. “Google would probably not have done this if
MSN had not made this move,” says Hal
Varian, an academic and adviser to Google. This would
explain why its bid is intended as a joint-venture. The idea
is that Comcast would bring the broadband internet access,
AOL the media content and “eyeballs”,
and Google would do the “monetisation” through its
advertising technology. This would ensure that each partner
concentrated on the bit of the business in which it really
excels.
A
Google-Comcast-AOL combination would
also be the most effective counter to Yahoo!'s (so far)
successful strategy of teaming up with broadband providers.
Yahoo! has deals with SBC and Verizon,
America's two largest phone companies, to give their
broadband customers free Yahoo! accounts, web mail and
online storage; this week Yahoo! struck a similar deal with
BellSouth, the country's third-largest telephone company.
Google, the only portal that does not make content of its
own, and Comcast, the biggest broadband provider in America,
are feeling a bit left out.
But a
deal between AOL and Yahoo! might be
culturally the easiest. Both are at heart media companies—Yahoo!'s
Mr Semel made his career in Hollywood before moving to
Silicon Valley. Both see media content, whether generated by
teenage bloggers or professional film studios, as their
natural terrain.
Ultimately, it all comes down to the three suitors'
estimates of what Mr Varian calls “the power of the
default”. Default users are “the great unwashed”, says Mr
Varian. They are the ones who, for instance, use
MSN because it comes pre-installed in
Internet Explorer, the web browser that itself comes
pre-installed on new computers. By contrast, teenagers and
geeks mix and match their web mail, IM,
online maps, search, blogging and so on from whichever
service on the internet they happen to like best. Default
users are less demanding, older but nonetheless rich enough
to target with small hyperlinked text advertisements. For
the dealmakers, it all comes down to figuring out how much
these naifs, collectively, are worth.
© 2005 The Economist.
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Leadership Focus