Has the Search Advertising Market Reached a Tipping Point?
Google, the world’s largest Internet search and search/advertising company, has announced a deal with #2 rival Yahoo!, a move that could lockup over 90% share of search advertising market. Reacting to the deal, the Department of Justice announced that it will open an investigation. Part of the question that the Justice Department must examine is whether the search advertising market has reached a “tipping point,” a stage where market rivalry completely stalls in favor of one dominant firm. This ConsumerGram will examine the market evidence and discuss how consumers would be impacted, if the Google/Yahoo! Deal becomes permanent.
“G” is for Gigantic
In his 2006 ConsumerGram, Dr. Larry F. Darby, former FCC chief at the Common Carrier Bureau, compared the financial results of a number of large IT firms and showed that Google was one of the most profitable and, in terms of market capitalization, largest web-centric companies, larger than any cable or telephone company in the world. While there are many instances where a small number of firms can operate competitively by driving down prices and achieving economies of scale and scope, in the absence of an effective competitor or in the presence of barriers to entry, a dominant firm can exercise market power, enabling it to raise prices on consumers and reap unreasonable profits. It is also a sign of market power when a dominant firm increases its market share, while rivals begin dropping out of the market. Is this the case of Google? Apparently, the Department of Justice wants to know just that, and it has opened an investigation specifically into Google and its deal with Yahoo!, fearing the deal may yield anticompetitive effects.
Increasing Concentration Spells – Tipping Point
There is some reason for concern. In network economics, “market tipping” can occur when one very dominant firm achieve increased market share and consumers perceive this increase as an increase in the value of the network. Said differently, an increase in market share leads to “increasing returns to consumption” and bestows value upon the dominant firm, value not accruing to other rivals. Once the market tips, a dominant firm has an advantage over would-be competitors – a permanent advantage that cannot be contested. The advantage becomes a barrier to entry for would-be rivals, who slowly wither away, are bought up, exit the market or become insignificant niche players. When the market tips, the dominant firm will have market power, enabling it to raise prices and reap excessive profits, much like any monopolist would. What does the market share evidence say about Google?
Google: The Search Engine of Growth
About one year after its IPO, Google’s search engine market share reached 36.9%, and by June 2006 share rose to 44.7% (ComScore, IR, July 18, 2006). However, Google’s market success has also met with regulatory success. In a recent wireless auction, the FCC changed its spectrum bidding rules requiring winning bidders to open their network to Google’s software and services. Google has also pushed for regulation and legislation that would constrain would-be rivals from competing with it in web content, as well as preventing ISPs from differentiating and managing its own network. Google continues to expose more consumers to advertising and track online consumer’s behavior, in large part due to network effects, as well as its acquisition of DoubleClick and YouTube – both receiving nods from regulators.
Today, Google’s share in the online search market share has increased and, as the table (on next page) indicates, Google’s share now stands as high as 78%. Its share is reportedly higher outside of the U.S, and its search engine is used almost 100% used by high school and college students.
Most troubling, however, are recent events suggesting that rivalry in the search engine and search advertising markets are waning altogether. AOL now uses Google’s search engine and, consequently, Google’s advertising program. Ask.com has recently downsized its staff and signed a five-year multi-billion dollar deal to use Google’s advertising/sponsored links program. Most recently, Yahoo! has begun a trial to use Google’s advertising too, effecting closing the door on Microsoft’s bid to challenge Google. If Google/Yahoo! deal becomes business-as-usual, Google would have garnered nearly all of the search (sponsored text) advertising market. Moreover, since some claim that Google’s ads earn nearly twice as much as other advertising programs, Google’s actual market share, based on revenue, is likely higher than widely reported. Google, largely though network effects, has become the default search engine, and consequently the advertising program, for many web applications, ISPs and corporate websites.
Google’s “Potential” Market Share (%)
of Sponsored Search Advertising
Hitwise, March 2008
Net Applications, March 2008
Net Applications, February 2008
Net Applications, February 2008
Nielsen, February 2008
ComScore, March 2008, Core Search
ComScore, March 2008, Expanded Search
* – Estimate for search traffic among university students
** – Estimate for search traffic among high school students
(Note: AOL also uses Google Search, as do many ISPs)
Conclusion: Searching for Competition?
However you look at it, the market for search advertising is dominated by Google, and one-time rivals appear to be resigning to use Google’s advertising and search features. This suggests that the market may have well tipped to Google and there is insufficient competition to challenge the market. Furthermore, with Google recording and archiving the personal browsing history of the vast majority of online consumers, it is impossible for any firm to enter the market and produce better targeted online ads with such a small share of consumer profiles. In other words, market rivalry has come to an end.
What this means for consumers is simple. Though it does not own a network, because Internet searches are the most common activity on the web, Google influences what consumers see in terms of advertising and search ranking, which lead consumers to “click ahead” in ways that benefit Google, its products and its sponsors. That dominance makes it harder for small firms to enter the market and differentiate themselves. In fact, even larger industry players, such as ISPs, wireless providers, Microsoft and others, are being pushed to the sidelines. In the end, what consumers lose is choice, differentiation and innovation.
To stem market power, public policies need to encourage inter-industry rivalry, IT investment and increased consumer choice in the sector, including the market for search and online advertising. Now that government has permitted Google to amass its market power, what will be done to fix it?