Google's Solid Competitive Advantage Is Not Threatened By Social Media

Apr.11.14 | About: Alphabet Inc. (GOOG)

Summary

Google is still ranked by Compete as number 1 in number of Unique Visitors.

Google's moat is widening with every search you make.

Social media data isn't game changing in the search industry.

Fellow contributor Shlomo Wiesen argues that Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) core business is under pressure because of increased functionality of social media. His latest article is summarized clearly in the final paragraph:

What the future of Google's success, as well as its role in search comes down to is the continued evolution of search. With the wider and increasingly strong net that social media casts over internet users and their web experience, other mediums, including search, will begin to suffer, or at least not grow as robustly as they used to.

I disagree with his views on the evolution of search and want to offer investors an additional perspective.

Google will not continue to grow at its historic pace, but I don't think the emergence of social media has anything to do with it. If anything, social media have increased revenues for Google. Social media made it more attractive for people to spend time online, where they are just a mouse click away from the best search solution available. Invariably when the need arises, Google is where people turn to fill their information needs. There are a few exceptions that Shlomo points out in his article like News.

Shlomo is most likely correct in that social media did take traffic away from other media. It's not from Google's Google.com search portal though. This is supported by Compete figures. In 2009 the top 3 sites in number of unique visitors were:

  1. Google
  2. Yahoo (NASDAQ:YHOO)
  3. Facebook (NASDAQ:FB)

Today Compete ranks these 3 exactly the same.

The future of Google's success is strongly tied to the evolution of search. However this should not be taken to mean that Google is on the back foot and forced to innovate.

Google's shareholders should be excited if search technology would not advance beyond where it is today.

Although switching costs appear to be low, they really aren't. To the casual observer it appears a search engine user could switch to a competitor at any time. I've shown in my earlier article: Google's wide moat is growing wider every second, that isn't actually the case. Google has a very solid competitive advantage and its wide moat is growing wider with every search.

This is true because Google connects your queries to your identity. Consequently they are able to place your current query into the context of your historical search behavior.

This type of data is even more useful to provide you with a great search experience than the type of data - admittedly highly useful as well - you make available through social media. This results in higher quality results. They are also adding to it with every search. You only put your personal information into a social network profile once.

Assume you start a search engine yourself. Let's call it "Alphasurf". You have all the money in the world and are able to exactly duplicate Google's search engine.

The thing is, the search results you will provide your users with, will be inferior to those provided by Google to its existing users.

It is very hard to beat Google at their game except with game changing technology. Using social media data (some of which can be accessed by Google and which it is tapping itself with G+) isn't that game changing technology.

Social media is a really interesting way of delivering cost effective content to users - and an obvious competitive force to traditional media - but it isn't a threat to Google's core business. Google won't grow at the lightning speed it has grown cash flow in the past. At the same time I expect it to grow cash flow - from its advertising business - at a rate that is hard to keep up with by other companies of its size.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.