Google Maps: Search Companies and Portals on Collision Course

Includes: AABA, GOOG
by: David Jackson

Google released a beta version of Google maps. Surprise, surprise - it's terrific. As with Gmail, Google just seems to do things better. But instead of focusing on the individual application, investors need to step back and see the big picture: search companies and portals/content comanies are on a collison course. Why, and what are the stock implications?

What's Google's motivation for rolling out Google maps? Here's what the product manager for Google maps writes on Google's blog:

We think maps can be useful and fun, so we've designed Google Maps to simplify how to get from point A to point B. Say you're looking for "hotels near LAX." With Google Maps you'll see nearby hotels plotted right on a crisp new map (we use new rendering methods to make them easier to read). Click and drag the map to view the adjacent area dynamically - there's no wait for a new image to download. Or get step-by-step directions to where you're headed. If a particular intersection on the route looks tricky, click on that step in the directions to see a magnified view. Play with the keyboard shortcuts (arrow keys to pan or the +/- keys to zoom in and out ) too. The tour shows you even more. Happy trails.

Bret Taylor
Product Manager

"Useful and fun"??? You've got to be kidding. Google is targeting the applications that have the greatest user stickiness and recurring revenue potential, and one by one improving them over Yahoo!'s offerings. The list so far: email, comparison shopping, groups (Google Groups versus Yahoo! Groups), and now maps.

Google maps are critical to Google for two reasons. They are critical content to provide in response to general seaches. And they are a critical element of a good local search offering. Local search, if done right, has significant revenue potential. Don't be surprised if Google maps is integrated with Google's satellite pictures at some point.

Expect more content from Google in the near future. An example: If you currently type a stock ticker into the Google search box, you're provided with links to stock information and news stories. That's not good enough though: Google needs to provide answers and content, not links. (Search engines are becoming answer engines.) In the near future, Google will probably provide actual stock charts and financial data in direct response to a ticker search. That will place Google search in direct competition with Yahoo! Finance.

What's the key take-away for investors?
Investors have been too willing to view Yahoo! as a content company and Google as a search company, and thus to ignore the growing competition between them. But in reality the two businesses and the two companies are colliding. Search is ultimately about providing access to content.

This has specific implications for these two stocks:

  1. Yahoo! will face increasing competition from Google, and possible user attrition as Google rolls-out improved offerings that compete with Yahoo! services.
  2. Google will face increasing expenses to add access to proprietary content to compete with Yahoo!, leading to lower gross margins.

Quick comment: As companies become extremely profitable, that draws increasing competition which lowers margins. No surprise if that's what's happening here.