Summary: The future of Google's search business depends on users adopting non-Microsoft web browsers.
Sell-side research analysts and buy-side hedge fund and mutual fund managers seem to agree on one thing about Google: its search business is great, while its contextual advertising business is worrying. Why? Because search has much higher gross margins. Google pays web site owners (like me) a large cut every time someone clicks on a Google ad. But on its own search site, Google pockets all the profit. And as Google's contextual advertising business has grown from zero, it has dragged down Google's aggregate gross margin. Search good; contextual advertising bad.
I think the opposite is true. In fact, it's Google's search business that is far riskier from a portfolio manager's perspective.
Most people agree that Google's search technology is great, but Microsoft and Yahoo are closing the gap. For most searches, there's not a lot between Google's, Microsoft's and Yahoo's results.
The key remaining difference is integrity: Google does not allow its search results to be polluted with pay-for-placement, whereas Yahoo places companies in the top 10 search results in return for payment, even if their URLs are irrelevant to the search in question. Microsoft suspended pay-for-placement recently as part of its attempt to improve the quality of its search results. But Microsoft has stated that it has no long-term commitment to eliminating pay-for-placement, but will evaluate the results in business terms. I'm not sure that counts as real search integrity.
Is integrity enough to keep people using Google? Now, admittedly a sample of one is not a good basis for generalization, but here's how I search. I use two browsers: Apple's Safari and Mozilla's Firefox. Both have a Google search box embedded in the top of the browser, next to the URL window. Instead of going to www.google.com, it's far quicker and easier to type a search term into the browser's Google-search-box. The results are the same.
This raises an interesting question. What will happen when Microsoft finally brings out a new version of Internet Explorer, with search embedded in the browser? And remember: the search functionality in Longhorn (the next major version of Windows) will include integrated web and local file search. Well, you can bet that Microsoft won't embed Google search into the browser. It'll be MSN search.
My guess is that in the six months following Microsoft's release of Internet Explorer with embedded search, Google's search market share could fall by 50%.
When that will happen is unclear. Microsoft exploited its OS monopoly to cut development resources for Internet Explorer. As a result, we're left with a product riddled with security holes and with functionally inferior to better browsers like Safari and Firefox. (It's remarkable that Internet Explorer doesn't offer tabbed browsing; Internet Explorer users don't know what they're missing.) To bring out a fully updated version of Internet Explorer, Microsoft has real work to do.
That could be Google's opening. The clock is ticking on Google's search business, and one solution is for Google to spur the adoption of web browsers with embedded Google search, or at the very least browsers that offer users a choice of embedded search that gives Google a level-playing-field.
In the short run, Google could encourage its users to download Firefox. But the only long-term solution is for Google to get PC vendors to bundle a Google-friendly browser with new PCs. How it will do that is unclear, because unlike Microsoft, Google has no relationship with Dell and the other PC vendors.
Google will have to re-ignite the browser wars. Whether it will succeed in doing so is an open question. And so too, it follows, is the future of Google's search business.