Google And The Future Of Search

| About: Alphabet, Inc. (GOOG)
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In two previous articles, I discussed potential threats to Microsoft Corporation (NASDAQ:MSFT) in the operating system and office suite markets. Google Inc. (NASDAQ:GOOG) may gain market share in those markets, but does not stand to make that much revenue from products that it mostly gives away for free. This article will focus on Google's main area - search.

Google creates hundreds of different products and services, but it still relies on advertising for 96% of its revenue. The biggest source of this revenue is from the ads that appear on Google's search results, but it has expanded this advertising platform to earn revenue elsewhere.

Google earns revenue both from Google-owned sites, such as Gmail and YouTube, and from a large network of third-party sites that place Google ads within their own pages. The majority and foundation of Google's revenue is based on their search engine, so an investor in Google will need to evaluate whether Google will be able to maintain its current dominance into the future and if it will be able to expand into new areas of search.

Google currently controls two-thirds of the US search market, with Bing and Yahoo (YHOO) claiming almost all the rest. In mobile and foreign markets, Google's share is even higher. This dominance is due to Google's superior ranking algorithms, its comprehensive and up-to-date search, and its ability to return relevant results.

However, Google's results are not always of the highest-quality. Websites spend a huge amount of effort trying to game the Google algorithm to boost their rank in the results. These efforts are often successful, resulting in lower-quality sites gaining the top spot in many searches. (See more examples here.)

Google relies on algorithms to provide its rankings, which may miss out on certain quality differences that a human could quickly notice. Certain large websites are often able to dominate many searches on Google even if they do not always have the best content or the page most relevant for the user.

For example, Wikipedia ranks at the top of a huge number of Google searches, but its page is not always the best quality, or the searcher may be looking for something easier or more concise. These are all areas where a better search can be created, but the question is who will improve first?

Google's only big search competitor is Bing, since it also powers Yahoo's search. Will Bing be able to offer improvements in these and related areas in a way that can beat Google and steal market share? It seems unlikely it will be able to beat Google head-on in making better incremental improvements.

Partially this is due to Google's head start, the fact that it spends more and focus more on search, and that it has more search data. Bing improved the situation somewhat by partnering with Yahoo, but there's still a big gap. In addition, Google's pace of improvements has been faster, and it has managed to build a very comprehensive search that analyzes a huge number of sources.

However, new search innovations will be developed that may be very different from the current form of search. There is no real way to know what company will make these new innovations. It may be Google or Bing and it may come from somewhere totally new. Blekko is one start-up trying out new approaches to search and there are others. IBM may decide to apply the technology behind Watson to general search. While Google may have the advantage now, this may change in the future, and consumers will easily be able to switch to a different search engine.

An additional issue with Google is that it just provides a standard list of links for a search query. However, people do not need many result, they need help finding the one website, product or information that is best suited for them. While Google provides some instant information and some additional features for certain categories, for many searches it just provides the same type of results as a decade ago. Technology improves and more advanced tools will be developed to help people hone in on what they want.

This issue is particularly relevant to purchase-related searches. Google earns much of its revenue from people searching for information about a product or service, especially within certain high-revenue categories, such as searches for insurance, loans or lawyers.

Yet many of these commercial areas are weak points for Google, since they are so heavily gamed. These are the types of searches where people could benefit from real a web service that really helps them choose the best deal for their needs, as opposed to just looking through a list of links. If another company is able to build a successful service to answer this need, it could harm Google's revenue, even if people continue to use Google for general searches.

There are many services that are trying to offer improvement in this area. For example, is able to extract and display useful data which allow consumers to compare and sort thousands of different products and services. is uses social data to help recommend products. There are general shopping searches like and, and more specific searches such as for airline searches or for jobs. There are also services that offer to analyze a user's needs and find the best possible service to fit that, such as for cell phone bills and credit cards.

These sites can often help users find what they want in a better way than a general Google search. Google recognizes this, so it has also expanded beyond regular search to compete in these areas. It took a big step in moving beyond keyword to actually understand data with its recent launch of the knowledge graph.

While it is now used to find more relevant results, in the future it may be used to compare different services. Google has also has begun using much more social data in its results, built off their Google+ platform. Google recently updated their shopping search to just display paid listings, putting it in direct competition with Nextag and Pricegrabber. This will bring in more revenue for Google, and also get rid of many low-quality sites in the results.

Google purchased ITA Software, the engine behind many flight searches, and now offers its own fast flight search. All these steps by Google show that it is not just resting on good general search results, but it is also building into new areas of search. These will help Google meet competitive challenges and expand into new revenue areas beyond standard search ads.

Google is taking on all these challenges head-on, so there's no reason to predict any decline soon. The long-term risks however, still remain. The biggest risk may not be from one company beating Google overall in search, but from people finding certain searches beat Google in certain categories. It is likely that Google will not always be able to provide the best results in every category. This may even lead to a meta-search engine that provides the top results from whatever search engine necessary.

The above-mentioned risks exist, but Google seems to be well prepared overall. Since Google has many new potential areas for revenue growth, it can be considered a stock to buy, albeit a risky one long term.

Disclosure: I am long GOOG.