On Microsoft’s search strategy
Posted by Arun Uday on May 30, 2008
Last week, there was an extremely interesting exchange of views on Microsoft’s search strategy between Tim O’Reilly and Michael Arrington. See:
http://radar.oreilly.com/archives/2008/05/microhoo-corporate-penis-envy.html
http://www.techcrunch.com/2008/05/25/the-importance-of-a-competitive-search-market/
http://radar.oreilly.com/archives/2008/05/why-search-competition-isnt-the-point.html
Tim seems to think that MS’s efforts are directed in the wrong direction since search as we now know it is essentially a “done deal”. On the other hand, Mike argues that Google is headed towards monopolizing search, which portends ill as far as internet related innovation is concerned and therefore, MS’s attempts to break into search should be welcome by all. I would say, I will have to go with Tim on this one, and here’s why.
One of the essential (almost mandatory) characteristics of an internet business model is - network effects, which means that the value of the service has to increase with increasing numbers of users participating in it (think of a telephone network). Prior to Google, it was not clear whether search would ever be successful in gaining network effects. However, amongst other things, one of Google’s greatest successes is that it has transformed search from individual one off interactions to an intelligent system that records every one of users’ actions and mines these data to constantly improve the search results. Therefore, for any keyword, if a particular result gets more clicks, it indicates that users find that more relevant, and this gets bumped up on the results list. Hence, every action performed by every user is incrementally beneficial to the system since it helps improve the results. Thats network effects for you.
Similarly, on the revenue front, Google’s Adsense program again has huge network effects working in its favour. The better the algorithms for matching content and text ads, the better will be the CPC yields. That will in turn attract more publishers to adopt the platform for monetizing content, which in turn will attract more advertisers. This enables Google to earn more, which it invests back into further ramp up of its search infrastructure (index, h/w etc), which further improves the results.
Thats the reason, I feel that Google has entered into a virtuos loop and its total dominance of search seems inexorable. I had a debate with Don Dodge (of MS) on this topic some time back (See: comments section of http://dondodge.typepad.com/the_next_big_thing/2007/05/why_1_of_search.html). That Google’s search marketshare has been growing forever proves my line of reasoning.
Therefore, I feel MS’s attempts such as its recently announced cash back offer is weak at best and doesn’t do anything to address the core issue. Like Tim argues, MS needs to fundamentally change the nature of search if they have any hope of gaining traction in this space rather than resort to superficial tactics such as the cash back scheme.
