Wednesday, February 06, 2008

Competitive advantage of Google

A few thoughts on the proposed Microsoft/Yahoo deal.

People have been throwing around all sorts of ideas, pro and con, on the deal but at its core, the question on the merits of this deal boils down to one of customer captivity.

For whatever reason, people like to use Google and while it is very easy to click and use another search engine, many people don't. While there are no financial switching costs, there may be some psychological ones (I know how to "Google" something on the net, I have no idea how to "Yahoo" or "Microsoft" something.) So this psychological hold Google has on customers is its one and only competitive advantage.

There is no technology competitive advantage. I think for most users, Google, Yahoo and MSN are essentially the same. Hard-core techies could probably point out some performance differences, but my mother can't.

It isn't about scale. Marginal costs are meaningless online, each new user costs nothing to the company. Maybe Microhoo's! fixed costs will come down somewhat due to synergy (whatever) but ultimately the average costs between Google and Microhoo will remain little changed, so there aren't any cost advantages to be had.

So what other competitive advantages are there? I can't think of any. The only thing Google has to protect its position is the fact that users are simply accustomed to using Google. Microhoo! therefore has only one goal, to break users of the Google habit.

If Ballmer and co. can do that, then this deal is worth something. If they can't, then adding the number 2 position with the number 3 position will not equal a number 1 position.

Hat tip: A lot of this thinking is powered by the writings of Bruce Greenwald. Prof. Greenwald, in the unlikely event you're reading this, I hope I got it right.


Anonymous said...

You cannot seriously believe that the only competitive advantage google has is to google something. Google has the largest most single ran server and host system. Additionally, they are the first web-based company to attempt to compete with Microsoft they are creating business web packages including spreadsheets, word processing, email and web creation services. They are innovative and creative and their searches are more accurate. These are just some of the small list of competitive advantages Google has over their competitors

Anonymous said...

All the competitive advantages you mention "Anonymous" are not real competitive advantages, read Competition Demystified by Bruce Greenwald....