Day after day, the stock market seems to send discouraging news to competitors seeking to slow Google's (GOOG) advance. It happened again on Nov. 7. Despite a high-profile partnership announced by key rival Yahoo! (YHOO), and a report that Microsoft (MSFT) had the upper hand in negotiations to acquire a stake in Time Warner's (TWX) AOL, Google's stock price continued to rumble northward, reaching a new high of $395 per share.
And why not? Google's search marketing business continues to best even the rosiest of expectations. Its third-quarter sales doubled to $1.6 billion, and profits jumped sevenfold to $381 million (see BW Online, 10/21/05, "Google and Yahoo!: Rolling In It").
YAHOO MOBILIZES. But the whir of activity among Google competitors deserves the careful attention of investors. Much of the action involves the web of alliances that surrounds the three biggest players in the Internet world: Google, Yahoo, and Microsoft. And competitors seem to be making the most of partnerships, as they line up against Google.
Take Yahoo's Nov. 7 alliance with TiVo (TIVO), which develops television services for digital video recorders, or DVRs. At first glance, it's a minor deal: Visitors to the Yahoo TV site can tell their TiVo devices what shows to record -- similar to an alliance hatched between AOL and TiVo in 2003. Yet it opens up the possibility for Yahoo to eventually intertwine its services with TiVo. For example, a user could access Yahoo weather or traffic reports from the TiVo device.
Meanwhile, Yahoo continues to forge ahead with its long-standing partnership with SBC Communications (SBC). The two first linked up in 2001 to provide Yahoo-branded high-speed Internet access to SBC customers. Earlier this year, the companies announced efforts to extend this relationship into TV set-top boxes.
Now, the companies are discussing ways to push Yahoo services onto mobile devices. Yahoo won't offer specifics, other than to say that reports of a Yahoo phone are inaccurate. But it's clear the companies are extending their relationship into as many venues as possible.
MICROSOFT'S UPPER HAND. Yahoo's deeper push into communications services could compete directly with Google's efforts to become more ubiquitous to Internet users. For instance, Google is bidding for the right to provide so-called wireless fidelity, or Wi-Fi, mobile Internet access to the city of San Francisco. And in July, Google invested in Current Communications Group, a company that provides high-speed Internet access over power lines (see BW, 9/5/05, "Google's Grand Ambitions"). Such efforts to extend the Web to users, wherever they may be, makes perfect sense for Internet companies that profit from this connection.
Meanwhile, Microsoft -- through an attempt to buy all or part of AOL -- continues to threaten what has been Google's most successful partnership. Google currently provides search results and advertising to AOL, taking in 20% of the revenue generated by the alliance. Both Google and Yahoo have also entered the discussions, but many observers reckon Microsoft has the upper hand (see BW Online, 11/7/05, "The Stakes in the Fight for AOL").
"[Microsoft's] MSN needs it the most," says Jefferies & Co. analyst Youssef H. Squali, who predicts Microsoft will eventually prevail in the negotiations. "There may be a hiccup for Google when it becomes clear they'll lose these key accounts."
ONLINE REAL ESTATE. Squali and others are not concerned about the loss of a key distributor for Google's search ads. AOL represents less than 3% of Google's net sales, analysts estimate, and the percentage is shrinking. A combined AOL and Microsoft would still trail both Google and Yahoo in terms of search market share, according to researcher comScore Media Metrix.
Analysts worry, however, that Google will lose a key ally, just as it hopes to branch out from search ads into more visual branded ads. These colorful ads, often containing audio and video, represent just as big a market as text-based search ads. Large marketers, in particular, value such ad units, as they attempt to build their brand online, as much as drive traffic to their sites.
Branded ads have been an untapped opportunity for Google. Earlier this year, it announced a service in which it will place such ads on its partner sites. But it has refused to carry these ads on its own site, for fear of slowing down Web pages and alienating users. If Google loses AOL, which showcases plenty of its own branded ads, it could lose important online real estate in its effort to get into branded ads.
GOOGLE GOALS. "There are many advertisers who see search as just one element of an overall marketing plan," says Squali. "Google needs to be able to sell them branded ads."
As long as Google's booming search business continues to print money, these concerns will likely remain on the back burner. But, if Google is going to live up to its staggering $110 billion market valuation, it will need all of the allies it can get.
READER COMMENTS
Elgin is a correspondent in BusinessWeek's Silicon Valley bureau
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