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The building blocks of Google's market power/search dominance

The NY Times unearthed a fascinating and extremely important piece of antitrust-relevant information in its great article today: "Firefox and the anxiety of growing pains." 

  • The NYT obviously wrote the article because it exposes a comical and ironic juxtaposition of an Open Source company like Mozilla, which is passionate about transparency, having cut a secret and lucrative royalty deal with Google, which is passionate about the "secrecy of its arrangement and agreements."

However, why this article is such a gem and is so important, is that it provides missing link evidence of why Google has become such a dominant search engine so fast, and why that domination is destined to increase. 

  • In other words this article tangentially helps explain how Google has well passed the "tipping point" where they will increasingly monopolize the search business. 

Google loves to claim that people organically choose Google and that consumers are but-one-click-away from choosing another of a hundred search engines.

  • Balderdash!
  • Let's peel off the cheap veneer of that superficial argument.

First, search engines (and browsers) mostly come to consumers loaded as part of a "default setting" of other software or hardware.

  • Distributors choose search engines!
  • A minority of users choose their own search engine, the majority use the default setting.

Second, this NYT article intimates that Google had a secret financial arrangement with Mozilla, which distributes the open source browser which is the main competitor to Microsoft Explorer's browser.

  • Thus, as Firefox has become an efffective viral competitor to Microsoft Explorer, the ~100 million users that have adopted Firefox as their new browser to replace Explorer, have automatically become default Google users.
    • Now it is clear why despite all its best efforts, Microsoft is losing share to Google pretty proportionate to its Explorer share loss.
      • We can cross-test this thesis by observing that Yahoo, which is not browser driven, has lost much less share to Google than Microsoft. 
    • Now it is also clearer why Google has such higher market share in Europe than in the US.
      • (Google's market share approaches 90% in Germany, and is ~75% in the UK and in Europe.)
      • Europe is more anti-Microsoft and pro-open-source than the US.
      • Google is "secretly" riding that "open" source wave. 
    • What is fascinating here is that it's not that millions of people are choosing Google over other search engines every day; it's that millions of people are being served up Google as their new default search engine by a distributor and they are sticking with them. 
  • What's also important to appreciate is that Google now wins every time a user switches to open source software, even though as the article effectively explains, Google does not subscribe to the transparency of the open source movement.
    • In other words, Firefox is Google's poodle to parade around the world to claim they are the benvolent master of the open source and free software movement. And Google gets paid for every "pet" of Google's open source poodle.  

Third, this Firefox "audience feeder" deal is just one of many that are the real source of Google's astonishing market dominance over the last few years.

  • Much more than any other player, Google appreciated that search was an "audience" game and that Google would be remunerated directly by the size of their audience or user base.
    • (Microsoft, naturally looks at its enormous client base as subscibers/paying customers and not as an audience to monetize.) 
  • Because Google has understood that the search game is all about audience size, it has been more than willing to pay up to acquire incremental audience.
    • Google was shrewd in investing roughly $1B in AOL, when it was in distress and to help it transform from a subscriber model to an audience model, in return for being AOL's default search engine.
    • Google paid Dell an undisclosed sum to make Google the default search engine for anyone who bought a Dell computer.
    • Google shrewdly paid MySpace almost $1B to be the default search engine on that extremely fast growing social networking site.

Fourth, but can't anyone buy a default search engine deal? Don't they just have to outbid Google? Isn't that competition?

  • How does any company ever become a monopoly? They reach a tipping point where their relative competitive advantage becomes increasingly overwhelming and cannot be matched by competitors in its market.  
  • In this case let's remember that open source Firefox is Microsoft's arch enemy, so Microsoft can't out bid Google there.
  • Most importantly, since the economics of how much a company can afford to pay for an incremental audience member is driven by the size of their search audience. Google's relative share size means that in paying the exact same price per user Google can afford to pay a distributor more than twice as much as Yahoo, more than six times as much as Microsoft and over twenty times as much as

Light bulbs now should be going off in people's heads, especially those in the antitrust community.

  • Google has 65% share of the search market in the US and 75% share plus in Europe.
    • It can now afford to pay dramatically more per new user addition than any other competitor.
    • The tipping point has been reached and surpassed.
    • The search game is over.
      • Game. Set. Match Google.

Don't let Google feed you any baloney that they are not dominant and that they have to compete against a hundred search engines.

  • The evidence is compelling to the contrary.

If you haven't read my previous analysis of why Google will become increasingly dominant in search, please see pages 5-6 in my 10 page analysis "How Google-DoubleClick Exploits Antitrust's weak underbelly to dominate Internet advertising going forward. 

  • This blog post takes that analysis much further.