First, let's get the Google IPO out of the way. It's going to be on everyone's list of market developments for 2004. And clearly, it's a lay-up.
For months, absolutely everyone has been speculating that Google would go public in the first half. Of course, it would be far gutsier to predict the opposite—that the Mountain View, CA.-based company will resist the temptations of a $15-billion valuation, give or take a few billion, and remain private. That would be consistent with the apparent desire of co-founder Sergey Brin, who appears to be much more of a geek than a suit.
The Inexorable Logic of Market Capitalism
But like a juggernaut, the inexorable logic of market capitalism has set unstoppable events in motion. Investment bankers have been hired. And neither Google CEO Eric Schmidt nor financial backers Kleiner Perkins and Sequoia Capital are about to resist literally cashing in on Google's position as the dominant search engine in the marketplace. Lucky institutional investors will party like it’s 1999.
The conventional wisdom agrees with the notion that Google must generate mountains of cash to gird itself against the expected challenge from that other juggernaut, Microsoft. In almost weekly interviews, the Redmond, WA.-based software giant reiterates just how serious it is about developing its nascent search capability.
That capability is supposed to be directly integrated into its much hyped—but still relatively inchoate—"next generation" operating system, a.k.a. "Longhorn." Thus I can predict with almost complete certainty that Longhorn will not be available in 2004, except perhaps in the finer pirate-software boutiques of Southeast Asia.
Danger for Google's Golden Goose
Once Google does go public, the company will face the dreary and predictable pressure to more fully monetize its traffic (read: danger to golden-egg-laying goose). Aggressive monetization is what killed search the first time around—the fact that there were no genuine search results to be found among all the paid listings.
To the extent that Google forgets its core mission of serving users above all others, the company will create an opening for somebody to topple it from its vaunted position. But Google, which seized a similar kind of opportunity three years ago, is undoubtedly mindful of that danger.
Still, a dominant share of Google's current revenue, estimated at somewhere between $700 million and $1 billion this year, comes from its AdWords and AdSense paid search programs, mainly from AdWords. The rest comes from licensing its technology to partners like AOL and Yahoo!.
Which brings us to another anticipated 2004 development that's almost a fait accompli: Google search results on Yahoo! will be nowhere in sight by mid-2004. Google's soon-to-be erstwhile partner in Sunnyvale, CA, will begin to figure out how to leverage the plethora of in-house search assets it has collected in Inktomi, AlltheWeb, AltaVista and Overture.
All these properties are like so many sports cars idling in the garage until Yahoo! figures out which ones it wants to drive. Regardless of what Yahoo! ultimately decides, Google's potential loss of that traffic and distribution will not be insignificant.
Currently, Google claims 150,000 paid search advertisers worldwide. Overture reports 100,000. FindWhat/Espotting (if the deal still happens) has a combined 40,000. LookSmart, if it doesn't lose too many customers post-MSN, has 30,000. Ah-ha claims 20,000. But if one were to draw a Venn diagram of all these advertisers, the area of overlap would be substantial.
Thus there are maybe 200,000 or even 250,000 paid search advertisers in the world today. Compare that with the approximately 10 million small- and medium-sized businesses (SMBs) in the United States and perhaps as many as 25 to 30 million more in developed countries overseas. Now that's a market!
In the United States, most of those SMBs operate in local markets. Roughly 60 percent report that at least 75 percent of their customers come from within a 50-mile radius. And local ad spending is worth approximately $22 billion annually.
Those SMB figures, and the coming pressure to be more profitable, are among the reasons why Google and other search providers are developing local search. But there are just a few small challenges in cracking the SMB market.
One is that most SMBs in the United States, the vast majority of which have fewer than nine employees, have no Website and little time or inclination to manage the keyword bid-for-placement process. That's true even though there's clearly a burgeoning interest in paid search advertising. Enter the "aggregators."
Local Search Looks Like Yellow Pages and Vice Versa
Google, Overture, LookSmart and others have self-consciously embraced the concept of Yellow Pages as a metaphor for the business models and marketplaces they are trying to create. Borrowing that old Yellow Pages tag line, they are "bringing buyers and sellers together."
Paid search delivers highly qualified leads—consumers that are "ready to buy," or almost. And there's every indication that consumers are using search to find local businesses. Yet the local search user experience still leaves much to be desired. But it's getting better.
Understandably, print and Internet Yellow Pages publishers have been wary of the meteoric rise of paid search and growing local search usage. But now the two industries are beginning a dance that may result in some very interesting moves.
Print directory publishers BellSouth and Verizon recently signed deals with paid search providers, LookSmart, as the first of many, and FindWhat, respectively. From the standpoint of the search engines, this is arguably the most immediate and viable solution to the problem of how to crack the SMB market—get Yellow Pages or newspapers or cable companies, which have local "feet on the street," to sell the product for you.
Next year, we will see many more such deals, to the point that all the major print directory publishers will have these partnerships. We will also perhaps see a Yellow Pages publisher, say SBC, buy a second-tier search engine. And we're going to see Internet Yellow Pages look a lot more like search, and begin to aggressively integrate pay-per-click pricing into the mix of advertising options available to SMBs.
In short, 2004 will be the year that local search finally emerges. But first, let's get that Google IPO out of the way.
Greg Sterling is the program director of The Kelsey Group's Digital Directories: Interactive Local Media continuous advisory service. The Kelsey Group is a provider of strategic research and analysis, data and competitive metrics on Yellow Pages, electronic directories and local media. Sterling can be reached at firstname.lastname@example.org.