Google is fighting battles on almost every front: social networking, mobile operating systems, web browsers, office apps, and so on. Much of this makes sense, inasmuch as it is strategic for them to dominate or commoditize each layer that stands between human beings and online ads. But while they are doing this, they are leaving their core business vulnerable, particularly to Amazon.
When legendary VC John Doerr quit Amazon’s board a few months ago, savvy industry observers like TechCrunch speculated that Google might begin directly competing with Amazon:
[Google] competes with Amazon in a number of areas, particularly web services and big data. And down the road, Google may compete directly in other ways as well. Froogle was a flop, but don’t think Google doesn’t want a bigger chunk of ecommerce revenue from people who begin their product searches on their search engine.*
In fact, Google and Amazon’s are already direct competitors in their core businesses. Like Amazon, Google makes the vast majority of its revenue from users who are looking to make an online purchase. Other query types – searches related to news, blog posts, funny videos, etc. – are mostly a loss leaders for Google.
The key risk for Google is that they are heavily dependent on online purchasing being a two-stage process: the user does a search on Google, and then clicks on an ad to buy something on another site. As long as the e-commerce world is sufficiently fragmented, users will prefer an intermediary like Google to help them find the right product or merchant. But as Amazon increasingly dominates the e-commerce market, this fragmentation could go away along with users’ need for an intermediary.**
Moreover, Google’s algorithmic results for product searches are generally poor. (Try using Google to decide what dishwasher to buy). These poor results might actually lead to short term revenue increases since the sponsored links are superior to the unsponsored ones. But long term if Google continues producing poor product search results and Amazon continues consolidating the e-commerce market, Google’s core business is at serious risk.
* Froogle (and Google Products) have been unsuccessful most likely because Google has had no incentive to make them better: they make plenty of money on these queries already on a CPC basis, and would likely make less if they moved to a CPA model.
** Most Amazon Prime customers probably already do skip Google and go directly to Amazon. I know I do.