While Google fights on the edges, Amazon is attacking their core

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.

http://maxniederhofer.com Max Niederhofer

Great post. Good reason why Google should buy Hunch, too.
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http://aseidman.com Ariel

Agreed with your meta point, and I would add travel to that list. If one or two players are able to aggregate most of the travel discovery and purchasing activity (read TripAdvisor + Expedia done right) it would cause some in Mtn View heart-burn. In fact Bing should take note of this. Rather then fight a head-on bloody war with Google they should aim to dominate a single and highly lucrative category (perhaps travel) sucking all the revenue for that category away from Google.

Regarding CPA vs. CPC: See this conversation on Quora…
“Whether the value is brokered in impressions, clicks or actions, the math is the same — it’s just a matter of where the risk of inaction is spread.”
http://www.quora.com/Why-does-Google-sell-pay-per-click-instead-of-pay-per-conversion-ads
http://ajm.org ajm

Chris, do you think Walmart could threaten your thesis by simply using their economies of scale to lessen Amazon’s monopoly in e-commerce?

Do you not think too that with the Internet becoming more global each day, and therefore fragmenting further, that other e-commerce companies will change the landscape e.g Baidu, Rakuten, Alibaba?
http://swolfgang.tumblr.com Scott Wolfgang

I get the point trying to be made here and do agree that Google is not paying as much attention to search, which is the Goose that Lays the Golden Egg. That said, I couldn’t disagree more vigorously with Chris’s assertion that Amazon poses a threat to Google’s search business. First off, retail is just one category of advertisers on Google and I suspect it accounts for less than 25% of Google’s total revenue. Second, Amazon is growing rapidly; however, it currently accounts for less than 10% of all ecommerce sales in the US so it isn’t exactly dominating in online commerce right now, let alone anytime soon. Further highlighting just how small a player Amazon is keep in mind that Walmart posts annual sales nearly 20x that of Amazon. Finally, Amazon spent $600m on all of its advertising (web, print, tv, etc) in 2009 while Google generated $23b of ad revenue that same year. Again, I appreciate the point Chris is trying to make, but I think when you look at the numbers, his argument just doesn’t hold up.
Aviah

Great post.
Great example of the power you get when opening your platform like Amazon did.
But if it happens, its a US case. Amazon is optimized for the US market, the shipping, regulations, returns policies, payments etc; this is the what drives their growth.
It may take Amazon many many years, if ever, to achieve the same efficiency it in intl. markets.
jason

But online tools that offer better purchase experience , have existed for a long time. for example , shopping comparison sites. or even amazon.

And still google made all this money.

I think you underestimate the importance of the “google search habit”, or there’s something else at work here.
Chris Clark

I agree with this post and really think the meta point is that irrelevant search results will ultimately fatigue Google users and drive them to niche providers elsewhere; be that Amazon, Expedia, etc.
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Elie

In 5 to 10 years, the commerce component of the web will look far more like a mall than today’s flea market. Curated branded shopping experiences from trusted vendors will win out over the chaos of unbranded vendors. At the mall, you don’t need a search engine to help you figure out up from down – at the flea market, you need the search engine to help you make sense of the chaos.
http://www.urbanophile.com/ Aaron M. Renn

One problem: Amazon's search engine sucks. It's often easier for me to search for Amazon products on Google than it is on Amazon. Google takes the approach of “let me help you find exactly what you want.” Amazon takes the approach of “let me help you find exactly what we want.” Therein lies the difference. Unless Amazon repents on this matter, Google's got nothing to worry about on the search front – though I like your idea and Amazon ought to be thinking like this.
Nikita Tovstoles

Like Google, many shopping comparison sites – including NexTag – appear to prefer a CPC model – because it lacks external dependencies of a CPA model. It would seem then that Amazon threatens those sites' business even more so than it does Google's. Perhaps I am stating the obvious ;-
http://discourseandnotes.com/ Dan

Thus, Google should buy Hunch?
http://synthesis.williamgunn.org Mr. Gunn

Elie – While I’m sure what you describe sounds attractive from a business point of view, it would be terrible for the consumer. When it comes to getting accurate and unbiased information, people don’t expect to find the information about a company coming from the company itself. People don’t trust brands, they trust other people. I don’t think Google is threatened.

I’m a Prime subscriber too, and I do go directly to Amazon for small stuff, but for any major purchase there’s a fair bit of Googling involved, too.
Rajat Suri

Good post! I was confused by your tweet, but this makes more sense.

Do you have any data as to how much ad $$ come from purchasing consumer products vs services? It may well be that Google’s core is not consumer product advertising. And no one searches for services on Amazon/ eBay (yet)

I definitely agree with you that Amazon is really dominating retail and personally I always skip Google to buy stuff on Amazon, only because 1) they save my payment/shipping info and 2) their customer reviews tend to be very accurate

PS I wish you stuck to Disqus comments, this seems so old school
http://bit.ly/9WiP16 Scott Wolfgang

I get the point trying to be made here and do agree that Google is not paying as much attention to search, which is the Goose that Lays the Golden Egg. That said, I couldn't disagree more vigorously with Chris's assertion that Amazon poses a threat to Google's search business. First off, retail is just one category of advertisers on Google and I suspect it accounts for less than 25% of Google's total revenue. Second, Amazon is growing rapidly; however, it currently accounts for less than 10% of all ecommerce sales in the US so it isn’t exactly dominating in online commerce right now, let alone anytime soon. Further highlighting just how small a player Amazon is keep in mind that Walmart posts annual sales nearly 20x that of Amazon. Finally, Amazon spent $600m on all of its advertising (web, print, tv, etc) in 2009 while Google generated $23b of ad revenue that same year. Again, I appreciate the point Chris is trying to make, but I think when you look at the numbers, his argument just doesn’t hold up.
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http://www.iamvictorio.us Victor Wong

Whatever happened to Amazon’s search efforts? A9 or something. They were making in roads in their offense against Google but obviously didn’t do enough.

I’m a huge Amazon primer user and I definitely skip google for any purchases that can be fulfilled by Amazon though these tend not to be big purchases like travel.
http://swolfgang.tumblr.com scott wolfgang

Hey Victor,

A9 was shut down bc it was an inferior search engine. I think that Google has a lot to be concerned about, but the assertion that people navigating directly to Amazon is a threat is quite hollow and not defendable by any real data whatsoever in my opinion.

Scott
JimmyT

So, it's to Google's advantage to provide sub-par search results, so you will click on their advertising links. Think about that for a minute.
Bill

I would have to disagree about Amazon sucking. Its usually relevant, and the reviews are great. I usually start my search on Google and end up on Zappos, Amazon, etc once I see where the most results are. Google is the default search but that will not last forever. Amazon is getting better and better, and I spend less & less time on Google. One of Google's most touted internal metrics is how fast they get people off of the site. Unless something dramatic happens, I dont see that changing anytime soon.
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http://www.laurentbourrelly.com/ LaurentB

Wrong!
You forget one piece of vital information, which relates to the real business of Amazon.
In fact, Amazon's core business is not about selling products; it's about making money on cash they hold. Exactly like banks do, Amazon is making $$$ while sitting on customer's cash while waiting to pay off the goods.
Brett

man for a person who makes money betting on “what will be” vs. “what is/has been” this article is very “what has been” in the sense that google and amazon today compete in desktop and Google has very much held its own and should continue to do so (are you only going to look for a dishwasher online at Amazon…if so, I want to sell everything I got to you) given comparison of different vendors. Going forward, where a little vision is required, Google should dominate mobile shopping (google goggles on android for those who want to see where the world is going). Amazon has nothing to compete
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Nid

Wow, get a clue! Google’s core business is advertising.

Worthless.
cdixon

wow, nid, i think that’s the single dumbest comment i’ve ever had on my blog. congrats!
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http://mattsly.com @mattsly

I appreciate the call out wrt to the innovator’s dilemma around (product) search quality. As you note, good organic results from a search engine threaten to cannibalize the CPC value of the ads. If I click on an ad, Google gets paid; organic result: nope. At least for that one-shot game, Google has no incentive to deliver good results. (I wrote more on that here: http://bit.ly/bIHyFQ)

This post also hints why it was so damn smart of Amazon to include data from “competitors” on its product pages, such that it (at least appears to) offer legitimate price comparison integrated into the shopping experience.

BTW – looks like AMZN was about 18% of all US e-commerce sales in 2009.

(as an aside, seems like overall comment quality has taken a beating since moving off disqus)
http://qwang.net Q dub

Amazon ultimately sits on a better data set for performing search-with-purchase-intent: They have purchase history, buyer reviews, and buyer correlations; while Google has PageRank. Amazon doesn’t have to take over 100% of e-commerce: They can try to federate the remainder via seller services e.g., payments, warehousing & fulfillment and bring 3rd party catalogs into Amazon.com
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http://tekgems.com TekGems

Product Search and Web Search need to be tackled in different ways. I’m afraid Amazon has about a 10 year lead on Google for product recommendation and search. Like I said in another post, I think Google’s play will be direct shopping results to Google Product Search and let buyers purchase directly via Google Checkout. Buyers will never have to leave the Google site. Offer buyer guarantees up to a certain amount for Google Checkout, provide reviews on merchants, and you have a solid formula for buyer trustability.
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JC

Google can fight back by moving in the same direction they always have…the cloud. Revolutionize the music industry by acquiring GrooveShark because that is what Apple is doing. They shutdown LALA to develop a cloud based application because lets face it, downloading is a thing of the past due to the proliferation of highspeed access.
http://CityandOut AndreaF

Although I don’t think that Google’s dominance in general will be affected too much just by Amazon I agree with 2 things:
1 – they are not focusing enough on search and this will hurt thm in the long run;
2 – Amazon is about to become far more pervasive than we can imagine; once their Kindle app becomes ubiquitous also thanks to Apple, many more purchases will be made directly from it (e.g. I am reading a magazine about golf on the Kindle app and I can purchase a golf club via Amazon with one click).
Travel/local is also shaping up to be an interesting battle.
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Lucian Armasu

Google Editions is coming soon.
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Azza

Agree. I noticed that I search for products more at Amazon th at Google since Amazon find better products/cheaper products/more choice/more relevant products.

Chris Dixon