Is Google losing their competitive moat?

We explore the factors that may diminish Google's dominance in online advertising

Warren Buffet first coined the term "economic moat" to describe a businesses ability to maintain long-term competitive advantages over the rest of its market sector. When it comes to online advertising no one can argue that Google has had a strong economic moat for sometime.

Though Google is constantly innovating with moonshot projects like the self-driving car, Google Glass and Project Loon, it's business model has always been one-dimensional. Google gets to work on interesting, world changing products because their search business is wildly profitable.

The effectiveness of their search business has meant Google has been the major player in online advertising for the last decade. However, several macro changes in online behaviour and technology might already be showing evidence that Google's dominance in online advertising may diminish in the next decade.

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Online advertising is no longer dominated by search

Google maintains more than 60% of worldwide search market share. Their dominance in search has enabled them to capture the lion's share of the $50 billion per year search revenue. Search has historically been far more profitable than display advertising at $34 billion per year, therefore Google has dominated the most lucrative slice of the online advertising pie. It's critical to note that search only covers one aspect of the purchasing funnel, intent.

In Peak Google, Ben Thompson argues that Google's dominance of the $50 billion search pie is increasingly being eclipsed by total online advertising which is now at $545 billion (2014).

Despite the hype about disruption, the truth is most tech giants, particularly platform providers, are not so much displaced as they are eclipsed.

Ben Thompson

Thompson furthers his argument by demonstrating cases such as IBM (mainframes) eclipsed by Microsoft (PCs) and Microsoft (PCs) by Apple (smartphone profit) and Google (smartphone share). To date Google's only real competition in online advertising has been banner ads however the rise of native advertising which will capture increasing portions of the purchasing funnel.

Search is only a small proportion of the purchase funnel

Search captures only one portion of the purchase funnel - intent. During this phase a person has already made up their mind that they need a specific service, brand or product. And as such are now ready to buy and want to inform themselves with more information about their purchase decision.

Traditionally, marketers have focussed solely on the awareness portion of the purchase funnel. By doing so marketers carve top-of-mind awareness of their brand with consumers. To achieve awareness at scale marketers leverage creative executions through traditional media such as TV, outdoor, radio and print. Online display has been a poor cousin to these mediums in terms of its impact on consumers and this is reflected in display's meagre share of advertising wallets and creative resources.

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The way we become aware of and affiliate with brands is changing. The biggest consumer tech products build hundreds of millions of active daily users within a few years and without traditional advertising. We spend more time on social networks and less time watching TV. We discover new products and ideas through Instagram and people actively recommend products they love through Facebook and Twitter. Strong brands are less important to strong products with engaged communities. As the medium for discovering, discussing and affiliating with new brands shifts to online mediums expect the advertising budgets to move there also.

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Given the importance of word-of-mouth (WOM) advertising in a socially connected world it's increasingly critical for businesses to maintain a strong relationship with customers post purchase. The more our existing customers engage with us, the more likely they are to repurchase and recommend us. The increased importance of post-purchase customer engagement has led to the creation and growth of massive market segments such as CRM, which Gartner predicts will be worth $36.5 billion by 2017.

As I argued in Messenger - the next evolution of CRM, there is still much potential for innovation within CRM. In particular, messaging services such as WhatsApp and Facebook Business Messenger could provide the perfect platform for companies to continue conversations with customers throughout the purchase lifecycle.

Aligning the funnel with future potential advertising revenue we can see a lot of potential for Facebook to be the owner of the top and bottom of the online advertising funnel.

Search behaviour is changing

Google's strength and appeal has always been its breadth. Got a question, any question - Google it. However, as we gain new computing contexts our requirements for search is evolving. Within many of the new contexts, Google is loosing search dominance.

Many of these new contexts exist because of smartphones. Having a computing device with us all the time naturally changes how and when we search for information.

When it comes to mobile search, Google isn't dominating. They're getting less profit from a decreasing share of the market. In their Q3 2014 earnings announcementt, Google reported a 24% increase in paid clicks and a 4% reduction in the advertising rate. The decreased rate being due to a lower yield from mobile search. Google's share of the mobile search market has also been deteriorated by an increasingly fragmented mobile search market.

A critical component to the mobile experience is apps and Google can't provide in-app search results for the iPhone. Why is that important? Because iPhone users are the most valuable mobile users - they're the ones advertisers want to target. At their latest WWDC conference Apple announced it has added deep linking and app search to their OS search tool "Spotlight." What's more Apple is strictly keeping user information private (unlike Google) and is keeping Spotlight ad free. This sparked Jason Calacanis to recently argue that Spotlight has the opportunity to disrupt Google in a big way.

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Privacy is a concern for a growing number of users. DuckDuckGo, a search engine whose proposition is that it is a privacy-focused search engine has seen traffic increase by 600% in the last two years. In iOS 8 iPhone users have been given the option to add DuckDuckGo as their default search engine, which has further spiked its adoption.

The nature of retail search is also shifting away from Google. In Q3 2014 39% of U.S. online shoppers began researching purchases on Amazon and only 11% started on a search engine. If Google directly tackles Amazon they may alienate their biggest client (2013), Amazon spent $158 million on Google PPC in 2013.

What does this mean?

It would be very surprising to see a company of Google's calibre collapse. However, it's reasonable to assume that they're not going to develop a product whose profitability rivals their search business. It's also reasonable to assume that the macro shifts we are currently witnessing in online advertising will continue to grow the online advertising market and by doing so - continue to shrink Google's share of it.