Google: Too Big To Succeed?

The comScore figures are out for November, and Google, remarkably, is still eating away at the competition and building on its already overwhelming dominance in the world of search. Google's share of American searches crept up four-10ths of a point, rising to 63.5 percent. Meanwhile, Yahoo's, Microsoft's, and the Ask Network's shares all dropped marginally, becoming ever more, well, marginal. Only AOL's share rose, but since it's still hovering around 3.8 percent of the market, that's not terribly significant. Clearly, Google is continuing to wipe the floor with everyone else in search advertising.

But there's trouble a-brewin' for Google and everyone else in the online search world. First, comScore also reports that online retail spending for the first 49 days of the holiday shopping season declined 1 percent relative to 2007; this is almost certainly the first time ever that online retail, which was growing by 20 percent as recently as a year ago, actually shrank. This is partly due to a late Thanksgiving, which shortened the traditional holiday shopping binge. Still, the numbers don't look good.

In addition, ZDNet Editor-in-Chief Larry Dignan riffs on a troubling note by Bernstein analyst Jeffrey Lindsay and warns that Google, Microsoft, and Yahoo may be becoming the equivalent of the Big Three: corpulent, moribund, lazy giants whose cash reserves actually work to stifle innovation while protecting inefficient online services that bleed money from the companies. Here's the argument, in brief.

Just as General Motors once gobbled up Oldsmobile and Chevrolet, Google, Yahoo, and Microsoft are buying any online company that looks at all interesting; Microsoft buys a company every three weeks, and Google buys one every five. But they don't do anything truly interesting or profitable with their acquisitions because they don't have to; their cash reserves keep them from tackling the challenge of making their new properties pay off with any sense of urgency. All three companies have photo sites and finance portals, but they're essentially mirror images of one another, with no features distinctive enough to give any one company an edge, make money, and drive innovation. All they're really doing, Lindsay argues, is undercutting each other with bargain-basement pricing. Take display ads, for example. Microsoft, AOL, and Yahoo are all running essentially the same display-ad business, driving the price of such ads down without offering anything new—and losing a fortune in the process. But Microsoft, in particular, keeps propping up the business with its vast capital reserves, on the theory that it's gotta make money sooner or later.

In essence, Dignan and Lindsay argue that the Internet, particularly Web 2.0, has consolidated before its time. The world of raw capitalism hasn't had enough time to kill companies that don't perform and reward the ones that do. Instead, an outside force has enveloped them and plopped them on a cushion of cash reserves, fostering inefficiency and stifling the market's ability to find a way to make money off social networking or Internet photo hosting or whatever. Meanwhile, the new Big Three are bleeding money in these departments, letting them live off the fat of search advertising or office software. It's a fascinating critique and well worth the read.

(Photo by Brendan Hoffman/Getty Images)