Home :: Finance: Google’s IPO – Foolish?

Salim Haji has written an interesting article for The Fool – on their UK site or their US site – about Google’s chances of cashing in on the search engine market. It’s very well worth a read if you’re interested in the financial side, or just interested in search engines. His argument is based on the idea that search engines gain from ‘network externalities’. Very roughly, this is when there is a strong advantage to using the same product that lots of other people use – think of telephones: the more people who have telephones, the more useful one is to you. He also uses the example of operating systems – there’s more value to using Windows, because lots of other people do, so there’s lots of software available. If 70% of the population started using Linux or Mac, all the developers would start writing for that platform, which would in turn put pressure on you to switch.

The questions he raises over Google’s IPO are…
Is there an opportunity for a single company to take advantage of these network externalities to control the market, and…
If so, is Google likely to be the one who does?

Salim is unconvinced about the answers to these questions, and thinks the IPO is priced as through the answers to both are a definite ‘yes’.

Personally, I’m not even convinced by his argument that there are network externalities for searching. He thinks we’ll standardise on one ranking algorithm, and then everyone will design sites with that in mind, and users will expect a particular layout for the results.

I see no reason for a standard algorithm, and can see very good reasons against one. Search engines used to use much simpler and more predictable algorithms, based just on what was on the page. This was quickly taken advantage of by porn sites and ‘search engine spammers’ to catch people who were looking for something else, but could perhaps be persuaded to take a break to stare longingly at unclad girls. Google has done well partly because it has done a much better job than most other search engines at avoiding being ‘poisoned’ by such results. If there’s one simple algorithm, and everyone knows how to design their pages to best take advantage of it, those porn sites will be back in their element. They’ll put more effort into grabbing those top search results than I ever will, so when searching for ‘pictures of canada geese at attenborough’, you’d get a different kind of birds.

As for the layout of the results, I could chose to view results with a completely different layout to everyone else without it being a disadvantage to me. In the early days of Google, I switched to using it whilst most of my colleagues were using Yahoo!. That didn’t give me a disadvantage – I had an advantage, because I found things faster than other people did. Now everyone’s using Google. If something better comes along (and there are some interesting attempts going on), I’ll switch again, and enjoy the advantage, whilst pointing people towards the better search engine.

I also think he underestimates what Google is about – they have more than just a search engine going on now. The search engine is at the core of what they do, but it’s not where their money comes from, so they’re less reliant on it staying at the top than Salim may think – but still fairly reliant on it.

There is competition, as ever, that could always take the top spot. Yahoo! are gearing up to have a go against Google in the searching space, and could turn out to do well, though I suspect it’s just not their thing. They’re good at community, and getting and keeping eyeballs, but massive scale distributed computing, of the type needed to do a good job of indexing four billion pages of information, is really Google’s thing. Microsoft are plodding their way in the same direction. They’re coming too late, and without the expertise and experience needed, but Microsoft have a bit of a history of taking new areas by using their existing audience and just keeping on pushing and pushing. If they do start a search engine, I’d expect it to be terrible at first, but if they really want it to do well, they’ll just keep throwing resources at it until it starts to get good. They’ve got to find something to do with all that spare cash they’ve got lying around.

Tip Jar

Liked this post? Leave a tip - $1, or send multiple if you like!