We stumbled across this research paper by Rufus Pollock where he investigates the growth of web search and advertising, and along the way asks the question of whether Google is the next Microsoft.

Here’s the abstract:

Abstract – Is Google the next Microsoft?

Internet search (or perhaps more accurately `web-search’) has grown exponentially over the last decade at an even more rapid rate than the Internet itself. Search engine providers such as Google and Yahoo! have become household names, and the use of a search engine, like use of the Web, is now a part of everyday life. The rapid growth of online search and its growing centrality to the ecology of the Internet raise a variety of questions for economists to answer. Why is the search engine market so concentrated and will it evolve towards monopoly? What are the implications of this concentration for different ‘participants’ (consumers, search engines, advertisers)? Does the fact that search engines act as ‘information gatekeepers’, determining, in effect, what can be found on the web, mean that search deserves particularly close attention from policy-makers? This paper supplies empirical and theoretical material with which to examine many of these questions. In particular, we (a) show that the already large levels of concentration are likely to continue (b) identify the consequences, negative and positive, of this outcome (c) discuss the possible regulatory interventions that policy-makers could utilize to address these.

It’s a deliberately provocative title of course, and in our opinion doesn’t really answer the question, but is still worth the read (you can safely skim read it).

You can skip the first 12 pages of preamble and history and pick up the theme from then on. Rufus reviews market share (on page 13) and it is interesting to see that Microsoft has almost 8% Search market share in the US as of September last year (we were under the impression it was much less). And interestingly Yahoo almost matches Google in Hong Kong. Elsewhere Google is creaming everyone. Also interesting to see is that Australia is included in the data but Europe is not (we’d have thought Australia was too small to be relevant).

The paper has lots of formulas, statistical deviations and other impressive looking shit, but we largely tuned out to these (apologies to any academics reading this, and admittedly it is a research paper so there needs to be heaps of substantive content!)

Section 4 of the paper (pages 15-22) covers an attempt to model the Search Engine Market. This is probably boring for most, but interesting to us, especially in terms of the capital required to support the R&D behind the engines as well as their hosting.

The market structure section (pages 22 onwards) continues with assumptions to do with the correlation between utility and quality, and then further to revenue it generates.

By page 38 we were losing our will to live due to all the formulas, but it was worth sticking with. Section 7 (p38 onwards) asks the question whether there should be regulation on the search engine industry. This is actually an important question because Rufus posits that there is good evidence to suggest that a monopoly position in Search (which is current and likely to increase), if left unregulated will cause problems. Here’s his closing statement (p42):

When monopoly, or near monopoly, does obtain it was shown that there is no guarantee that the private interests of a search engine and the interests of society as whole will coincide – and good reasons to think otherwise. It is therefore likely that search, if left entirely unregulated, will develop in ways that are not always to the bene?t of society as a whole. For this reason it is important that policy-makers start now on the process of developing their strategy in relation to this key area of the knowledge economy. The power rapidly accumulating in the hands of a few major search providers is a great one. It behoves to ensure that it is used in a way that brings the greatest bene?t to society as a whole.

Download the Rufus Pollock paper here. Check out his blog here.

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