What's At Stake As Google Takes On Amazon?

By Bruce Kelly AAA

Residents of West Los Angeles and New York will soon see blue and white Google Inc. (GOOG) vans zipping around their neighborhood, stopping to deliver sundries. That’s because Google’s battle with Amazon.com Inc. (AMZN) to become the most desirable shopping destination on the Internet is heating up, with the skirmish shifting from the World Wide Web to the mean streets of the biggest cities in the United States.

The rivalry intensified earlier this month when both companies announced same-day delivery shopping services in Los Angeles. Google will also offer the service in Manhattan. It launched the shopping service last year in the San Francisco area. 

Google shoppers can have a six-month free trial for the service or pay a $4.99 fee for each item delivered. Amazon now offers same-day service in 12 metropolitan areas via Amazon Prime and Prime Pantry, a bulk grocery delivery service.

Google's Big Bets

The effort is a big deal, with one of Google’s three founders and its current CEO, Larry Page, underscoring it. “We’re excited about our new Google Shopping Express service, which is a great way to get deliveries the same day you order them,” Page wrote this month in his annual founder’s letter to shareholders. He also included self-driving cars and healthcare as areas in which the search-engine giant wanted to expand. “These seem like pretty crazy ideas today, but if the past is any indicator of our future success, today’s big bets won’t seem so wild in a few years’ time.”

Amazon is not about to be left behind. When it announced its similar same-day shopping service in Los Angeles, it said it was expanding the offering into San Francisco, Seattle and Phoenix.

High Stakes in e-commerce

The stakes between Google and Amazon are huge. By fighting Amazon, Google is protecting its advertising base. It dominates online searches and the fast-growing and super-lucrative ad market, and posted more than $50 billion in advertising revenue in 2013. (Fore more on this topic, see Online Advertising Takes The Lead)

The big question is which company will wind up dominating the e-commerce market, which reached a staggering $225 billion last year, according to the U.S. Department of Commerce. It’s easy to believe that Google and Amazon are not in the same line of business, but the companies are locked in a head-to-head struggle to become the de facto place for shoppers to search when they are perusing items online. If shoppers on the Internet turn to Amazon, which links shoppers to a plethora of vendors other than itself, Google loses revenue because it could have showed those same shoppers ads. 

Google’s effort is much more than to compete with Amazon to see which company can more effectively deliver tanning oil to the Kardashian manse in La La Land. The leading search engine wants to transform itself from consumers' favorite way to browse the web to their favorite place to shop. That means going head-to-head with Amazon and its search engine that remembers shoppers’ tastes and proclivities and sends emails about deals they may want.

Always Be Shopping

To cement that idea in consumers’ heads, Google is offering the new shopping service. It's not stopping there, either. Google has already moved to turn your mobile phone into a veritable mall; it recently tweaked its search app for Android smartphones so that it pings you when you're physically close to a product that you have already searched.

The push to get consumers to buy from Google is really about advertising. If Google can consumers to buy products after an online search, the company shows its advertisers how effective its ads really are.

Google has been taking aim at Amazon for some time. Last year, the company revamped it search function, which gave retailers the opportunity to show more information about their products for everything from guitars to microwave ovens. The change took place first on desktops and then on mobile devices. Retailers were able to show prices, photos and descriptions of items at the top of consumers’ search results. And those new, revamped Google search results looked a lot more like search results on Amazon than the old, text-heavy Google ads.

Fast-growing Ad Market

“The market for Internet search advertising is still growing in the double digits, while display advertising is growing thanks to newer innovations tying display ads to specific actions, including clicks, leads and customers,” according to Morningstar analyst Rick Summer. “Faster growing geographies, such as Asia, are propping up overall growth rates even as pockets of economic weakness hit various regions.”

“As the pre-eminent leader in search, Google maintains more than 60% of worldwide market share; no other competitor has even 10%,” Summer notes. About 90% of all searches on mobile devices come from Google, according to Morningstar Inc. (MORN).

That’s not to count out Amazon, which about a decade ago used to get customer traffic from consumers searching on Google. Amazon but now relies on shoppers to use its own search box, a remarkably effective tool. It’s been working to cut out Google as the middle man. Now, with Google offering its same-day shipping, Google is simply returning the favor. It’s making its own move onto Amazon’s turf by selling and delivering items directly to the customer’s door.

The Bottom Line

The war over advertising traffic will be fought on many fronts, the most recent of which is same-day delivery of whatever your average consumer could desire. Google's plans to challenge Amazon on the $225 billion e-commerce front is happening now and will only escalate. To the winner go the spoils (likely at a competitive price and delivered fast).

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