Chasing Google

By Arthur Pinkasovitch | July 27, 2010 AAA

While the internet started off as a novelty service used primarily for military communication, it now forms an integral part of everyday life. In the process of becoming a worldwide phenomenon, the landscape of the web has changed drastically.

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Internet Overview

According to comScore, a provider of online marketing data, in 1996, AOL (NYSE:AOL) was the top-ranking internet website, having an audience reach of 41% followed by Yahoo (Nasdaq:YHOO), in fourth place with 29% of the estimated 20 million American internet users.

In 2004, when the internet population escalated above 150 million, Yahoo reached 72.7% of the population, AOL was no longer in the top 10 and Google (Nasdaq:GOOG) ranked #5 with a solid 39.7%, well behind Microsoft's (NYSE:MSFT) 71.6%.

Search Engines

Google, Yahoo and Microsoft sites are among the most frequented on the internet, and are constantly trying to expand their reach. Company growth can be achieved through two basic means: attract users from competing search engine providers and increase the international internet market penetration rate.

Currently, less than 30% of the total population uses the internet, a figure which is significantly higher for North America, sitting at 76.2% in 2009. With the number of worldwide internet users approaching two billion, search engines are in fierce competition to increase their user base - which translates into higher advertising dollars.

Much has changed with internet statistics following 2004, when Yahoo was considered the king of search. According to data provided by comScore, of the 16.4 billion web searches executed by Americans in June 2010, 62.6% were placed through Google while Yahoo and Microsoft sites saw search traffic of 18.9% and 12.7% respectively. Google has continued to grow its dominant internet presence in recent years; holding a 58.5% search market share in October 2007, to 65% in June 2009, before slightly retracting in 2010. As a result, Yahoo has seen its search volume decrease by 4% since October 2007.

Microsoft vs. Google

Although Microsoft's market cap exceeds that of Google's by $70 billion, Google has a much greater web presence. In its latest quarter Google had revenues of $6.820 billion, $4.499 billion of which were driven by Google.com and a 52% to 48% split between international and U.S. operations respectively. Microsoft had quarterly revenues of $16.309 billion, but only $565 million came from the online service division. After factoring in the cost of revenue, the online service division posted an operating loss of $696 million.

However, with the success of Windows 7, which has sold 175 million licenses, Microsoft has the balance sheet to continue pushing into the search engine space. Since June of 2009, Microsoft sites have increased their search volume by 4.3%.

Competition

Within the internet information industry, Google is over three-times larger than Baidu (Nasdaq:BIDU) and Yahoo combined, the second and third-largest companies in the space. Google remains in the center of internet search, but competition is arising from unlikely sources such as Facebook and Twitter as people diversify their sources of information.

Additionally, Baidu has an industry leading five-year growth rate of 57%, dwarfing the 16.25% achieved by Google. Although Google has faced difficulty penetrating the growing Asian internet user market and remains pressured by its competitors, the brightest minds in the nation should be up for the challenge. (For additional stock analysis, see Yahoo's Cost Cutting Doesn't Cut It.)

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