Is Google Becoming A Monopoly?

Google (GOOG) has become a monopoly in Internet searching, but other than this segment, it is not a monopoly. Using Google to navigate the web remains the preferred method by which most people find information online. However, Google is far from a monopoly in terms of the entire gamut of Internet services. The perception of Google being a monopoly is derived from the fact it happens to have dominance in the most lucrative area of the Internet.

From Upstart to Juggernaut

Google's monopoly does not come from coercion or anti-competitive practices. Instead, it is derived from offering a superior product. On the Internet, there is little barrier to entry so anyone can set up competition at little cost. Through Google's history, many well-capitalized companies have attempted to wrest market share away from it. The most aggressive and recent competitor was Microsoft's (MSFT) Bing. Even Google at one time was an upstart company that beat out billion dollar companies such as Microsoft and Yahoo (YHOO), which were dominant in Internet searches.

Google makes money from searches by selling promoted advertising based on search keywords. The ads are more powerful than traditional advertising because they can be targeted by interest and geography. Advertisers like the program because they can get real-time feedback on the effectiveness and engagement of their ads. This continues to be the backbone of Google's business and its major source of revenue.

In 2014, Google had just under $60 billion in revenue with nearly 90% coming from searches. As of 2015, Google had 75% market share in searches. People use Google to search nearly 13 billion times per month, which averages to 26 searches per person per year. There are very few products in the world with this ubiquity and dominance. Despite these impressive numbers, it is not fair to call Google a monopoly, because it is not suppressing competition. There are no significant barriers to entry, and customers have no significant transaction costs in switching services.

Fighting to Stay on Top

Additionally, the Internet remains in its infancy. The proliferation of the Internet and the manner in which it has made its way into the daily lives and activities of human beings is a marvel. Predicting the future is impossible, as are the winners and losers. New companies will emerge from nowhere, like Google did less than 20 years ago. The biggest threat to Google and other Internet companies is less likely to be a well-funded competitor but instead a teenager playing around with code in her basement.

Google is well aware of this reality and continues to use cash flows coming in from searches to invest in other ventures. Some of these ventures have been failures, such as Google Glass or Google Plus, its foray into social media. However, some of its ventures such as Android, Chrome, Gmail and YouTube have proved to be successes in terms of user engagement and retention. Yet even with this traction, Google has not been able to monetize these offerings. Instead, the Google search cash cow allows the company to remain patient while it pursues its broad strategic goals.

In these markets, Google is engaged in intense competition with some of its rivals. In terms of mobile operating systems, Google's Android competes with Apple's (AAPL) iOS. While Google is winning by a market share measure, Apple is doing better when looking at margins. Google is willing to break even or lose money on these projects while it gains market share. Microsoft also continues to pour in billions of dollars in advertising to promote Bing.

Another threat to Google is Facebook (FB), which has become dominant in social media. Facebook has plans to bring content creators to its own platform, negating the need to even have a website. Many Facebook users spend the majority of their time on the site. Facebook uses its algorithms and social recommendations to find content users find engaging. Of course if this strategy becomes successful, it could make searching less lucrative for Google, as people would spend more time on social media and less time on the Internet.

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