January 2005

What's Next for Google

Continued from page 5

By Charles H. Ferguson

The State of Search
For a long time, search engines were expensive luxuries for those who operated them. They never made money. Market leadership traded hands repeatedly. Sites like AltaVista rose to prominence and fell away. The entirely separate business of selling software products for text indexing and retrieval was a backwater. But then things changed. As the Internet and the Web grew, searchable digital content began to supplant conventional media, and efforts to improve the quality of search results intensified.

Early search engines ranked results largely according to crude criteria such as the number of times a page mentioned the user's chosen keywords. But in a research collaboration that began in 1995, when they were still graduate students, Brin and Page applied a practice called citation ranking to the Web, and it turned out to be a much more reliable way to find relevant information.

For many years, reference publications like the Science Citation Index have ranked scientific papers' "impact" by counting the number of times they were cited in other papers. Brin and Page's insight was that if hyperlinks were viewed as citations, the same thing could be done for the Web. That insight led to the first truly superior search engine. Stanford applied for a patent on Brin and Page's "PageRank" technique in 1998 (it was granted in 2001). Soon afterward, Brin and Page started Google and raised money from top-tier venture capital firms Sequoia Capital and Kleiner, Perkins, Caufield, and Byers.

Today, the search industry has two layers. The leaders, Google and Yahoo, both provide "retail" search services on their own websites. But both firms also license, on a highly selective basis, their infrastructure and services to other companies in a "wholesale" market. For example, Google provides the underlying search services for AOL and Amazon.com's A9 search subsidiary. Looksmart powered MSN Search for some years. Now, however, Microsoft is developing its own search engine.

Google holds nearly 40 percent of the U.S. retail search market, more than 50 percent of the U.S. wholesale market, and larger shares of the global market. Yahoo enjoys a rough parity with Google in the United States, and Baidu has been expanding in China. Interestingly, while Google operates its own service in China, it also holds an equity stake in Baidu.

Google derives nearly all of its revenues from advertising, of two distinct kinds. First, it places advertisements on pages of search results returned by its own site. Those advertisements are selected according to the words used in the search. Advertisers bid in highly complex auctions for the right to place ads on results pages for searches that use specific terms like "used cars," "SUVs," and so forth. Second, Google manages advertising for a wide network of external websites for which it provides ad placement services. It has combined its search engine with sophisticated text-matching and auction systems to target, price, sell, and evaluate its advertisements, both those placed on its own site and those on its affiliates'.