Who Rules the Web Now?
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At the recent Online Publishers Association Member Summit, the two of us gave a keynote in which we presented some hypotheses about the future of online competition. Our audience was composed of C-level digital executives from nearly a hundred major media brands. However, we believe that the competitive dynamics shaping online media businesses will also affect many mainstream and Main Street businesses that don’t normally think of themselves as competing with Internet titans.
We wanted to share these thoughts with the HBR community and invite site readers to comment, poke holes in our argument, and otherwise put these ideas to the test. So, here goes:
Only five years ago, the superpowers of the web looked and acted like Big Media companies. Chief among those players were Google, Yahoo!, and AOL.
Today’s landscape is radically changed. A new ruling oligopoly has emerged – Google (still), Apple, Amazon, and Facebook (flush with new capital).
In a supposedly democratizing medium, the power of leading online companies has only become more concentrated. Wired reported late last year, “The top 10 Web sites accounted for 31% of US page views in 2001, 40% in 2006, and 75% in 2010.” Facebook alone accounted for one quarter of all Internet pages viewed and ads served.
These are not online publishers, like Yahoo! or AOL. These are tech companies. We believe they may extend their dominance in ways the world could have only imagined a few years ago. They have massive amounts of currency (cash and stock); huge storehouses of customer information; and cloud computing resources that make them low-cost providers in any digital endeavor. A virtuous cycle is baked into their strategy: use these resources to achieve scale in ways that help achieve even more scale.
Based on our argument to this point, we have five hypotheses to share:
First, the ambitions of these companies know no limits. Greater scale bestows greater competitive advantage. As each of these companies expands its fixed-cost infrastructure, profits grow geometrically because the additional variable cost of adding each new user is near zero. Adding a profile on Facebook has little to no impact on Facebook’s operating costs. The extra search on Google, essentially, is immaterial to Google’s economics. More usage funds more infrastructure.
Second, we have seen these four companies flex their muscles in bidding wars across multiple sectors including Internet advertising, mobile advertising, mobile devices, and e-commerce. As they pursue their quest for greater scale, they are poised to bring the scale dynamics of digital businesses to offline activities.
Third, aggregation of an ever larger “installed base” of users is essential to drive scale economies. Owning the audience is an imperative. The login systems for Facebook and iTunes give Facebook and Apple the ability to influence users through ad services downstream. The Google search window gives it the capability to direct the distribution of audiences and thus revenues across other websites. Amazon is now a primary source of traffic for thousands of third-party retailers.
Fourth, monetizing audiences requires analytics. That’s the new game among the Big Four. They’re out to kill the cost-per-thousand or CPM-based ad sales model. Instead, each possesses a wealth of user information to target ads to individual consumers on a cost-per-click (CPC) or cost-per-action (CPA) basis. In effect, they are turning online advertising into a lead generation play to deliver better ROI for marketers. That’s why Google will log roughly $30 billion in revenue this year from just two ad services (AdWords and AdSense).
Fifth, the dynamic among these companies is reminiscent of the Cold War. Someone must die so another may live. Hence the ruthless competition for talent and M&A deals. Hence locking in lesser players into “spheres of influence,” whether it’s Groupon (for which Google bid $6 billion, before a week later it was worth $15 billion), Twitter, LinkedIn, or Netflix. Why did Amazon spend a billion dollars on Zappos? Its retail vertical for shoes wasn’t working. If Amazon Unbox doesn’t pan out, expect it to buy Netflix. Why did Google spend $750 million for AdMob? To keep AdMob from being acquired by Apple.
Finally, as these players’ analytics become ever more sophisticated as a function of scale, their ability to rationalize how branded goods of all kinds are marketed and sold will grow dramatically. With the advent of advertising exchanges, a shift from art to science will happen first in online advertising, and then expand offline. Shoppers are already using smart phone apps like RedLaser in retail stores to inspect products in the analog world before buying them online using Amazon Prime (saving sales tax, check-out time, and avoiding the burden of carrying purchases home). Amazon’s widget that makes it easy to shop from inside Facebook reveals one way this oligopoly will become increasingly interconnected, while disintermediating as many others as it can.
Next time you’re heading into a strategy meeting to develop your five-year plan, we think you may want to keep the dynamics above in mind. They’re likely to shape our future — profoundly.
Peter C. Horan is the executive chairman of Halogen Media and is the former CEO of About.com, AllBusiness.com, and IAC Search and Media. He has also taught in the Schools of Business at Seattle University and San Francisco State University. Jeffrey F. Rayport is an Operating Partner at Castanea Partners, a Boston-based private equity firm focused on retail, information, and marketing services, and was formerly a faculty member at Harvard Business School.
Who Rules the Web Now?
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