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Friday, April 08, 2005

Seven implications of GOOG Q&A, and the threat to YHOO, ASKJ and GRU

Google (ticker: GOOG) announced that it now provides facts (in addition to links) in response to a search phrased as a question. For example, a search for "When did Bob Marley die?" returns the answer "11 May 1981" as the top result. This is a significant development for Google, Yahoo (ticker: YHOO), Microsoft (ticker: MSFT), Ask Jeeves (ticker: ASKJ) and its acquirer IAC (ticker: IACI), and GuruNet (ticker: GRU). Here's the Google announcement in full, followed by analysis and stock impact:

The Google announcement (from Google's blog):

Thursday, April 07, 2005 

Just the facts, fast
Have you ever needed a piece of info right now? Today we're excited to introduce Google Q&A. We've pulled together facts from all over the Web to help give you the fastest possible access to the quick bits of information you need every day; just type a query into the search box, and you'll get back the answer at the top of your search results. Q&A knows about a lot of areas: celebrities, countries of the world, the planets, the elements, electronics, movies, and anything else we've thought of so far (including enabling you to get answers on your mobile device). Try it out, and keep checking back. This is only the beginning.

Jonathan Betz
Tech lead, Google Q&A

Seven implications:

1. This is a trend

Google Q&A is the latest move by Google to provide users with its own content or direct access to other people's content. Previous examples: Google maps, Google movies (analysis), Google stock quotes (analysis). Search engines are indeed becoming answer engines (to use Jacob Nielsen's phrase). The reason is simple: when people search for something, that something is information, not a link.

2. Google's move into direct content threatens other search companies

Google's move to provide direct access to content follows in the footsteps of other search engines. GuruNet's Answers.com takes this approach to its logical conclusion, but even Ask Jeeves marketed itself on the basis that it provided faster answers (you wouldn't ask a butler for a link...), and MSN provided greater direct access to information than Google did. Google now threatens those companies (and stocks).

3. The convergence of search and content threatens Yahoo

Yahoo has built vast databases of content, but the way users access content is changing. Previously, users would go to the relevant section of a web site to find the content they wanted; now they use search. Take stock quotes as an example. Stock quotes were originally part of Yahoo Finance, then Yahoo added a box to search for stock quotes on its home page, and now typing a stock symbol into a general Yahoo search bar will return a stock quote and chart, just like Google does. But if search is the gateway to content, search engines can easily displace content providers by offering direct access to content themselves. This is exactly what Google is doing, and Yahoo is the largest potential loser.

4. Competitive advantage will depend on ownership of proprietary content

GuruNet's Answers.com has a great interface and has received great reviews, and as a result GRU stock has rocketed. But the Internet Stock Blog's first post on GRU pointed out that its competitive advantage was unclear since it didn't own the content itself, and in fact sourced much of it from Wikipedia which has its own search functionality and is free for anyone to use. Now Google is offering Wikipedia content as one of the sources it uses for Google Q&A. The search engines will draw a lesson from this: competitive advantage will be built on proprietary content. (Early example: Google's acquisition of satellite map company Keyhole Corp.)

5. Don't underestimate Google's ability to deliver content

While reviewing Google stock quotes and reflecting on Yahoo's emphasis on user-generated content, Om Malik says:

"...adding all that stuff at the top of the page, is antithesis of what Google once stood for - elegant simplicity... Yahoo is a content company that also does search. Google is a search company trying to do content. So far, it has not worked well. Unlike it being the must use search engine, it doesn’t feel like a must go to content destination... Yahoo gets content, Google doesn’t. It's as simple as that."

This is a mistake, and since it comes from someone as intelligent, eloquent and informed as Om Malik, it's likely embedded in Yahoo's stock price (= investor complacency) as well. Why a mistake? (1) Users want answers, not links, and answers aren't clutter. (2) It's better to be a search company moving into content than vica versa, because search will be the gateway to content, and we know from experience that he who controls the gateway... (3) Google doesn't feel like a "must go to content destination" because it's early, early days. (4) The ultimate repository of user-generated content is the Web itself, not content generated by Yahoo members. By leveraging (scraping?) other people's content, Google will quickly reach critical mass. Example: compare Google News to Yahoo's news.

6. Stock impact almost entirely negative

Some broad themes: (1) Content costs money, and that will lower search engines' margins in the short-term. (2) Google's push into content will only increase the pressure on the other search companies that positioned themselves as providers of answers rather than links (ASKJ, GRU, and to a lesser extent MSFT's MSN). (3) YHOO is the long-term loser here, and that might not be priced into the stock.

7. But some positive stock impact

(1) A real opportunity for TWX - it owns content and provides search to AOL users.
(2) Good news for companies that own proprietary content - they'll get acquired.
(3) In the long run, as search engines become answer engines, they'll become even more useful, and that means profitable.

GOOG chart below.
Goog_7

 

Posted by David Jackson on April 8, 2005 at 04:09 PM in Sub-sector: Content, Sub-sector: Search, ticker: ASKJ, ticker: GOOG, ticker: GRU, ticker: IACI, ticker: MSFT, ticker: TWX, ticker: YHOO | Permalink

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Comments

I enjoyed your article, and I completely agree that "search engines are indeed becoming answer engines". However, I think this trend bodes well for GRU's market cap. I say this because:

1. In my opinion, answers.com is by far the best "answer engine" right now. Take a look at the rave reviews here:

http://answersblogger.blogspot.com

2. GRU's market cap is tiny compared to GOOG's . In round numbers, GOOG at $50 billion is valued at 250X GRU at $200 million. If search engines really are becoming answer engines, I think GRU (and the answers.com brand) is worth more than 1/250 of GOOG.

Posted by: Tom Nelson | April 8, 2005 10:38 PM

Answers.com is elegant and useful. However, as CEO Rosenschein admitted during the Roth conference, there is nothing that GuruNet does that a determined competitor could not. Google has shown its determination, from Google Q & A to its direct negotiations with Wikipedia, to create its own solution in the answer space.

The question is where this leaves answers.com. What if Google stops linking to answers.com for definitions? What if content providers like wikipedia and Columbia Press realize that they can charge more to have their content scraped? Sure, in a vacuum GRU has a lower market cap than Google, but when any financial measures are considered its hard to see any value whatsoever. The revenues to date are paltry, operating cash flow is negative, and profits are absent.

Finally, GRU has yet to prove that contextual advertising translates well to the answers paradigm. To see why I have doubts, go to the answers.com home page and look at the top 5 answers searched through one-click. Today they are: cavil, prelate, conclave, egregious, and The Grotto. Do you think that people searching for those terms are as likely to generate CPC revenues as, for example, someone searching Google for "Canon digital cameras"? I dont.

Posted by: Josh Silverman | April 9, 2005 11:03 AM

Josh,

Appreciate your comments and agree that a comparison by market cap will leave a man peniless and broke (especially in this comparison). However I think you are selling yourself and any reader of this thread short by fundamentally analyzing Gurunet at this juncture. Unless you have a model for Q1 that leads you to the neg. OCF, absent profits, etc, it is an improper analysis because Gurunet is operating off of a CPC bus. model for the 1st quarter of its history. I think we will all see how effective this model is for GRU when q1 numbers come out. As a question to you, what would make you assume that one click searches would have anything to do with click through? I agree that the searches may be eccentric but Gurunet appears to be doing their job by bringing people relevant information when they one click, thus creating loyal users; the ones that not only 1 click, but pull up answers.com when they are looking for that Canon dig. cam. Love to hear more of your thoughts...


DJ


BTW, Dave.. have been playing around on GOOG's answer service and even though it is possible to close it, the gap between the two services (GRU & GOOG) are pretty wide.

Posted by: dj | April 9, 2005 10:07 PM

DJ,

You are reading my reference to GRU's revenues much more broadly than it was written or intended. My only point was that the market caps of Google and GRU cannot be compared in a vacuum -- to do so would be the same as saying my house must be undervalued because it would sell for so much less than Bill Gates' mansion. There must be some reference point.

I agree with you that the traditional data points referenced in fundamental analysis are unclear for GRU because of its revamped business model. We must each decide for ourselves whether this lack of clarity should be rewarded or discounted in the stock price. I believe that it should be discounted, and think that GRU will be a precarious investment until it proves its ability to generate substantial revenues and earnings.

Posted by: Josh Silverman | April 10, 2005 12:43 AM

I appreciate your thoughts, Josh. I absolutely agree that there is plenty of downside risk with GRU, but I would also argue that there is plenty of upside reward. I find the risk/reward attractive right now, but I agree that anyone with a low tolerance for risk should avoid the stock.

A few thoughts:

1. You said "there is nothing that GuruNet does that a determined competitor could not". I agree, but I think the same could be said for Google too. That's one reason that I don't own Google at a market cap of $50B.

2. I'm certainly *not* comparing market caps in a vacuum. I'm looking at a lot of reference points, which in aggregate make me comfortable owning GRU shares. One reference point: Askjeeves just sold for nearly $2B. In my opinion, answers.com offers a vastly better user experience, and should be worth a whole lot more than 1/10 ASKJ. Alexa figures show answers.com at about 1/2 the reach of askjeeves and closing fast. (In my opinion, however, IAC did overpay for ASKJ).

3. As I wrote earlier, answers.com routinely gets rave reviews "ie, the best internet innovation in years". I've used the site extensively and I agree, and I'm betting that this will eventually translate into a market cap much greater than .2B.

4. It's clear to me that for my searches, answers.com should be the default starting point. If answers.com doesn't have information for my topic, the Google results are automatically presented, ie, I get the Google results with zero extra effort. With Alt-click, I can get this answers/Google team effect with *less* effort than using Google alone. More and more people are figuring this out, as you can see by the answers.com traffic ramping up relentlessly every week.

5. I agree that there is some merit in avoiding GRU until it proves it can generate substantial revenue. However, if and when that proof appears, I think the price of GRU would be high enough that the risk/reward would actually be *less* attractive to me than it is right now.

Posted by: Tom Nelson | April 10, 2005 07:12 AM

I just wanted to add to my point #4 above. I think substantial numbers of internet users will come to the conclusion that, for them, answers.com is better than google.com as a default starting point for searches. In terms of the potential valuation of GRU, I think it's critical to understand that point. If I'm right, eventually GRU will be handling many more searches for "digital camera" and "mesothelioma" along with "conclave" and "cavil".

Please take a look at my blog entry here:

http://tinyurl.com/4sz85

---snippet from the above URL
Note carefully the last example. If answers.com doesn't have information for your search, it automatically gives you a Google-powered result. This is a crucial point--it means that you can use answers.com as the default starting point for *all* of your searches. If answers.com has a topic for any particular search, that's great; if not , you've got the Google-powered results with no extra effort. You've got the best of both worlds!
----

Posted by: Tom Nelson | April 12, 2005 11:44 AM

Let's not forget that Google's Gmail email is a lot better than Yahoo's. Gmail is so good that one wonders exactly how they make a profit from it.

Posted by: Half Sigma | April 17, 2005 07:45 PM

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