Why Peter Thiel Is Wrong About the Search Monopoly

Peter Thiel claimed at Farsight 2011 yesterday that running a search engine currently incurs about $5-10 billion in fixed costs, meaning that search is a natural monopoly where players can’t make money unless they have about 30-35% market share (video here starting around 8:00). It’s a fascinating analysis of the search industry, although in my mind hopelessly misguided.

First of all, Blekko is a clear counter-example. It’s a viable search option and has a much lower burn rate. DuckDuckGo is also an interesting product, although it doesn’t quite qualify as a contradiction of Thiel’s thesis since it runs partially on APIs like Yahoo’s.

Ignore the Existing Cost Base

More generally, taking the existing cost base as a given in technology markets is pretty foolish, from a couple of perspectives.  Consider the 80/20 rule.  In most areas, Google and Bing have already exceeded user needs and are working on features that provide very incremental benefits.  It might be nice getting to a result a couple of seconds faster with Google Instant, and Google’s spelling correction (which occupies an entire development team) is pretty cool.  However, a new competitor can get to 80% of Google’s spelling correction pretty quickly. No one’s going to miss the remaining 20% if that product provides some truly novel benefit.  Whether DuckDuckGo’s privacy or Blekko’s slashes qualify as something many people want remains to be seen.  But Thiel is ignoring the entire concept of disruptive versus sustaining innovation.

Would Thiel make the same argument in the car industry?  If we looked at Toyota and General Motors, would we assume that starting a car company requires billions in fixed costs?  Clearly not; just look at Tesla.

Fixed Costs Aren’t Really Fixed

We all know that fixed technology go down over time, from hardware to bandwidth to (open source) software.  New upstarts in search will be able to do more with less, especially if they choose to focus on providing value along a specific dimension of customer needs rather than trying to do everything at once. Think about what that $5-10 billion in fixed costs really represents: video search, image search, ad serving, real-time search, and a million other things.  Do you really think every search engine needs to offer all of those features?  Clearly not!

The search field is disintegrating into more specialized applications.  Although it’s in Google and Bing’s interest to keep all of those applications under the hood of one monolithic search engine, that’s clearly not the only model.  I will bet you that Hipmunk is going to beat the pants off Google and Bing for flight search (at least until they get bought), and with much less investment. There’s incredible value in not being tied to an established mindset and infrastructure.  That’s the whole point of startups.

What’s Really Disruptive?

The key for search startups in avoiding the fixed cost trap is that their innovations must be truly disruptive.  They have to satisfy a need that current search engines do not, that users care about, and that is not too tightly coupled to the entire search infrastructure that incumbents have in place.  I think this the main problem for Powerset, the semantic search startup Thiel invested in.  They were targeting the mass market, and thus their strategy was tightly coupled to all the features that mass market users have come to expect.  In addition, generalist users probably didn’t care enough about semantic search to give up other features.  If customers aren’t willing to give up other benefits for your innovation, then it’s not really disruptive.  Powerset might have done better if they had focused on a niche that absolutely had to have semantic features (maybe patent search?) and then expanded over time into other segments.

I’m Biased

Since I’m working on a vertical search engine, I’m hopelessly biased. And I actually think Thiel’s plans to invest in underlying infrastructure technology make a lot of sense. I just wish he hadn’t described the economics of search in such a superficial way.

Drilling Down on Search Results

In my last two posts, I shared some tips for where you should start your research process (probably not a search engine) and how to get the most out of search engines.  Now let’s talk about working with your search results once you have them.

The main point is to avoid focusing only on the results themselves.  Instead, look for good industry, company, or topic-related sites.  For example, CafePharma has a lot of good information on pharmaceutical and medical device sales forces, ChannelWeb is a good resource for computer hardware and software distribution channels, and Construction Equipment Guide is pretty self-explanatory.  Trade sources are one of the best places to get in-depth information.  Some general business sites like Knowledge at Wharton and the McKinsey Quarterly can also be very useful.  Don’t be satisfied with just the listings from these sites that happen to come up on the search results.  Dig in.

First, narrow the search to the specific site in question by using the search engine “site:” operator or the advanced search page, depending on whether you prefer typing into the search box or using a form.  The search box is usually faster, but for complex queries, it can be easier to keep your thoughts straight when you have dedicated fields for different terms and operators on the advanced search page. Continue reading Drilling Down on Search Results

Research Strategies - Where to Start?

So you have a new piece of research to do.  It could be a competitive analysis of your industry.  Maybe it’s due diligence for an acquisition.  Or maybe it’s background research for a sales meeting your boss has coming up.  Where do you start?  If you’re like most people (myself included, sometimes), your natural inclination is to fire up Google (or maybe Bing or Yahoo).  Contrary to popular opinion, that’s probably not the ideal place to start.

Why?  First, it’s too easy to end up with irrelevant or only marginally helpful results, especially if you don’t have a set of well-targeted search terms in mind.  Second, it can be very time-consuming to go through search results, and that may impede your progress.  Finally, you never really know when you’re done.  There’s always the temptation to keep searching for that last little nugget of information, and once you do stop, there’s always the nagging worry that you missed something. Continue reading Research Strategies 1: Where to Start?

Search Engines and the Illusion of Comprehensiveness

Lots of information is ridiculously easy to find these days.  GDP of Argentina?  Check.  Last quarter’s earnings at Google?  They’re everywhere.  But as soon as you start trying to do more in-depth research, you become painfully aware of the ongoing limitations of the current search engine paradigm.

For example, try doing basic background research on, say, Oracle’s marketing strategy.  You’ll quickly find that out of the top 50 results on Google, half are either redundant or spammy (companies like Highbeam trying to get you to sign up for their subscription services), another 40% have marginally useful but redundant information (all linking to the same press release, for example), and only the remaining 10% really provide much value. Continue reading Search Engines and the Illusion of Comprehensiveness