Can there be another Google?

By Elinor Mills
Staff Writer, CNET News.com

Published: December 6, 2005, 4:00 AM PST

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Internet search is reaching an important pivot point, where market leaders are rewarded by Wall Street, laggards are punished, and start-ups try to fill niches left empty by the major players.

Though the market has seen a few leaders come and go over the last decade--anyone remember AltaVista?--few would doubt that a distinct top tier has emerged, occupied by Google, Yahoo, AOL and MSN.

Wall Street has certainly noticed, and it's rewarded the two standout companies--Google and Yahoo. As of the end of trading Monday, Google shares were up about 130 percent over the last year to $405.85, while Yahoo shares were up 4 percent to $40.47.

Google also is getting the bulk of business. Its search traffic rose nearly 30 percent to 83.3 million unique users in October from the year before. Yahoo search saw a 12 percent rise to 52.3 million unique users, according to Nielsen/NetRatings.

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What's new:
Venture capitalists and start-up companies in the Internet search realm are looking for new ways to exploit the field, areas that search leaders Google, Yahoo, AOL and MSN have missed.

Bottom line:
Among the possible consequences--and benefits--of successfully developing a niche product or service in search is that one of the industry leaders acquires your company. Some observers also point out that, with Time Warner looking for a partner for AOL, the search sector could see some major consolidation.

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It's a case study straight out of business school: When a market gets to a certain point, the leader gets the biggest reward on Wall Street. The runner-up does OK too. But investors start losing interest in the little guys. InfoSpace's share price, for example, has dropped about 45 percent in the past year to $26.29, while Mamma.com and LookSmart shares have fallen more than 60 percent to $2.46 and $4.09, respectively.

Though there's still plenty of growing to do--indeed, some analysts estimate search advertising in the United States could grow nearly 80 percent in the next five years to $7.5 billion--the leaders are clearly established. Now they're building from their base into areas like Internet telephony and wireless access, and girding for a protracted market share battle.

That leaves venture capitalists and the start-ups in which they invest looking for areas the leaders have missed. By filling in the cracks, they hope to cash in on their investments by getting acquired by one of the powerhouses rather than through a blockbuster initial public offering. Can another Google still emerge? Never say "never." But industry experts say the barrier to entry gets higher as the big companies become more established.

"In the late 1990s, if you were a start-up and went public, you were just competing with other start-ups. It was a wide-open market. Now it's already a pretty competitive market," led by Google, a $4 billion company that's still growing at a 100 percent annual clip, said Carl Haacke, consultant and author of "Frenzy: Bubbles, busts and how to come out ahead." "The start-ups are competing with the Googles of the world, and the potential for people's imaginations to run wild is tempered because of that."

Of course, the tech industry has seen this sort of thing before. Not long ago, the security market consolidated around a handful of big companies like Symantec and Check Point Software Technologies, while venture capitalists pumped money into start-ups in hopes of an acquisition. Before that, the market for customer resource management, or CRM, software consolidated around big companies like Siebel Systems, Oracle and SAP, while start-ups focused on the niches.

Indeed, in such an environment, often the only way to get a seat at the table with the big companies is to introduce a disruptive technology or business model--like Salesforce.com did when it started selling low-cost, on-demand CRM software.

"Salesforce.com...created out of things that existed a paradigm-busting attack at the CRM market," said Joshua Greenbaum, principal at Enterprise Applications Consulting. "It really set the industry on its ear."

So, barring a disruptive innovation, it looks like the best way to get a toehold in search is to think "niche."