Back in the simpler, more innocent mid-1990s, Internet searches were seen as a loss leader. As Piper Jaffray's Safa Rashtchy explained in a March 2003 research report, portals all but dismissed search. Sure, it was a nice way to bring in users, but it was just one of the many services that surfers would use on a Web site. Better to outsource it.
Overture changed all that. By selling the rights to keywords of a Web search on a cost-per-click basis, the company opened a Pandora's box of profit. The idea made sense: If you're in the market for a tennis racket and type "tennis racket" on a Web search to compare products, a list of vendors accompanying your search results would probably be welcome. Those vendors would want your attention, and would compete with each other economically to get it. The more lucrative the terms, the more expensive to get top billing on a results page.
By building a better search engine, you attract a bigger audience, and thus increase the rates you can charge. Google soon joined Overture.
Rashtchy estimated that the search industry will reach nearly $7 billion in revenue by 2007, growing at a compounded rate of 35% each year. Those kinds of numbers attract a lot of attention. In 2003, Yahoo!,which was outsourcing its search to Google, wanted in on the action and paid $1.63 billion to buy Overture. Last month Yahoo! dumped Google and now exclusively uses Overture, officially declaring war. Sleeping giant Microsoft, meanwhile, was rumored to have made an unsuccessful stab at acquiring Google, and is now using its nearly infinite resources to improve it own search engine.
Google is also taking on Yahoo! and Microsoft in the Web mail business. Earlier this month it announced its GMail service, which will include one full gigabyte of mail storage for free.
There's also pressure from below. Shares of Montreal-based search engine Mamma.com skyrocketed on March 16 after it was discovered that Internet billionaire Mark Cuban bought a 6.3% stake in the company. And let's not forget Ask Jeeves, which has seen shares go from penny stock status to about $41 today.
To beat back pretenders to the search throne, Google is reportedly days away from announcing plans for an initial public offering. The company, which has jealously guarded any details involving its finances, will finally have to reveal how large--or small--it is. Speculation about its numbers vary wildly. Although we estimate a modest market capitalization of $3 billion, some expect the Google's valuation to be as high as $25 billion.