Analysis: Amazon, Google
on collision course in 2013
By Alexei Oreskovic and
Alistair Barr | Reuters – Sun, 23 Dec, 2012
SAN FRANCISCO (Reuters) -
When Amazon.com Inc CEO Jeff Bezos got word of a project at Google Inc to scan
and digitize product catalogs a decade ago, the seeds of a burgeoning rivalry
were planted.
The news was a
"wake-up" call to Bezos, an early investor in Google. He saw it as a
warning that the Web search engine could encroach upon his online retail
empire, according to a former Amazon executive.
"He realized that
scanning catalogs was interesting for Google, but the real win for Google would
be to get all the books scanned and digitized" and then sell electronic
editions, the former executive said.
Thus began a rivalry that
will escalate in 2013 as the two companies' areas of rivalry grow, spanning
online advertising and retail to mobile gadgets and cloud computing.
It could upend the last
remaining areas of cooperation between the two companies. For instance,
Amazon's decision to use a stripped down version of Google's Android system in
its new Kindle Fire tablet, coupled with Google's ambitious plans for its
Motorola mobile devices unit, will only add to tensions.
The confrontation marks
the latest front in a tech industry war in which many combatants are crowding
onto each others' turf. Lurking in the shadows for both Google and Amazon is
Facebook with its own search and advertising ambitions.
"Amazon wants to be
the one place where you buy everything. Google wants to be the one place where
you find everything, of which buying things is a subset," said Chi-Hua
Chien, a partner at venture capital firm Kleiner Perkins Caufield & Byers.
"So when you marry those facts I think you're going to see a natural
collision."
Both companies have a lot
at stake. Google's market capitalization of $235 billion is about double
Amazon's, largely because Google makes massive net earnings, expected by
analysts to be $13.2 billion this year, based on a huge 32 percent net profit
margin, according to Thomson Reuters I/B/E/S. By contrast, Amazon is seen
reporting a small loss this year.
Amazon shareholders have
been patient as the company has invested for growth but it will have to start
producing strong earnings at some stage - more likely if it grows in higher
margin areas such as advertising. Google's share price, on the other hand, is
vulnerable to signs of slowing margin growth.
AD CLASH
Not long after Bezos
learned of Google's catalog plans, Amazon began scanning books and providing
searchable digital excerpts. Its Kindle e-reader, launched a few years later,
owes much of its inspiration to the catalog news, the executive said.
Now, Amazon is pushing its
online ad efforts, threatening to siphon revenue and users from Google's main
search website.
Amazon's fledgling ad
business is still a fraction of Google's, with Robert W. Baird & Co.
estimating Amazon is on track to generate about $500 million in annual
advertising revenue - tiny, given it recorded $48 billion of overall revenue in
2011. By contrast, 96 percent of Google's $38 billion in 2011 sales came from
advertising.
But Amazon's newly
developed "DSP" technology, which taps into the company's vast store
of consumer purchase history to help marketers target ads at specific groups of
people on Amazon.com and on other websites, could change all that.
"From a client's
perspective, the data that Amazon owns is actually better than what Google
has," said Mark Grether, the chief operating officer of Xaxis, an audience
buying company that works with major advertisers. "They know what you just
bought, and they also know what you are right now trying to buy."
Amazon is discussing a partnership
with Xaxis in which the company would help Amazon sell ads for the service,
Grether noted.
Amazon did not respond to
an email seeking a comment.
STARTING POINT
Amazon can bring in
higher-margin revenue by selling advertising than it can from its retail
operations. By showing ads for products that it may not actually sell on its
own website, Amazon establishes itself as a starting point for consumers
looking to buy something on the Web.
Research firm Forrester
reported that 30 percent of U.S. online shoppers in the third quarter began
researching their purchase on Amazon.com, compared with 13 percent who started
on a search engine such as Google - a reversal from two years earlier when
search engines were more popular starting points.
Amazon now sells ads that
show up to the side of product search results on its website. There were 6.7
billion display ad impressions on Amazon.com in the third quarter, more than
triple the number in the same period of 2011, according to comScore.
That early success is a
"huge concern" for Google, whose business relies heavily on product
searches and product search ads, said Macquarie Research analyst Ben Schachter.
Partly in response, Google
recently revamped its product search service, Google Shopping, by charging retailers
and other online sellers a fee to be listed in results.
Founded four years apart
in the late 1990s, Bezos has long worried about Amazon's reliance on Google for
traffic, according to people close to the company, while also being dubious
about Google's high market valuation.
"He'd say: ‘This is
the first time in the history of the world where the map maker is worth more
than the territory that it's mapping,'" recalled the former Amazon
executive of Bezos' comments about Google's popular online mapping service.
TENSIONS BUILD
Google's Android system is
thriving but still has not cracked the nut of how to make money from mobile
search ads and sales of digital goods like games, apps, music and video.
"If they can figure
out mobile ads, that would truly be Google's second act," said Forrester
analyst Sucharita Mulpuru.
But Amazon launched a
broadside against Google in 2011 with the creation of its own version of
Android for its Kindle Fire tablets that replaces key Google money-making
services, such as a digital music and application storefront, with its own.
Not unlike Apple,
"Amazon wants to control the experience on their devices," said Oren
Etzioni, a University of Washington computer science professor. "That
doesn't make Google happy."
The two are also clashing
in cloud computing software.
Amazon started its cloud
business more than six years ago, providing data storage, computing power and
other technology services from remote locations. Google only launched its cloud
computing business this year, but the market is growing so quickly there is
still room to grab share, Etzioni said.
"I would not write
Google off," he added. "Amazon has the early lead but it's very
early."
TRANSACT OR DIE?
Still, mobile gadgets and
cloud computing are currently tiny businesses compared with the
multibillion-dollar opportunity presented by advertising and online commerce.
Google recently acquired
BufferBox, a company with a network of lockers that shoppers can use to receive
packages. It is also testing same-day delivery in San Francisco, hinting at
growing interest in a larger role in online retail.
It is not talking about
its full plans for retail, but some analysts think features such as same-day
delivery or "pick-up" lockers, are valuable features it can use to
enhance its existing online ad business. An ad for shoes, for example, might
also make the shoes available for pick-up in a locker nearby, said Needham
& Co analyst Kerry Rice.
If Google can own the
search and the delivery, it will be able to provide the same experience as
Amazon, with no inventory - "a higher margin, more efficient model,"
Chien said.
Earlier this year, Google
launched a new certification service highlighting merchants that ship quickly
and reliably and backing it with up to $1,000 in "purchase
protection."
Google could create a
database of products and send shoppers to a page that has a way to buy quickly
through the company's payments service Google Wallet, Forrester's Mulpuru said.
Google could then send
that transaction to the retailer who would ship the product to the consumer.
That ability is critical, according to Schachter, who said if consumers lack
the ability to purchase items through Google it will lag Amazon and eBay Inc.
(Editing by Edwin Chan,
Peter Lauria, Martin Howell and Maureen Bavdek)
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