The Coming Blog Wars: Google vs. Yahoo
For Yahoo and Google, the Internet’s two search titans, Blogs are rapidly becoming both an important distribution channel and a growing cost center. The battle to control this distribution channel, while at the same time reducing its costs, will intensify greatly this year and will most likely be characterized by some rapid fire acquisitions within the “Blogsphere”.
It’s The Channel Stupid
According to Technorati, the number of blogs on the web has grown from about 100,000 two years ago to over 6,500,000 today with about 20,000 new blog being added every day. Over at Pew research, their latest study indicates that 27% of Internet users in the US, or 32 million people, are now reading blogs, up almost 150% in just one year.
Right now, Google owns the blog-channel thanks in part to its acquisition of Blogger, but mostly to its self-serve Adsense platform that allows bloggers to easily add paid placement and search services to their sites. (I set up both services on this site in 30 minutes with no human help or interaction.) While Google doesn’t say just how much of its revenues it generates via blogs, with growth numbers like those above it’s no doubt that Google’s “blog-related” revenues are growing quite quickly.
While Yahoo is rumored to be building a competitive offering to Adsense, for now it is limited to only serving large sites, so its blog-related revenues are likely miniscule, however Yahoo clearly is aware of the growing importance of blogs and knows that it must have a competitive response to Google’s Adsense platform.
If either player were able to control or at least significantly influence which paid placement services bloggers chose to incorporate into their sites, it would given them a substantial competitive advantage in their head-to-head competition and control over one of the fasting growing channels on the web.
For example, not only would control allow Yahoo or Google to push their own paid placement and search services at the expense of the other, but it would allow them to route other “affiliate” traffic through their own hubs and thereby take a piece of the action. For example, rather than having bloggers link directly to something like Amazon's Associates program, the bloggers would instead send their traffic to a “master” affiliate account at Google, one in which Google was able to negotiate a larger % cut due to its overall volume, or they might just send it to Froogle if that was a better deal. In such a case both the bloggers and Google win. Google gets a cut of affiliate revenues that it previously missed out on and bloggers get a slightly higher rev share thanks to Google’s much greater bargaining power.
A Costly Partnership
While integrating blogging more closely into their business models offers Google and Yahoo additional revenue opportunities, it also presents them with significant costs, mostly in the form of revenue share payments that they must make to blogs. While they must make similar (and often higher) payments to traditional media partners, the payments to blogs are more costly to process (due to large number of blogs) and much more susceptible to click-through fraud schemes. Controlling the cost of the channel is therefore likely to be almost as big a focus as increasing the revenues its produces.
While controlling fraud will be very important, it likely won’t be a source of competitive advantage as both firms have similar incentives to control fraud. One can even imagine both firms partnering, directly or indirectly, to jointly fight fraud. That leaves reducing payments to blogs as the most obvious way to control costs, however reducing payments will be difficult to achieve due to competitive pressures.
Blog Barter: Spend Money To Save Money
The best way to save costs may actually be to spend some money and acquire companies that currently offer services to bloggers. These services can then be bartered to blogs in return for a reduction in payments. For example, a blog that pays its hosting firm $20/month might be willing barter $20 worth of its click-through revenues for hosting instead of writing a check. At the very least, Google and Yahoo might be able to buy such services for $18/month and resell them for $20 in click-through credits thus saving themselves 10% cash in the process.
This math, plus burgeoning payments to bloggers, is likely to prompt both Google and Yahoo to make some rapid fire acquisitions in the space. For Google, the acquisitions will be about protecting its lead and denying Yahoo the chance to become competitive. For Yahoo they will be about quickly catching up to Google and potentially surpassing it. Of the firms, Yahoo is perhaps in the best position to initiate this “blog barter” economy given that it has a broad range of existing subscription services that it can barter, however they are also the further behind in terms of using blogs as a channel for their services.
The Hit List
While it’s tough to say with 100% accuracy which start-ups will be on the blog-inspired M&A “hit list” of Google and Yahoo, it is clear that such firms will do one of two things: they will either enhance control over the distribution channel or they will reduce its costs by enabling “blog-barter” transactions. Google early on struck the 1st blow in this M&A battle with the acquisition of Pyra Labs (creator of Blogger) in 2003, but more deals are undoubtedly on the horizon due to blogging’s explosive growth in 2004. A few of the most likely candidates for acquisition include:
- Six Apart: Creator of the popular TypePad blog authoring software and service (this blog is hosted on their service), TypePad has long been rumored to be a potential acquisition candidate, most recently for Yahoo. With 6.5M users after its recently announced acquisition of LiveJournal is completed, Typepad is clearly the biggest piece of the blog channel that it potentially up for grabs. While the odds on bet is that Yahoo will acquire TypePad given that it has no blog platform to date, Google may well try to lock up the channel by acquiring TypePad ahead of Yahoo, but it’s also possible that long shots such as Amazon and Microsoft may make their own bids.
- Burning Door: Operator of the increasingly popular Feedburner service that provides detailed usage statistics of RSS feeds, Feedburner is an ideal acquisition both as an incremental revenue generator and a “blog barter” service. On the revenue front, Feedburner offers a fantastic platform for “splicing” contextually relevant RSS advertising and affiliate offers into RSS feeds creating yet another advertising platform for the search players. On the blog-barter front, serious bloggers will easily part with a few “barter bucks” each month in return for the detailed usage and reporting statistics that Feedburner is able to provide.
- MySpace: Originally pitched as a social networking site, MySpace has melded social networking with blogging to the point where the site has become some kind of strange youth-centric amalgam of the two worlds. The risk is that MySpace is really just GeoCities 2, but this may turn out to be the best kind of platform for advertisers to reach the youth market in a contextual, non-obtrusive way. In addition, if MySpace can help its members earn a little pocket change through blogging, they may be able to solve the input-output asymmetry problem that I wrote about in an earlier post on social networking.
There are a bunch of blog aggregation sites such as Bloglines, Technorati, del.icio.us that appear on the surface to be interesting acquisition opportunities, but it is unclear what these sites really add to the existing capabilities of Yahoo and Google as these sites focus on end-users, not bloggers, and Google and Yahoo already have plenty of end-users.
As for VCs, this round of blog-inspired M&A will be a nervous game a musical chairs as quickly placed wagers either pay-off or are permanently bypassed. Watching how this , the Great Blog Battle, plays out will be entertaining indeed!
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The thoughts and opinions on this blog are mine and mine alone and not affiliated in any way with Inductive Capital LP, San Andreas Capital LLC, or any other company I am involved with. Nothing written in this blog should be considered investment, tax, legal,financial or any other kind of advice. These writings, misinformed as they may be, are just my personal opinions.