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Google Knows Microsoft-Yahoo Search Combo Is a Threat

Microsoft (MSFT) and Yahoo (YHOO) wanted to combine their search operations to target Google (GOOG). Now both U.S. and European regulators have given their blessings to the union. And external calm to the contrary, Google is worried.

On the surface, this seems ridiculous. Google has huge market share that continues to grow. And yet, the company has shown its concern in a number of ways. Let's start with the least-credible evidence, because it's just a rumor: Google might be paying to be the default search engine on the Apple (AAPL) iPhone. Any time a company pays for access to a market on the Web, it is worried about competition.

But set that aside for now, because it's still only a rumor. More tangibly, I'd argue that Android is further evidence of Google's concern. Google wants to control a major mobile operating system because it potentially offers control of mobile marketing -- particularly search marketing -- and keeps it from having to fund Apple-style deals. If Web search technology and revenue were enough, Google wouldn't need to take the step.

The biggest evidence came only a week or so ago: the Super Bowl ad. I admit that I was taken in at first, because Google didn't follow the pattern of companies that create something new for the game, and the ad focused on its existing search business. But consider what this shows: On one hand, the decision was relative hasty, hence the pre-existing material (which relatively few people in the country had seen). On the other, Google could have focused on any of its product lines, but chose search.

Why market search? Because Google has something big to lose: The bedrock of its business. Microsoft has started to look at search differently from Google, which potentially means ways to present unique benefits to users.

For example, as my colleague Chris Dannen suggested, Google Maps may be falling behind Bing. That literally is a graphic example of how Microsoft can do something new and eye-catching in search. Microsoft Surface will use Bing in all sorts of public locations, getting people accustomed to using the engine. Microsoft has also focused on shopping -â€" an area that Google has neglected. And yet, as publishers like have found, powering consumer purchases can be a significant revenue source, one untapped by Google. Microsoft just happens to have significant experience in, and extensive relationships with, retail channels that might be interested in partnerships.

Also, as Chris noted today, there are people who have challenged Microsoft CEO Steve Ballmer's assertions that scale is an advantage in improving search. But I think the people offering those points, including Google chief economist Hal Varian, are either unconsciously or deliberately misunderstanding the Microsoft view. Ballmer doesn't think that scale helps make search better. He thinks it helps improve search business strategy. As more people use your search engine, you get more of the advertising dollars that are virtually Google's sole revenue source. As people move to Bing, the press covers it more, and you get more free marketing. More talk about Bing translates into more people trying it.

This isn't the network effect that Microsoft Office sees, where the more people that use a product, the more others need to use it to maintain compatibility. The Bing strategy is just old fashioned marketing. It's like a positive emotional feedback loop -- nothing to do with logic and everything to do with how people make decisions in the real world. People didn't switch to Google from Alta Vista because they got search results that were that so much better. They switched because suddenly Google became the cool place to do search, and then habit set in.

Bing an exceptionally powerful tool for Microsoft for two reasons. One is that it doesn't depend on search advertising right now. The $150 million a year that Microsoft pays to Yahoo represents a rounding error in its revenue. The more Microsoft can drain from Google's revenue tap, the more effectively it can compete. The other reason is that Google is simply bad at marketing, largely because it seems to lack the necessary emotional intuition. Just look at how badly it flubbed the privacy questions surrounding Buzz. Google executives don't understand regular people. That's ultimately what makes the Microsoft-Yahoo partnership such a devious and potentially powerful strategy. It's anything but high tech.