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.
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.
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.
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 Statesto $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 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."at a 100 percent annual clip, said Carl Haacke,
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."
"There has been quite a bit of venture activity lately in the search market, but more in complementary technologies and smaller, more niche search companies," like search for photos, jobs and local classifieds, said Josh Grove, a research analyst at the venture capital research firm VentureOne, a Dow Jones company.
The number of search equity investment deals in the United States has risen to 31 so far this year, up from 27 in 2004, and just eight in 2001, according to statistics from VentureOne and Ernst & Young. The amount raised, meanwhile, has been $176.9 million so far this year, surpassing last year's $164.9 million and about three times what it was in the two prior years combined, the study shows.
Feeding that venture capital activity, Google and Yahoo are in investment and acquisition mode.
"Google and Yahoo are sitting on huge amounts of cash, and they are buying companies at extremely early stages. I've heard of a number of venture capitalists getting annoyed (with the fact that) before they can get to a company, Google has bought them," Haacke said.
Among the recent Google acquisitions are Web analytics company Urchin, photo-sharing company Picasa and mobile software companies Android and Dodgeball.
"Historically, our (mergers and acquisitions) strategy has been to look for unique products, technologies and engineering teams that can help us provide innovative products to our users or enhance our existing services," Google spokeswoman Lynn Fox wrote in an e-mail response to questions.
For its part, Yahoo this year acquired Flickr, the popular photo sharing Web site, and Pixoria, whose Konfabulator technology is used in Yahoo Widgets, a service that lets people run small, customizable desktop applications.
"Start-up companies mostly are focused on developing specialized search technologies, vertical search, for things like travel, sports or health care," said Stewart Alsop, a partner at the venture capital firm New Enterprises Associates.
So what's next? Some think the search sector is already primed for some consolidation. There also are plenty of rumors thator even interested in selling AOL.
But don't think the IPO spigot is completely shut off for search companies.
Allen Morgan, managing director of the Mayfield Fund, which invested in general search engine Snap this year, still predicts that, though the only noteworthy IPO in the U.S. this year was , there will be a few next year and in 2007. That could give the latest band of start-ups time to mature.
There's no doubt that investors and entrepreneurs alike are still wistfully eyeballing Google's success.
"We are all blown away by Google," said Joe Bartlett, a venture capital lawyer and founder of VC Experts, a resource for data and analytics on private equity. Even "at the height of the bubble, nobody has ever seen anything like Google. I've been an investor in some pretty fancy companies, and (legal) counsel to others that have had meteoric climbs, but Google has people mesmerized."
"Nobody," Bartlett added, "thought you could climb out of Stanford and in a few years be duking it out with Microsoft."