Google rises at Yahoo's expense

The contrast between the financial results announced last week for the two top search engine companies couldn't have been more stark.

Yahoo's first-quarter revenue was $1.67 billion, less than half Google's $3.66 billion. Google, once again, blew away Wall Street expectations, while financial analysts openly wondered how long Yahoo CEO Terry Semel would stay in the Internet company's corner office.

Contrast those divergent fortunes with two years ago: The companies were pulling in about the same amount of revenue; they looked primed to battle for Internet domination; and the jury was still out on whether Google's largely unproven management had the chops to take on a seasoned pro like Semel, a longtime entertainment executive whose hand prints are on Hollywood's Walk of Fame.

Now few would argue the answer to that management question was, in fact, a resounding "yes."

"Google has a racecar. Yahoo has a Honda," said Stephen Arnold, author of The Google Legacy. "It goes back to the (search) algorithm, the engineering team and this constant improvement the Google people do. And I don't see any way to close the gap quickly."

So what happened? While a wide range of factors from personnel decisions to luck played a role, most pundits think it came down to this: A smart bet on advertising and technology inside the Googleplex and a bad bet on an online media empire, built from scratch, that would be run out of a Yahoo office in Santa Monica, Calif., about 400 miles away from the company's Silicon Valley headquarters but close to the entertainment industry.

"Yahoo did not execute in a couple of key areas for a number of years," said John Battelle, author of The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture and publisher of Searchblog. "They didn't revise, update, and leverage Overture (search advertising technology)," and they failed to improve the search experience and quality for consumers and advertisers, he said.

"They would acknowledge it was a mistake," Battelle added, "and it's proving to be a costly one."

Google, on the other hand, recognized the potential for pay-per-click ads early and has steadily improved its search and advertising technology. And search, of course, is a big deal. Americans conducted 6.9 billion searches online in February and nearly half of those were on Google, according to researchers at ComScore. Google has 48.3 percent search market share in the U.S. compared with Yahoo's 27.5 percent, ComScore said. Nielsen/NetRatings has the gap even wider, with Google at 55.8 percent share and Yahoo at 20.7 percent.

Google's share is rising at the expense of Yahoo and Microsoft. While Google's share rose 6.1 percentage points last year, Yahoo's fell 0.6 percentage points and Microsoft's dropped 1.1 percentage point, ComScore numbers show. Readmore