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The search engine landscape has changed rapidly over the five years to 2012.  Since 2007, the dominant online advertising medium has switched from banner ads to search ads, largely thanks to the efforts and success of Google.  The Search Engines industry derives most of its revenue by serving ads to users depending on the search term entered.  Under this business model, search engines are paid a small fee whenever a user clicks on an ad; advertisers create ads targeted to specific keyword queries, with the search engine determining which ads to present based on the advertisers’ offering price and the ad’s popularity.  This efficient advertising system, coupled with an increasingly internet-connected populace, is expected to propel industry revenue growth at an average annual rate of 11.5% from 2007 to 2012.  From 2011 to 2012, search engine revenue is expected to increase 14.6%, to $17.1 billion. (Source: www.ibisworld.com)

The success of search engines over the past five years has heralded the decline of other advertising media.  Newspapers, radio and TV broadcasters’ share of spending on ads declined over this period.  Conflict between traditional media and search engines increased in 2010, as News Corporation, owner of the Wall Street Journal and the Fox Network, led a coalition of other content producers to require subscriptions to access most of their websites.  However, this trend is expected to be offset by the increasing popularity and capabilities of consumer devices, from smartphones to TVs.  As these devices offer expanded access to internet content, the search advertising business model will displace more traditional advertising.  (Source: www.ibisworld.com)

Google is not only the major player in this industry, with a market share of almost 85.0%, based on percentage of search traffic. Google’s founders, Sergey Brin and Larry Page, developed the core search algorithm while attending graduate school at Stanford University; Google’s core search algorithm assesses relevancy by looking at how often a given web page is referred to from elsewhere on the internet. Google has maintained its technological lead by consistently improving its search results, though most of these details are not available to the public. Over the five years to 2011, Google posted annualized revenue growth of 29.0%, to $37.9 billion.  (Source: www.ibisworld.com)

                                                                                             Source: www.ibisworld.com

                                                                                                    Source: datamonitor

Now we will take a look at the Herfindahl–Hirschman Index (HHI) to determine the concentration of the US search engine and global internet software and services markets.  By looking at this figure, we can determine if Google is a big fish in a little pond or a little fish in a big pond.  THe HHI values range from 0 – 10,000, with 0 being very fragmented and 10,000 being very concentrated.  The market HHI value if figured by squaring the market share value of the top four players in the industry and then adding those values together.

For example:

This table shows that the US Search Engine Market is extremely concentrated (close to 10,000 HHI).

This table shows that the Global Internet and Services Market is extremely fragmented (close to 0 HHI).

Therefore, the market share of Google in the US market is a very strong attribute.  However, Google’s market share in the global market is still strong since they are the global leader, but they hold much less of the market share than the domestic market.  Therefore, Google has plenty of room to grow in the global market.