A chance conversation last week alerted me to a potential chink in Google's apparently impregnable market position. As the mythical Greek hero Achilles found, just a small area of vulnerability (in his case a single heel) is enough to bring down even the most invincible of combatants.
Google certainly likes to parade its dominance, even despite emerging conflicts of interest between its expanding range of online services and some of the advertisers it relies upon to provide virtually its entire revenue stream. Any student of market dynamics will tell you that the 800lb gorilla of any sector has a near-monopoly position and thus can more or less do as it pleases, whatever its customers think. But companies who abuse that position can't rely on customer loyalty if they unexpectedly become vulnerable to fresh competition. Google can ride roughshod over its customers' complaints and misgivings so long as it's the only game in town. It will find the tables quickly turn if that's no longer the case.
There's a paradox at the heart of Google's success that highlights the location of its Achilles' heel. It makes money because users of its search engine find what they want by clicking on ads. That's right, the ads are better targeted than the search results. It's not so much a search engine company, more an ad engine company. The search engine is almost a smokescreen (indeed, I've argued in the past that Google should spin off its search engine and just concentrate on ads, but the company is making too much money from its vertically integrated play to split up horizontally like that).
Now think for a moment why the ads work better than the search engine itself. The simple explanation is the wisdom of crowds. The ads are more accurate because they benefit from the concerted efforts of hundreds of advertisers competing with each other to float to the top of the ad rankings. Whereas the search results are based on algorithms that explicitly filter out the attempts of website owners to game the results. They're based on the passive, serendipitous wisdom of hyperlinks.
Google's exposure is to a search engine competitor that finds a way of harnessing the wisdom of crowds to producing better search results. Someone like UK-based Trexy.com, for example, which uses a downloadable toolbar to collect information about user search behavior, and then aggregates these 'search trails' to improve the accuracy of its results.
Come to think of it, why doesn't Google do this already using the Google toolbar? There are smart people at Google. They probably long ago understood the paradox I've just described. But Google has no incentive to improve its search engine in the way I've described. The company's business model depends on ads remaining the best way to locate a result. If its search engine did that for free, how would Google make money?