21-Lagging Badly Pedaling Downhill

It’s one thing to be the market share leader in your industry. It is another thing to take full advantage of that place by creating and exploiting significant economies of scale. The average industry leader fails to do this. But here is an example of an industry leader who does it extraordinarily well.

Posted 5/15/08

Microsoft, at least for now, has failed in its efforts to acquire Yahoo. If it had succeeded in this acquisition, Microsoft would have had to do some radical surgery on Yahoo’s search business, and on its own as well.

Yahoo is lagging badly despite high growth. Yahoo’s revenue growth in the search business is about 19% a year. This sounds very good. In many industries that growth would be spectacular. But the overall growth in search revenues is 28% a year. Yahoo is lagging badly. Google is the overwhelming star performer. Its growth rate is 58% a year.

Yahoo performs poorly against most of its four major competitors. The four major players in the marketplace are Google, Yahoo, MSN and AOL, in that order of market share. Together they account for something less than 60% of the total market. (In the average mature market, the top four competitors own more than 80% of the total market. So, this market has much maturing yet to do. All the top competitors are losing share to Google. The only top competitor to perform worse than Yahoo? Microsoft’s own MSN. The merger of these two companies is equivalent to the combination of two Division II college football teams in the hopes of beating USC.

Each of the players in the search business, other than Google, has a significant value proposition problem. Value is the combination of Performance for Price. If a company’s market share is falling, the inescapable fact is that the Value proposition it offers is wrong. Either the price is too high or the Function, Reliability and Convenience of the offering are too low. Or both the pricing may be high and the Performance may be low. Eventually, this lagging Performance shows up in the numbers.

Yahoo’s relative numbers already show its lagging Performance. Its ROE last year was 11%, but Google’s was 21%. Its trailing P/E is 34, but Google’s is 42. As the market inevitably slows, these lower returns may easily turn into losses. The antidote lies in a better Value proposition. Both Yahoo and Microsoft need a lot of work.

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Update 2022:

Google has succeeded. Everyone else has failed.

Google has been the model of an effective industry leader. Over the years it has allowed competitors neither a price nor a Performance advantage opening to its customers. Its market share continues to grow and is now largely unassailable. According to Statista, at the end of 2021, Google held 86% of the worldwide search market, Microsoft’s Bing controlled 7%. Yahoo’s share was under 3%.

Verizon originally purchased AOL in 2015 for $4.4 billion and acquired Yahoo in 2017 for $4.5 billion. After completing its Yahoo acquisition, Verizon placed both brands under the nondescript “Oath” brand. The combined company struggled. In 2018, Verizon wrote down the combined value of its purchases of AOL and Yahoo by roughly half.

It is likely that Google has succeeded because of its high Reliability. For a simple description of how customers buy go HERE

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Update 10/26

Google remains the overwhelming winner in the marketplace and faces relatively limited competitors offering unique Customer Buying Hierarchy benefits. The company has used its overwhelming dominance and economies of scale to innovate where others cannot. The company’s return benefits are impressive.

Google’s global market share remains near 90%. Its share has dipped slightly as Microsoft’s Bing has challenged it with AI innovations and integration benefits, and as AI assistants such as ChatGPT have begun to take some searches. Still, Bing is a far cry from being a substantial threat to Google.

Google has continued to lead its market by exploiting its unique position and concomitant economies of scale in the search business. It created a Function advantage by using its overwhelming leadership in real-world searches to gain a unique understanding of what a searcher is seeking. It has developed an unparalleled understanding of natural language. These advantages enable it to provide more targeted answers to a searcher’s query, often reducing the need for further clicks in search of better answers.

It has innovated in Convenience using its economies of scale cost advantages as well. In 2015 mobile searches exceeded those on the desktop in ten countries, including the United States and Japan. In response, the company swiveled its attention to a “mobile first” approach to developing its business. It focused on emphasizing high speed and enjoyable experiences for searchers using smaller screens. The result of this effort is that Google’s market share in mobile searches exceeds 95% in 2026.

Finally, Google dominates the Reliability trade. Its superior performance and huge market share make it the default choice for the vast majority of search users in the market. Users assume that bigger is better in this market as well as in many others.

Google’s financial results have been truly impressive. Its search business has grown at about 15% per annum since 2019. This growth has come without a sacrifice in margins. The company’s return on equity in 2025 is a stratospheric return of about one-third. Alphabet earned $132.2 billion on $402.8 billion of revenue in 2025.

Google does face some challenges from competition offering unique Customer Buying Hierarchy benefits. It does not appear that any of these unique benefits will result in serious challenges to Google. Bing has innovated in Convenience. The company has integrated its search service with its Windows 11 operating system and the Edge browser. It has complemented this integration with new AI services, a Function innovation. Google should be able to match these innovations with time. Google faces some Convenience challenges in the Eastern and Asian markets where the company is often under a regulatory disadvantage. These challenges have had limited effect on Google’s market share. The larger challenge is at home. A federal court found Google a search monopolist, and its 2025 remedies stopped short of selling Chrome. Google and the Justice Department have both appealed.

What about poor Yahoo. Despite many highlights in the early 2000s, the company is a search afterthought. Its market share is below 2%. This, from a company who was once offered, and refused, a merger worth over $44 billion by Microsoft. It once had over 20% of the search industry. It was simply overwhelmed by Google and its constant innovation. Verizon bought Yahoo in 2017 but failed to make notable progress with it. It wrote down half of its investment in the Yahoo business the next year, and in 2021 sold Yahoo and AOL to Apollo for $5 billion, well below the $8.9 billion it had paid for the two.

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Quick Hits

Six patterns from the StrategyStreet system this story confirms.

1. Share leadership pays off when the leader exploits Economies of Scale. Google’s return on equity was 21% against Yahoo’s 11% when this blog was first posted. In 2025 Google’s net income was $132.2 billion on $402.8 billion of revenue, a return near one-third. Google used its scale both to create new unique Function and Convenience benefits and to support its margins.
2. Scale funds the innovation a smaller rival cannot afford to copy. Google’s searches taught it natural language, a Function Innovation. It then went “mobile first,” a Convenience Innovation, and now AI answers. Bing’s Windows and Edge integration matches the idea, not the scale behind it.
3. Customers read size as Reliability, so the biggest becomes the default. Yahoo once held more than 20% of search. Today Yahoo has about 1%. Users who walk the Customer Buying Hierarchy stop at Function and Reliability. Google wins both, and searchers pay nothing at any engine, so Price never comes up for them. Advertisers do pay a price, which is the next pattern.
4. Reliability pays off in price. Searchers pay nothing at any engine, so advertisers pay the price, and they pay Google more per click than Bing, by roughly a third in one 2026 benchmark. Few advertisers are swayed by a discount that size. Microsoft’s search advertising brought in $15.2 billion in its fiscal year ended June 2026, about 6% of Google’s $243 billion over the same twelve months. Google holds a Price Umbrella and the discounter is not taking share.
5. Merging two Weak Competitors does not create a strong one. Microsoft’s 2008 pursuit of Yahoo was two Division II teams hoping to beat USC. Verizon repeated the mistake. It bought AOL for $4.4 billion and Yahoo for $4.5 billion, wrote down about half, and sold both to Apollo in 2021 for $5 billion. Buying share that is already leaving does not stop it leaving.
6. Markets tend to concentrate even in Developing markets. This one concentrated into a single competitor. A mature market has its top four competitors at about three-quarters of total revenues. In 2008 the top four in search, then growing 28% a year, held under 60%, so the market had “much maturing yet to do.” Seventeen years later Google alone holds about 90%, and search is still growing about 15% a year. The next risk is not a rival search engine. It is the antitrust appeal and AI assistants.

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