The Next Battle for Digital Domination

“Theory of disappearing layers – as the amount of user attention available to internet services becomes constrained, number of layers in an acceptable user experience moves towards 1.”

Don Richard

I woke up this morning and, as I do every morning, opened my laptop and turned on the coffee machine before doing anything else.

A few minutes later, I went through a couple dozen new emails as I sipped my coffee. Same inbox, same routine, same internet… day in and day out.

Nothing has changed.

But, of course, that’s simply not true. Nothing stays the same. In the digital world, that’s especially true. It’s in a state of constant flux.

Right now, it’s seeing two massive user trends take shape. Each one is gaining steam, pulling in more and more people and more and more dollars.

They coexist without problems or interference from each other… at least for now.

But for how much longer?

As they get bigger, one is bound to crowd out the other, establishing itself as the single dominant trend.

At stake is a huge burgeoning market, the U.S. digital ad spend. It’s expected to amount to $83 billion this year, according to research firm eMarketer, with $59.2 billion going to mobile.

Today, I’m going to reveal who the big winners will be… and the big losers.

Tailwinds Gather for the Current Dominator

Last week, I discussed Snapchat’s IPO. I mentioned it had a great shot at leveraging its popularity with the millennial generation to attract TV ad money.

It’s all part of a game-changing migration of ads going from TV to digital and, increasingly, to mobile.

This year, for the first time, the internet is expected to overtake television as the advertising industry’s biggest revenue source.

Snapchat is gearing up for explosive growth. Its ad revenue should go up 158% this year, according to eMarketer. But keep in mind its share of mobile ad spending is still tiny, just 1.3%.

The really big winner? Google.

It’s in the perfect position to take advantage of one of these two big user trends over the next decade.

So what’s one of these market-defining trends?

People are using their computers and smart devices to look up EVERYTHING. From places to things to historical facts to the weather to sports scores, you simply “Google” it.

It’s an “everybody everywhere” phenomenon.  And Google is its dominant force.

Google has a commanding 78% share of the search advertising market. Poor Bing and Yahoo – Google is continuing to snatch market share from these two fading search engines.

Google is the king of ad revenues, almost tripling what its closest competitor, Facebook, brings in.

It’s expected to effectively ride the market’s expansion this year. As U.S. digital ad spending rises 16%, Google’s revenues should increase by 15%.

Facebook is the only one managing to keep up, as this chart shows…

It seems that there’s no stopping Google’s digital domination.

Not All Blue Sky

Yet there’s another big trend that’s emerging. And wouldn’t you know, Google is on the wrong side of it…

Shoppers are turning away from using a search engine to use Amazon.

One report by BloomReach says that 55% of consumers search Amazon first for products, compared to 28% who start with a Google search.

Some interesting details…

  • When shoppers know what gift they want, 59% will start on Amazon, 24% on Google, and 16% at a retailer that has that product.
  • If people don’t have a gift in mind, 49% will start on Amazon, 28% on Google, and 26% on a retailer the gift recipient likes.
  • 90% of consumers will check Amazon even if they’ve found their product elsewhere. 78% of these shoppers do this “often” or “always.”

Amazon has amassed 300 million customers worldwide. And 70% of retailers have named Amazon as their top marketplace for sales.

Amazon is every bit as dominant in e-commerce as Google is in search. Separate but equal.

Can it last? I’m afraid not.

Amazon has removed much of the friction in product searches and purchases. The typical Amazon Prime customer goes on the site, finds a product and 1-Clicks the order for same-day shipping.

It’s easy and fast. Now compare that to Google…

It shows you dozens of websites, and those websites offer you different things. Some are better on price than others. Some are better on shipment. Some have better return policies. Some offer comparison shopping. And so on.

Lots of choice.

And that’s the problem.

Shoppers are showing decreasing patience. Increasingly, they value completing a specific task as quickly as possible more than they value having multiple options.

This is what I believe…

What is true for shoppers today will increasingly apply to everybody using the internet.

Google is already taking steps not to get left behind. It now offers Google Assistant with its latest smartphones. And like Alexa (from Amazon), its Google Home tries to give users one right answer or one right way to complete a task.

This is a different business model for Google, and it requires a different monetization strategy. What will advertisers pay Google for a “search” that gives a single result to the user?

I doubt Google knows. But I bet it suspects that it’ll probably be much less than what they pay now.

Not Ready for Prime Time

I don’t personally use Alexa, but my daughter does. Whenever I visit her, I’m amazed at what Alexa can’t do. Apart from finding music, turning lights off and on, getting the latest weather report and contacting Uber…

I’m already running out of things.

Truly “smart” assistants may be the next big thing, but they’re not arriving tomorrow. Right now, ask any question that’s slightly nuanced and you’re facing a familiar Google search with many options to choose from.

It’s going to be a while before a “single answer” and the “right answer” become one and the same. And the one thing more frustrating than having to wade through a lot of options?

Being given a single option that’s wrong.

To its credit, Amazon has given users the kind of fast and easy online experience they would welcome for ALL their internet inquiries.

The bar has been raised.

Google’s search revenue model is safe for now. Smart single-answer technology is still years away.

Google has the technological prowess to develop smart artificial intelligence-assisted technology as fast as anyone else. And it will certainly be interested in any startup that can accelerate its timeline.

This is why Adam and I are on the lookout for startups with AI-enabling technology that helps providers gain insights into their users.

As we encounter the more interesting ones, we’ll be sure to let you know.

Invest early and well,

Andy Gordon
Founder, Early Investing