Comparing Google's Search Franchise To
Mccormick's Spice Franchise
Author: Geoff Gannon

Google has a competitive advantage. In fact, one might even say
it has a franchise in web search. I wouldn't say that. I mean,
Google does have a franchise; but, it doesn't have a monopoly
on web search and never will. There are real problems with
Google's model that are often overlooked. It does a poor job of
finding certain sites that are difficult to describe in
keywords. For this reason, there may still be a market for web
search in the form of specialized niche directories and in some
of these "social search engines" (e.g., Stumble Upon) for many
years to come.

I'm not suggesting any of these services will be as successful
as Google; I'm sure they won't be. I am simply pointing out
that there is a difference between a need and the means by
which that need is satisfied. Even as the dominant search
player, Google will only have a franchise on the means (keyword
search); it will not have a franchise on the need (finding stuff
on the web). Also, Google can not, at present, rightly be called
the dominant search player. There is no dominant player in
search. Google is the leading search player. It is also the
catalyst for many changes in search. But, it is not yet the
dominant player in search the way McCormick (MKC) is the
dominant U.S. spice producer.

Looking at McCormick's franchise is actually a pretty good way
of evaluating Google's. Why do I say McCormick is the dominant
player (domestically) in spice, but Google is not yet the
dominant player in search? There are a few reasons.

McCormick has a 45% share of the U.S. retail spice market. Its
closest competitor has a 12% market share. We may differ about
exactly how the web search pie is carved up. But, I think we
can agree that Google's share of the market is less than 45%,
and that at least two of its competitors have a share of the
market greater than 12%. So, Google's position differs from
McCormick's in two material respects (already). Google has a
smaller slice of the pie, and the search market is less
fragmented than the spice market.

The spice market is an upside down funnel. The few producers
are at the top. They feed their products through three
distribution paths: retail, industry, and restaurants. In each
case, the shape of the upside down funnel remains intact,
because the widening happens at the very end. The ultimate
consumer of McCormick's product doesn't get to choose from all
available spices. His choice is always indirect. He picks a
grocery store, a food product, or a restaurant. Then, must
choose from the spices that particular supermarket chooses to
carry, or the restaurant he frequents chooses to use (and/or
make available).

In search the story's a little different. There is still
something of an upside down funnel shape in search. Although,
it is less pronounced than it was a few years ago. Search
results are fed through dependent sites that searchers visit.
But, it is the searcher who chooses the dependent sites. A few
of these dependent sites account for a large part of all
searches. That is very different from the spice market, where
no supermarket or restaurant chain accounts for a large part of
all spice consumption – none even comes close. So, the searcher
has a much bigger role in choosing his search provider than the
spice consumer has in choosing his spice provider. Even though
it is true you are sometimes searching without knowing Google
is the search provider, the situation is nothing like it is at
McCormick. When eating a meal you aren't thinking about
McCormick. Quite often, however, you are using a McCormick
product. Whether it was in that package of spices you used to
cook a meal at home, or in that manufactured food product, or
in the dish you ordered at the restaurant, you are a consuming
a McCormick product.

What matters as far as the investor is concerned is that the
ultimate consumer of McCormick's product rarely makes an
active, unfettered choice to consume that product over all
other competing products (or even many competing products). The
closest he comes to making such a choice is at the supermarket;
though even there, the decision of how much shelf space to
allocate to each company's products was made for him. To use
Google, the first time searcher must make an active, unfettered
choice.

Finally, there is the matter of infrastructure. This consists
of two parts: production and distribution. McCormick has an
existing production infrastructure which is helpful as far as
costs are concerned, but isn't especially valuable. It could be
duplicated by a new entrant with deep pockets. McCormick's
distribution infrastructure is almost impossible to duplicate.
It is worth far more than it cost McCormick to create it.
Prying McCormick's customers (situated at the narrow of that
inverted funnel) away from the company's products would not be
easy. This distribution infrastructure gives solidity to
McCormick's spice franchise in the U.S. In some instances, it
will also help McCormick aboard (as some of the company's
customers are expanding globally and will be inclined to stick
with McCormick in their overseas operations).

Google's production infrastructure (the algorithm and the
index) is easy to duplicate and will become even easier to
duplicate in the future. There isn't much of a barrier to entry
here. Google may currently offer the best search service around,
but there is no reason to believe this will always be the case.
Distribution is very often the most valuable part of any
franchise (it is usually the part that is hardest to
duplicate).

So, the natural question is: in the world of search, if you
build it will they come? Will the best search engine always
attract the most searchers? Probably not. That's good for
Google, because it won't always be the best search engine.
Google has a great brand. Whatever value is in Google comes
from that brand. That brand is what will keep searchers from
flocking to the inevitable newer, better search engine.

All of Google's revenues are ultimately dependant upon
attracting searches. Getting those searches requires two
things. First, millions of people must make the active,
unfettered choice to search Google. Then, those millions of
people must keep searching with Google. The brand is the key to
step one. The service is the key to step two. Search customers
are sticky. But, they probably aren't as sticky as we think.
It's very easy to take immediate action on the web (just click
a link). Switching away from Google isn't like switching away
from Windows.

That leaves the brand. True, when you think search, you think
Google. But, is that brand worth $120 billion? No – and neither
is Google.


About The Author: Geoff Gannon writes a daily value investing
blog and produces a twice weekly (half hour) value investing
podcast at http://www.gannononinvesting.com