Tuesday, January 10, 2006

Search Engines: Leeches or Simple Commission Agents?

In a recent post, it is argued that search engines are fundamentally changing the economic landscape and leading to economic asymmetry.

Basically the search engines are just intermediaries. Okay you can call them hypermediaries, but basically they just end up driving visitors to your site, or put another way, “charge a commission” on every transaction. When I say charge a commission, I mean that in the Internet space, most transaction for the Online Businesses originate from these search engines, and they charge you per click fee. The per click fee is minuscule, but then all traffic driven to your site in not a sale, and if you add it up, basically you are paying a commission on each sale you make to these search engines. This fact is also illustrated by Nielsen’s post albeit he is not using the “commission” term per se. I don’t think this aspect is fundamentally different from many businesses we know of. As a case in point, Nike is acting as an intermediary when it gets shoes manufactured from an outsourced outfit in Indonesia, and charges a “commission” (in terms of a premium over cost of manufacturing) on the sale. The analogy is Nike can “direct” the customers to purchase the shoes in the stores, which the shoe manufacturers in Indonesia cannot do by themselves. It is a different thing (can also be a scary thing) that Nike has a stranglehold over the lives of these manufacturing outfits. It is clear that today search engines have a stranglehold over all sales you can make online. Unless you feed them their commission, you cannot get any sales.

What happens when search engines compete with each other? Well Nike competes with Reebok, but it doesn’t change a thing for the manufacturer. The intermediaries are still able to charge a fat “commission” on the manufacturing price. The only difference in the model is that in case of search engines, the businesses get direct customer interfacing. In case of Nike, it is filtered. In both cases however, they are no good without the (hyper)mediary.

I think that its an imperative strategic initiative for businesses to break the stranglehold of search engines and find ways and means to bypass them and reach their customers directly. If you cannot reach your customers directly and rely too much on a single channel, you cannot win.

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