Google, Amazon rivalry set to escalate in 2013

Google, Amazon rivalry set to escalate in 2013

When Amazon.com Inc CEO Jeff Bezos got word of a project at Google Inc to scan and digitize product catalogs a decade ago, the seeds of a burgeoning rivalry were planted.
The news was a "wake-up" call to Bezos, an early investor in Google. He saw it as a warning that the Web search engine could encroach upon his online retail empire, according to a former Amazon executive.
"He realized that scanning catalogs was interesting for Google, but the real win for Google would be to get all the books scanned and digitized" and then sell electronic editions, the former executive said.
Thus began a rivalry that will escalate in 2013 as the two companies' areas of rivalry grow, spanning online advertising and retail to mobile gadgets and cloud computing.
It could upend the last remaining areas of cooperation between the two companies. For instance, Amazon's decision to use a stripped down version of Google's Android system in its new Kindle Fire tablet, coupled with Google's ambitious plans for its Motorola mobile devices unit, will only add to tensions.
The confrontation marks the latest front in a tech industry war in which many combatants are crowding onto each others' turf. Lurking in the shadows for both Google and Amazon is Facebook with its own search and advertising ambitions.
"Amazon wants to be the one place where you buy everything. Google wants to be the one place where you find everything, of which buying things is a subset," said Chi-Hua Chien, a partner at venture capital firm Kleiner Perkins Caufield & Byers. "So when you marry those facts I think you're going to see a natural collision."
Both companies have a lot at stake. Google's market capitalization of $235 billion is about double Amazon's, largely because Google makes massive net earnings, expected by analysts to be $13.2 billion this year, based on a huge 32 percent net profit margin, according to Thomson Reuters I/B/E/S. By contrast, Amazon is seen reporting a small loss this year.
Amazon shareholders have been patient as the company has invested for growth but it will have to start producing strong earnings at some stage - more likely if it grows in higher margin areas such as advertising. Google's share price, on the other hand, is vulnerable to signs of slowing margin growth.
Ad clash
Not long after Bezos learned of Google's catalog plans, Amazon began scanning books and providing searchable digital excerpts. Its Kindle e-reader, launched a few years later, owes much of its inspiration to the catalog news, the executive said.
Now, Amazon is pushing its online ad efforts, threatening to siphon revenue and users from Google's main search website.
Amazon's fledgling ad business is still a fraction of Google's, with Robert W. Baird & Co. estimating Amazon is on track to generate about $500 million in annual advertising revenue - tiny, given it recorded $48 billion of overall revenue in 2011. By contrast, 96 percent of Google's $38 billion in 2011 sales came from advertising.
But Amazon's newly developed "DSP" technology, which taps into the company's vast store of consumer purchase history to help marketers target ads at specific groups of people on Amazon.com and on other websites, could change all that.
"From a client's perspective, the data that Amazon owns is actually better than what Google has," said Mark Grether, the chief operating officer of Xaxis, an audience buying company that works with major advertisers. "They know what you just bought, and they also know what you are right now trying to buy."
Amazon is discussing a partnership with Xaxis in which the company would help Amazon sell ads for the service, Grether noted.
Amazon did not respond to an email seeking a comment.
Starting point
Amazon can bring in higher-margin revenue by selling advertising than it can from its retail operations. By showing ads for products that it may not actually sell on its own website, Amazon establishes itself as a starting point for consumers looking to buy something on the Web.
Research firm Forrester reported that 30 percent of U.S. online shoppers in the third quarter began researching their purchase on Amazon.com, compared with 13 percent who started on a search engine such as Google - a reversal from two years earlier when search engines were more popular starting points.
Amazon now sells ads that show up to the side of product search results on its website. There were 6.7 billion display ad impressions on Amazon.com in the third quarter, more than triple the number in the same period of 2011, according to comScore.
That early success is a "huge concern" for Google, whose business relies heavily on product searches and product search ads, said Macquarie Research analyst Ben Schachter.
Partly in response, Google recently revamped its product search service, Google Shopping, by charging retailers and other online sellers a fee to be listed in results.
Founded four years apart in the late 1990s, Bezos has long worried about Amazon's reliance on Google for traffic, according to people close to the company, while also being dubious about Google's high market valuation.
"He'd say: 'This is the first time in the history of the world where the map maker is worth more than the territory that it's mapping,'" recalled the former Amazon executive of Bezos' comments about Google's popular online mapping service.
Tensions build
Google's Android system is thriving but still has not cracked the nut of how to make money from mobile search ads and sales of digital goods like games, apps, music and video.
"If they can figure out mobile ads, that would truly be Google's second act," said Forrester analyst Sucharita Mulpuru.
But Amazon launched a broadside against Google in 2011 with the creation of its own version of Android for its Kindle Fire tablets that replaces key Google money-making services, such as a digital music and application storefront, with its own.
Not unlike Apple, "Amazon wants to control the experience on their devices," said Oren Etzioni, a University of Washington computer science professor. "That doesn't make Google happy."
The two are also clashing in cloud computing software.
Amazon started its cloud business more than six years ago, providing data storage, computing power and other technology services from remote locations. Google only launched its cloud computing business this year, but the market is growing so quickly there is still room to grab share, Etzioni said.
"I would not write Google off," he added. "Amazon has the early lead but it's very early."
Transact or die?
Still, mobile gadgets and cloud computing are currently tiny businesses compared with the multibillion-dollar opportunity presented by advertising and online commerce.
Google recently acquired BufferBox, a company with a network of lockers that shoppers can use to receive packages. It is also testing same-day delivery in San Francisco, hinting at growing interest in a larger role in online retail.
It is not talking about its full plans for retail, but some analysts think features such as same-day delivery or "pick-up" lockers, are valuable features it can use to enhance its existing online ad business. An ad for shoes, for example, might also make the shoes available for pick-up in a locker nearby, said Needham & Co analyst Kerry Rice.
If Google can own the search and the delivery, it will be able to provide the same experience as Amazon, with no inventory - "a higher margin, more efficient model," Chien said.
Earlier this year, Google launched a new certification service highlighting merchants that ship quickly and reliably and backing it with up to $1,000 in "purchase protection."
Google could create a database of products and send shoppers to a page that has a way to buy quickly through the company's payments service Google Wallet, Forrester's Mulpuru said.
Google could then send that transaction to the retailer who would ship the product to the consumer. That ability is critical, according to Schachter, who said if consumers lack the ability to purchase items through Google it will lag Amazon and eBay Inc.
© Thomson Reuters 2012

Amazon's influence felt far and offline

Amazon's influence felt far and offline

Bricks and mortar retailers like Nordstrom Inc and Walgreens have found a way to deal with growing pressure from Amazon, by joining forces with small e-commerce companies.
Through acquisitions, investments and partnerships with smaller, emerging start-ups, large retailers are breaking into new markets and tapping into the social media and marketing expertise of the firm's often tech-savvy founders.
And as consumers keep hitting the mousepad instead of the mall, the trend is likely to keep growing in 2013 and beyond.
U.S. retail e-commerce during the third quarter grew 17.3 percent from the year-ago period to $57 billion, or 5 percent of total retail sales, according to the Census Bureau of the Department of Commerce. Total retail sales rose just 4.6 percent during the same period.
"It's a market-share shift," said Kristen Green, a venture capitalist at Forerunner Ventures who backs online companies such as men's retailer Bonobos and cosmetics company Birchbox.
It is also a change for retailers who have woken up to the threat from Amazon fairly recently.
"When I was meeting with brick and mortar retailers 24 months ago they weren't thinking about online," said Carlo Bronzini Vender, a senior partner at New York-based investment bank Sonenshine Partners who helped advise the sale of Drugstore.com to Walgreens. "Now people are being more proactive about it."
Looking for online smarts
The deals are frequently small, driven by retailers' attempts to master online, rather than to immediately boost sales. Women's clothing site GoJane, which Aeropostale Inc acquired in November, generated just $19 million in sales last year. Aeropostale net sales were $2.3 billion last year.
"They're buying learning, people and energy," said Bruce Cohen, a strategist at retail consulting firm Kurt Salmon. "They're buying labs to test and learn to see what works."
Other recent deals within the last year include Nordstrom's acquisition of flash sales site HauteLook and investment in men's clothing company Bonobos; Walgreens' acquisition of Drugstore.com and PPR SA's partnership with e-commerce site Yoox.
Fast growing e-commerce start-ups pegged by bankers as potential acquisition candidates by large retailers include vintage-inspired clothing site ModCloth, customized-jewelry site Gemvara and eyeglass company Warby Parker.
Missing out on digital expansion can sting. Wal-Mart Chief Executive Mike Duke said at a conference last week his biggest regret was not moving more quickly into e-commerce.
In fact, some prizes may have grown up too fast to be acquired.
Several online retailers have raised large funding rounds at such high valuations that venture capitalists say initial public offerings are likely the only way that investors can make back their money.
Among the list this year are One Kings Lane, a furnishings company that raised $50 million earlier this month; Zulily, a children's clothing company that raised $85 million last month; and Fab.com, a flash-sales site that raised $105 million earlier this year.
Web companies also see real-world benefits to offline partners.
Bonobos, which received a $16.4 million investment led by Nordstrom in April, now has access to the Seattle-based retailer's distribution network. Bonobos' fitted chinos, non-iron trousers and other staples are now available on Nordstrom's website and in their department stores.
"We realized there was a big portion of the available target market that we weren't reaching through online," said Jeremy Liew, a partner with Lightspeed Ventures and a Bonobos investor.
Since then, the company has opened five "offline showrooms" across the country in which men can try on clothing that they can then order from the Bonobos website.
Be Amazon or be different
Some venture capitalists view the rush to invest in online retail with a skeptical eye. Bessemer Venture Partners' Jeremy Levine, who backs companies including online diapers company Quidsi, sold two years ago to Amazon for $500 million, thinks investors need to be on guard.
"Online retail is a natural monopoly business and people aren't seeing it," he says. "These companies are going to start to feel serious pain from Amazon."
While it is relatively easy for smaller sites to generate meaningful sales in the short term, Levine says, the long-term outlook is cloudier. "As soon as Amazon decides it doesn't want you," he says, "they will just crush you."
Amazon's March acquisition of order-fulfillment company Kiva Systems will further widen the gap between the e-commerce giant, brick and mortar retailers and upstarts struggling to keep up, bankers and analysts say.
That is why Fab.com CEO Adam Goldberg says the company focuses on crafting personality for its site so browsing is fun. He also aims to triple the percentage of unique products to 15 percent of merchandise in 2013 from 5 percent this year.
"Nobody is going to beat Amazon selling the products Amazon already sells," says Goldberg.
© Thomson Reuters 2012