The focus of my analysis will be on forecasting Vertical Search Marketing industry profitability. To predict the future profitability of Vertical Search Marketing industry my analysis is based on Robert M. Grant Contemporary Strategy Analysis
Trends that are changing the industry’s structure: We see from the Search Engine Watch study that horizontal search can't always do the job. Clearly this is what is driving the quietly exploding vertical search revolution.
But what really is the limitation? Search Engine Watch has recently had the chance to talk to Tim Mayer about Yahoo Search Builder and to Shashi Seth at Google about their Custom Search Engine product and a consistent theme emerged. Tim refers to it as "disambiguation", and Shashi refers to it as "not knowing the context". They are both referring to the same thing. The problem is that horizontal search engines often do not know what you want based on your search query. For example if your query is "surf" and you live in Santa Cruz, what is it that you really want? Or if you type in "diabetes", the horizontal search engine does not know if you are a doctor looking for research data, or a patient looking for treatment information or tips on managing the disease.
Horizontal search engines are trying a number of initiatives to address this problem, such as search query refinements that allow users to focus their searches more quickly, such as Yahoo Shortcuts or the Google Onebox. However, these refinements are not entirely scalable, as it requires human editorial input for each query to make them accurate.
Vertical search engines address this problem by allowing the custom design of search engines for a specific purpose. The human input is built in from the beginning, and is provided by motivated people who are not on the payroll of the vertical search engine platform provider. If you decide to use a search engine which says it's a "health information search engine for doctors", instead of one that is labeled a "health information search engine for patients", you have already helped to reduce the ambiguity of your search queries even before you type in your query.
In addition, traditional horizontal search engines cannot always determine the target audience of a page or site. Vertical search engines naturally address this issue, because the sites included in the results have been selected according to more specific criteria, and perhaps even by human input.
New players seeking to enter: While much of the search world keeps its eyes focused on every move made by Google, Yahoo and Microsoft, hundreds of small vertical search engines have sprung up, along with several technology providers that enable them. The world of search is such a dynamic place that you can find major developments taking place right under your nose that just aren't getting that much attention. Vertical search is one area where this is happening.
Outsell reports that the vertical search market will reach $1 billion in revenue by 2009. And enterprise search technology provider Convera's recent survey of more than 1,000 professionals found that only 43 percent of business professionals always find what they want from a horizontal search engine after several attempts, and half of those who don't find what they want will then turn to a vertical search engine to improve their results.
The major search providers have long recognized the importance and benefit of verticalization, with each offering some level of vertical options in its general search. In addition, Google, Microsoft and Yahoo have each developed a vertical search platform to allow developers to build a custom vertical search engine using their technology. Microsoft launched Live Search Macros in March, Yahoo's Yahoo Search Builder debuted in August, and Google unveiled its Custom Search Engines in October.
Industry products becoming more differentiated: On September 23rd of 2009 Kelsey group at DMS 09 did a case study to highlight vertical opportunities. Directional Media Strategies 2009 (DMS ’09) is The Kelsey Group’s 30th Yellow Pages and directories conference. In his keynote message, one message Dave Swanson, chairman and CEO of R.H. Donnelley, relayed was that RHD is going to be investigating geo-specific vertical opportunities, essentially meaning evaluating specific categories in specific cities (i.e., attorneys in Orlando).
Here’s a quick recap of what each vertical player discussed:
Darrell Campbell, Founder and CEO, Everycarlisted.com: Part of Superpages.com, the site has 2 million vehicles listed with 1 million videos on the site currently. About 40 percent of Everycarlisted.com’s traffic comes from the car tab on the Superpages.com site. Currently, the site participates in SuperBundles deals and car dealers specifically spend, on average, about $1,000 per month. Package deals range from $350 to $1,450 per month. To come from Everycarlisted.com is video and more video — with the goal of being an all video site.
Craig Smith, CEO, ServiceMagic.com: Over the past 10 years, ServiceMagic.com has grown to 950 employees who help push leads to 61,000 member businesses. The home improvement service vertical handles 40,000 inbound calls per week from homeowners looking for service professionals. The interesting piece of ServiceMagic is that it has tapped a group of businesses that are very small (typically fewer than five employees), spend less than $1,000 per month, and predominately (60 percent) do not have a Web site. Looking forward the vertical is evaluating community expansion, same-day service requests and a project cost guide.
Howard Yeh, VP - Corporate Development, Healthcare.com: Healthcare.com’s business model is pay per click — 100 percent performance-based. The company focuses on the 18 million people in the U.S. who purchase private health insurance. Due to state regulations, local agents remain a crucial piece in helping consumers through the complex process of acquiring insurance. Currently Healthcare.com has about 350 advertisers actively purchasing pay-per-click ads that average about $4. In the near future, Healthcare.com is evaluating diving deeper into the health-care vertical whether it be in new areas of medical procedures or monetization opportunities.
As Campbell said, ” I can’t think of a vertical that the Internet is not going to transform.”
So what are the true industrial economics of Vertical Search Marketing industry? What can Porter’s five forces analysis tell us about the likely profit potential of new Vertical Search Marketing business?
The Vertical Search Marketing industry has some similarity to the internet e-business industry. The first thing to note is that most new Vertical Search Marketing businesses are not fundamentally new business. For the most part they use a new and extended reach for targeted advertising. They offer a better rate of return on every ad spend by advertiser. As such, the main features of these markets are, strong substitute competition from traditional Horizontal Search Marketing, low entry barriers as it doesn’t cost much to develop and implement a vertical search website and high product differentiation. The principal structural features of these businesses are shown below:
The implication is that most Vertical Search Marketing businesses whether for doctors, patients, job seekers, house hunters, recruiters and travellers will tend to be highly competitive and, on average, will generate low margins and low rates of return on capital.
So will any Vertical Search Marketing business offer high profitability? The key is the potential to reduce rivalry and raise barriers to entry through innovation strategy that exploit network effects, economies of scale, or product differentiation.
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