Risk from Partnerships on the Web
One reason I think that technology investment should be left to technologists is articles like this one in the Motley Fool. It discusses how companies can end up screwed over by Google when Google decides to compete directly. The example they give is WebMD which has a very high portion of their traffic come from Google. Not to long ago Google decided to put answers to health questions from their own data ABOVE the search results, diverting a number of would be WebMD customers. One of the panelists closes by saying, “this isn’t any different than Matel having 20% of their sales through Walmart.” I agree it’s analagous, but there are some key differences to partnering on the web (either explicitly or implicitly) and partnering in retail.
Specifically comparing WebMD and Matel, here are a few differences (one that makes WebMD more vulnerable, but two that make it significantly less):
- Matel has a contract with Walmart. WebMD doesn’t have any such agreement with Google. This makes WebMD more vulnerable to Google taking a vertical integration approach (not just searching content, but having their own content). It’s very unlikely, and probably breach of contract, if Walmart starts making toys that are very similar to Matels and selling them in a more prominent position than Matel’s.
- On the other hand, Matel is also at the mercy of the same contract. I’m not familiar with Matel’s model, but they may have promised some exclusivity to Walmart. What if Walmart starts losing significant market share to Target, Matel may well be stuck unable to sell to Target. On the other hand if Lycos comes back and replaces Google as the main search engine, business continues normally for WebMD (assuming Lycos’ algorithm doesn’t find some other health site that I’m unfamiliar with).
- The retail and manufacturing models also have significantly different cost structures. Matel has made capital investments in their factories to produce a certain number of units, they also have a significant amount of inventory. If Walmart were to suddenly take away 20% of Matel’s business away, this would be a significantly bigger problem then if Google suddenly took away 20% of WebMD’s traffic.
I’m not saying Google’s move in to health shouldn’t concern WebMD, I’m just saying that the potential impact to the business needs to be evaluated very very differently. If you’re going to make an investment hypothesis based on partnerships on the web (or elsewhere in technology), I would consider consulting a techie first.