Search is a market driven by massive networking effects and economies of scale. The big get better, the big get cheaper, and the big just keep getting bigger. Google has 65% of the Search market and continues to grow. In a deal announced yesterday, Microsoft will supply search to Yahoo and now has a combined share of 28%. For the first time ever, Microsoft has enough market share to justify continuing large investments. And, more importantly, they now have enough market to get good data on usage to tune the ranking engine to drive better quality search. And, although Microsoft and Yahoo! will continue to have separate advertising engines and separate sales forces, they will have more user data available to drive the analytics behind their advertising businesses.  The Search world just got more interesting.

The market will continue to unequally reward the big player if nothing else changes. Equal focus of skill and investment will continue to yield unequal results. But, at 28% rather than 8%, its actually possible to gain share and grow even with the negative network effects and economies of scale.  This is good for the Search market, good for the Microsoft Search team, and good for users.

NY Times: http://www.nytimes.com/2009/07/30/technology/companies/30soft.html?hpw

WSJ: http://online.wsj.com/article/BT-CO-20090729-709160.html

                                                --jrh

James Hamilton, Amazon Web Services

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