IPTS Workshop: Socio-Economic Challenges of Search

Is there room for an independent

European search engine industry?
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Per Koch , Oslo, Norway, Pandia.com
Position paper for the European Commission JRC Institute for
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Prospective Technological Studies September 2008

Summary
In this paper the author argues that the globalisation – or rather “Americanisation” -- of the
European search engine industry requires a rethink of innovation policies. The traditional
argument of supporting R&D and innovation in order to develop European alternatives to a
US hegemony makes less sense in a world where more and more of the European
companies are acquired by Non-European firms.

Instead of focussing on the development of companies owned and controlled by Europeans,

the objective should be to develop Europe based search engine technology clusters that
generate innovation in general. As long as Europe has the required expertise, there will be
continued activities in this area on European soil, thus generating economic growth,
innovation, and spill-overs in the form of new companies, competences and technologies that
can be used elsewhere in the innovation systems.

How Europe failed to develop a viable alternative to Google

Early this year Microsoft bought the Norwegian search engine company Fast Search and
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Transfer . Fast had once launched the AlltheWeb search engine, by many considered one of
the few serious alternatives to Google. It was not to be. AlltheWeb was bought by American
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Overture as early as in 2003 . Overture was then acquired by Yahoo! which ditched
AlltheWeb in favour of Inktomi’s technology when developing its new Yahoo! Search Engine.
The remaining part of Fast became a company focussing on enterprise search solutions.

This sounds like another European search engine failure. In spite of its strong research base
in Trondheim, the Norwegians did not manage to conquer the search engine market with a
European alternative to Google. As a matter of fact, Fast will now help the Americans
strengthening their grip on the search market.

This is not the only story of this kind. Spanish Terra Lycos failed in its time to turn the
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American born HotBot and Lycos search engines into viable alternatives.

At the moment there seems to be only one “real” search engine – i.e. one having its own
algorithm and index – that can be said to offer an alternative to the big three and that is
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French Exalead. But even Exalead finds it close to impossible to make any headway into the
North American markets.

1
Per Koch is together with Susanne Koch the owner and editor of the Pandia Search Central
(www.pandia.com), a European English language site covering search and the search engine industry.
He is also Director for analysis and strategy development at the Research Council of Norway. He was
from 2000 to 2006 a researcher at the Norwegian institute STEP, later NIFU STEP, in the area of
innovation and research and innovation policy. He has been a Senior Analyst for the EU Trend Chart
project and is currently a delegate to the OECD Committee for Science and Technology Policy.
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http://ipts.jrc.ec.europa.eu/
3
http://www.pandia.com/sew/594-microsoft-to-buy-fast.html
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http://www.pandia.com/sw-2003/04-fast.html
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http://www.pandia.com/searchworld/2000-44-europe.html
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http://www.pandia.com/sw-2004/59-exalead.html

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 IPTS Workshop: Socio-Economic Challenges of Search

The American dominance had caused concern in European, and especially French, policy
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circles. The EU project Quaero has been seen as an attempt to develop a European
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alternative to Google.

Why do the Americans dominate the global search engine

scene?
As far as we know, there has not been done a serious study of why US companies have so
much greater success in developing global search brands. We have a few hypotheses,
though.

A large homogeneous home market

US companies benefit from having a home market of 300 million inhabitants. Yes, the EU is
now larger, but while Europe is divided into a large number of languages and national
cultures, the US represents – in spite of all its diversity – a much more homogeneous market.

What is more important: the area is totally dominated by one language: English. This means
that US Internet companies immediately may tap into a huge potential user base without
making special socio-cultural adaptations at home. This again makes it easier to reach the
critical mass needed to go into the global markets.

The large home base also makes it easier to get access to competent manpower from other
parts of the area. There is a lower threshold for moving from Virginia to California, than from
France to Germany.

Search as part of a larger portfolio

It is easy to forget that Google is not a typical search engine company. In fact, there are no
typical search engine companies. Google is the only one of the “big three” companies which
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was originally built on a search engine.

Yahoo! started as a resource directory. When the company finally decided to put up a search
engine, they originally outsourced this service to others.

It could also be argued that Yahoo! first and foremost is a media company, generating large
amounts of online content and other types of online services. Yahoo! remains the number 1
web destination in the world, even if it lags behind Google in search. In other words: Yahoo’s
role in the search market can partly be explained by the fact that it has developed different
web destinations that attracts searchers as well.

This is also part of the explanation for Microsoft’s inclusion among the big three. In spite of its
strange strategy of weakening the MSN brand in favour of Live, MSN continues to deliver a
large number of searchers. The search field in the Explorer browser also plays an important
role here. Moreover, Microsoft has the clout needed to keep on going, even if its business
strategy in the search area is a bit clumsy.

The European market is fragmented, and we have no similar media companies or technology
companies that cover the whole of Europe. Similar developments have been taking place in
parts of the European market (e.g. Eniro in Scandinavia and T-Online in Germany), but none
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of these companies have a home base similar to the one of Yahoo! and Microsoft.

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http://en.wikipedia.org/wiki/Quaero
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http://www.pandia.com/sew/340-quaero.html
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Ask is as well, but that search engine is now planning to turn itself into a portal.
http://www.pandia.com/sew/629-ask-2.html
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http://www.eniro.com/en/ and http://www.t-online.com/

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 IPTS Workshop: Socio-Economic Challenges of Search

An entrepreneurship culture
Much has been said about the need for a European Silicon Valley. The fact is that most
attempts to build Valleys outside California will fail, because Silicon Valley is the result of a
unique socio-cultural framework conditions that cannot be replicated elsewhere.

That is in itself not an explanation for why there is no European Google, though. There are
other ways of developing innovative clusters that can lead to search engine innovation.
Indeed, the Fast example tells proves that even a small Scandinavian cluster like the one in
Trondheim can give birth to a technology that potentially can rival Google’s.

At Pandia we get a constant stream of reports on new European based start-ups attempting
to make its mark on the search engine scene, and many of them are at the technological
forefront. There is entrepreneurship and there is innovation.

Some of our contacts report that it might be easier to get access to early-stage pre-seed
capital in the US as compared to most European countries. There is also near to no stigma
attached to bankruptcy in the US. That means that failure is considered part of a useful
learning process rather than a negative personal trait that excludes you from future business
adventures. Less risk-aversion may mean that more ideas reach the maturity needed for
market application or acquisition by larger companies.

Different management practices

It has been argued that Anglo-American management practices are different from Continental
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European ones. If we let ourselves oversimplify a bit, we could say that American
stockholders are looking for a steady stream of short term innovations that generate trust in
the market and increase stock value.
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One explanation for the promotion of Google Labs is that the test site convinces investors
that this is a company that constantly generates new ideas for future market developments.
Steve Jobs puts on his black turtle neck twice a year to present some breathtaking new
innovations. One objective is to convince Wall Street that Apple continues to be the most
innovative company in the ICT industry.

Continental companies, especially family owned firms, may allow themselves a more long
term perspective, investing in more fundamental research projects that will need years to
deliver commercial results. Their surrounding support system, including the EU Framework
Programme, also promotes long term R&D projects that will at least require three years
before delivery, and then a few more for market adaptation. This technology push approach is
normally driven by researchers – even university researchers – who are often motivated by
academic, not commercial, objectives.

Both strategies have their strengths and weaknesses. The European long-term strategy may
lead to more radical innovations, but the lack of a more short-term market oriented
approaches means that the companies may fail to develop the competences needed to turn
their innovations into useful services and products. The socio-economic development of the
Web is also hard to predict, and the technologies delivered by the long-term projects may not
be the answer to future needs, and they may become obsolete before they are ready.

Product and technology lock-in

The US approach gives the companies a better sense of immediate market needs, but may
undermine their ability to fund the research needed for the development of “disruptive”
technologies. Indeed, the focus on short-term gain can stop the companies from exploring
radical new approaches, as it may undermine their present revenue-generating products.
Microsoft’s failure to explore the Web as a new market for software as a service and its
inability to beat Google in the search engine game is partly caused by its Windows lock-in.

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Inside the black box of multinationals, Sverre Herstad (ed.) Report, Oslo 2005,Nordic Innovation
Centre
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http://labs.google.com/

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 IPTS Workshop: Socio-Economic Challenges of Search

Google may go into a similar trap. The company is constantly adjusting its algorithm to fight of
spammers, and has made incremental improvements to the underlying technology since
1998. Still: the basis remains the same, namely its Page Rank technology. If someone,
somewhere, comes up with an approach that gives much better search results than Google,
Google may end up as the 1998 frontrunner AltaVista -- as a search engine has-been. In
short: Europe may give us the next Google, if the relevant entrepreneurs are able to approach
the market in a sensible way.

Again, the dichotomy between Anglo-American and European management practices is a

very simplistic model, and the recent interest for “open innovation” on both sides of the
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Atlantic proves that there is much variation. But the idea of differences in the underlying
“mentalities” is definitely worth exploring.

Does it matter if the European search engine industry is

American?
Much of the European debate on the role of globalization, multinational companies and
foreign take-overs is dystopian in nature. Globalization is presented as a threat, and foreign
take-overs are considered – at best – a loss of national pride and sovereignty. In the worst
case scenario such acquisitions are seen as part of a foreign plot aimed at moving assets and
technologies out of the country.

This understanding has been strengthened by the trend of moving industrial production to
countries that allows cheap production with low-skilled workers. The fact that India has
become a leading nation in the Internet economy make some fear that parts of the so-called
“high tech” ICT industry may be moved there as well. Indeed, at Pandia we have several
Indian advertisers that promote reasonably priced search engine marketing services to
Americans and Europeans.

The European Commission seem to legitimize its R&D and innovation investments based on
arguments regarding the competitiveness of Europe as a unit. Europe is, according to this line
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of reasoning, lagging behind the US and needs to catch up. It is as if Europe is a huge
company competing with another company called the Unites States. The analogy is
misleading at best.

To us the opposite argument rings more true. The Norwegian case may again serve as an
example. The small search technology cluster based on the Norwegian University of Science
and Technology (NTNU) and Fast Search and Transfer is considered to be world leading by
American companies. Not only has Microsoft bought Fast. Yahoo! and Google have
established their own development units in Norway in order to get access to this cluster. In
other words: Even if there are no big Norwegian owned companies left, there is a lot of
research and development going on.

The Israelis are often praised for their ability to attract foreign investments, and the fact that
companies like Intel and IBM are situated close to Israeli campuses is considered a sign of
strength. It would make equally much sense to argue that the presence of big American
search engine companies on Norwegian soil will strengthen the cluster, not weaken it.

Google and Yahoo! want to access Norwegian brain power, and that human capital is
embedded in human beings that cannot easily be moved to India. Much of the profit

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http://en.wikipedia.org/wiki/Open_innovation
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In the Lisbon Strategy the EU set itself “a strategic goal for the next decade: to become the most
dynamic and competitive knowledge-based economy in the world capable of sustainable economic
growth with more and better jobs and greater social cohesion, and respect for the environment”.
http://ec.europa.eu/growthandjobs/pdf/kok_report_en.pdf Cp. also the report from the High Level Group
chaired by Wim Kok 2004: “The Lisbon strategy is even more urgent today as the growth gap with North
America and Asia has widened, while Europe must meet the combined challenges of low population
growth and ageing.” http://eur-lex.europa.eu/LexUriServ/site/en/com/2005/com2005_0024en01.pdf

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 IPTS Workshop: Socio-Economic Challenges of Search

generated by Yahoo! and Google in Europe will end up in the pockets of American share-
holders, but their activities will also lead to economic growth and employment in Europe.

Moreover, their presence means that Europeans working in their European units get access
to the internal learning arenas and networks of these companies. Some of these people may
eventually decide to start their own companies. In any case the big US-owned companies will
have to collaborate with local knowledge intensive service providers, suppliers and
customers, and they might eventually form the nuclei of new European search enterprises.

A strategy for a future European search engine industry

Regardless of whether the ultimate objective is to develop an alternative to an American
dominated search engine industry or European based search engine development in both
European owned and American owned companies, some strategic elements need to be in
place.

The development of a European search engine industry is dependent on a large number of

socio-economic factors, including access to venture capital, flexible laws and regulation, the
development of language and cultural skills in the relevant companies, collaboration with
other companies and knowledge institutions locally and abroad, and more.

A development of a third generation “holistic” innovation policy can help these companies as
it might help companies in other branches of industry. The work done within Pro Inno
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Europe may be of help in such a policy development, as may the research policy knowledge
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base developed by Erawatch.

In general there is a tendency to overestimate the role of research in industrial innovation.

Companies may innovate by other means: through organisational change, incremental
process innovation, design, marketing, branding and so on. The successful search engine
companies make use of all these types of innovation.

The fact remains, however, that historically nearly all the major search engine technologies
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have roots in university research, and it is the combination of commercial search engine
enterprises and relevant university research that attracts the American companies to Europe.
A sufficient public funding of R&D in universities and research institutes is needed to keep
this knowledge base alive and to generate new technologies.

Needless to say the Commission will have an important role to play here, both within the
European Framework Programme for Research and the Competitiveness and Innovation
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Framework Programme (CIP). Quaero and its German offspring Theseus may provide
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Europe with much needed search engine innovation as they are focusing on technologies of
high relevance to the development of a broadband based and social web oriented Internet,
namely video and audio search.

If any of this research leads to a break-through in search technology, either as regards a

radical improvement of regular web search results or in accessing non-text information, it may
actually give Europe a second chance in developing an alternative to the big three. That
requires, however, that policy-makers manage to look beyond a simplified science-push
paradigm to supporting a wide range of innovation activities that takes socio-economic trends
and market opportunities into consideration.

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http://www.proinno-europe.eu/
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http://cordis.europa.eu/erawatch/
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Google at Stanford, Inktomi (now Yahoo!) at Berkely, AlltheWeb at NTNU, AltaVista at the University
of Cambridge (and others), Excite (Architext) at Stanford, Exalead at Ecole Polytechnique, Lycos at
Carnegie Mellon University. The main exception to this rule is MSN Search/Live.
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Information Communication Technologies Policy Support Programme
http://ec.europa.eu/information_society/activities/ict_psp/index_en.htm
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http://www.pandia.com/sew/553-quaero-2.html and http://www.pandia.com/sew/570-theseus.html

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