How Microsoft Missed The Disruptive Innovation In Paid Search

from the missing-the-details dept

We recently highlighted a part of one of Paul Graham's recent essays that told the story of how Yahoo missed the paid search opportunity, by fearing that it would cannibalize all the revenue coming in from its "portal" business. As we noted, it was a great example of why big companies so rarely notice disruptive innovation, even when it's handed to them. Ali Partovi picked up on the same part of Graham's essay, and wrote a similar story about why Microsoft also failed to see the opportunity in paid search, despite the fact that Partovi and others were pushing for it, both from the outside, and then inside (after Microsoft bought his company, LinkExchange):

From 1997 to 2000, we visited Yahoo more than a dozen times to pitch the Keywords idea: pay-for-placement, keyword-targeted text ads on the side of search results. Despite repeated rejection, we pitched every member of Yahoo's executive team multiple times, each time finding new ways to present the concept and new data to support how profitable and huge the opportunity might be, all in vain....

In late 1998, Microsoft bought LinkExchange for $265 million, telling us they liked the "Keywords" vision. As Microsoft employees, we continued pitching the Keywords deal not only to Yahoo, but also to the up-and-coming Google. I wasn't surprised to find that these companies were wary of partnering with Microsoft. My greater surprise was the seemingly insurmountable resistance we faced within Microsoft itself.

After almost two years of fighting bureaucratic obstacles, we finally got the green light to launch "Keywords" as an MSN Search feature in 2000. It started growing rapidly, and the MSN Ad Sales division feared (correctly) that it would cannibalize banner ad revenue. They therefore decided (incorrectly) to shut down Keywords after a few months. If Yahoo's demise stemmed in part from being ambivalent about technology, perhaps Microsoft's error stemmed in part from being ambivalent about ad sales: we couldn't get the senior execs interested enough to intervene.

Both cases highlight the same basic point: the claim that big companies will automatically recognize a disruptive innovation and "copy it" is wishful thinking in many cases. Time and time and time again we see stories more like the ones above, where truly disruptive innovation isn't just ignored, it's actively blocked at big legacy companies who fear it cannibalizing an existing business, rather than recognizing the opportunity.

In the end, both Microsoft and Yahoo failed to jump into keyword advertising in any serious way until long after Google established it as a giant business. At that point, both tried to play catch-up, with Yahoo buying Overture and Microsoft rebuilding its product -- and as we've also seen over and over again, by waiting that long, it was too late. The two companies still haven't come anywhere close to catching up in market share, even if the technology is considered to be about equal at this point.

So the fear of some big company coming out and just "copying" you is generally overblown. If your idea is really disruptive, they probably won't recognize it, and by the time they do, you'll have a big head start, and their attempts to copy what you did will prove a lot more difficult than they expected.

Filed Under: ali partovi, disruptive innovation, paid search
Companies: google, microsoft, yahoo