The United States of Google

The search giant has become the Internet's sole superpower, leaving rivals such as Yahoo and AOL confined to narrow niches.

By MSN Money Partner Jan 16, 2014 2:59PM

Google campus in Silicon Valley © Ole Spata/dpa/ logoBy Dana Blankenhorn, TheStreet

CEO Marissa Mayer's dumping of Henrique de Castro, whom she had hired away from Google (GOOG) soon after taking over at Yahoo (YHOO), has all the elements of a good soap opera.

But it's not the real story.

The real story is Google is consolidating control of the online space, a theme that unites most of the day's big Internet stories.

Google is the Internet's sole superpower.

The strength of Google does not lie in its executives -- both Mayer and de Castro came from Google. It lies in Google's infrastructure, which cloud analytics firm Deepfield estimated last year now handles one-quarter of the Internet's entire traffic.

Thus, when Google decides to do something, such as buying Nest (which its Google Ventures had backed) for $3.2 billion, an "Internet of Things" that once seemed trivial suddenly becomes very real.

When Google chooses not to do something, such as local news, nothing a competitor tries will succeed -- as AOL (AOL) has proven with its Patch sites, which it passed on to the "special situations" experts Hale Global in a joint venture.

Google's power may be behind the muted response to the U.S. Court of Appeals' ruling against net neutrality. Even if cable and phone carriers try to strangle Internet content and charging it for carriage, Google Fiber -- and Google's vast fiber network -- can stand against it.

It's an example of what Larry Lessig called "West Coast Law" -- rules encoded in software and enforced through hardware trumping the East Coast Law written by policymakers.

The problem at Yahoo is not that its executives can't execute. It's that they lack the scale and infrastructure to compete. Yahoo's display ad business competes directly with Google's own ad business and can't handle the continual price erosion of online advertising's increased scale -- scale Google creates daily.

Thus, like every other Internet company, Yahoo can only seek to find niches within a Google-dominated world. After buying a number of small tech companies such as Tumblr, Yahoo seems to have decided to return to the pre-Mayer strategy of media. This may be why TheStreet contributor Eric Jackson's Ironfire Capital of Toronto, which holds a stake in Yahoo, is now buying AOL shares. It expects Yahoo to gobble up the smaller Internet media company. 

AOL is also trying to compete with Google in the advertising space, and it's finding similar problems. Google makes ad buying self-service, and delivers impressive analytics that let managers tweak campaigns in real time. Its software is better and its data on ads are deeper than any competitor can hope to offer.

Google's oft-quoted mantra, "Don't be evil," can no more stand against its own success than the United States' good intentions can stand against the world's skepticism.

The U.S. spends 41 percent of the world's military budget. Google's dominance over Internet infrastructure is becoming just as great. The company spent $2.29 billion on infrastructure in the third quarter of 2013 alone, almost twice what it spent in the first quarter.

AT&T's (T) widely hyped infrastructure spending plan, by contrast, is $14 billion spread over three years. Yes, Google is now bigger than the phone company.

Thus, you can think of Yahoo as Canada, trying to compete with the United States. Think of AOL as Bolivia. They can't lead, they can't follow. The best they can do is get out of the way.

At the time of publication the author owned shares in GOOG and YHOO. This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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