Why Google should invest in Microsoft

NEW YORK (Fortune) -- Of course Google's not investing in Microsoft (Charts, Fortune 500) or Yahoo (Charts, Fortune 500). But Google (Charts, Fortune 500) has a big and growing problem that more successful competitors and a more balanced market could help it solve - an ever-growing swath of the world's businesses are becoming dependent on its services.

That's a recipe for regulation. To stave that off, Google needs strong competitors. Google may be too good for its own good. Or maybe its competitors, especially Microsoft and Yahoo, are just inept at copying its successes. The company has taken an overwhelming lead in Internet search, with a corresponding advantage in search advertising. It commands about 50% of the market for Internet search in the United States.

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Now it's extending itself further by using related technologies to effectively place ads of many types across the Internet with its AdSense service. And it's trying to sell and broker ads in other media as well. It's making many billions in profit. This all is why its market cap has now exceeded $194 billion - making it by far the most valuable media or Internet business.

But there's a downside. A growing number of companies, especially smaller ones, are dependent for a stunning proportion of their sales - sometimes more than half - on referrals they get from Google ads. These companies could not effectively function without the promotional help they're getting from Google. That means on the one hand that Google is doing a great thing greasing the wheels of capitalism. But it also means that its responsibilities are becoming more burdensome.

Separately, if you are in media - be you CBS (Charts, Fortune 500) or a one-man blog operation - Google has the power to make or break you. If your content for whatever reason doesn't show high up in Google search results, you are at a significant disadvantage to others whose content does. The companies that master the art of getting good placement in search results get the traffic, just as do the ones that pay to get top billing on the ad side of the web page.

Google is so dominant and makes so much money in search that some have argued that Yahoo ought to abandon its own efforts to compete and simply contract with Google to provide the ads that appear next to search results. It would make more money that way, many calculate, at least for the short term.. Ask.com already gets a big chunk of its revenues and profits this way.

Given Google's market dominance, the current objections to its $3.2 billion acquisition of ad placement network Doubleclick may be the tip of the iceberg. I see no reason why Google should be prevented from owning Doubleclick, but the reaction to the deal shows that worried advertisers and others are starting to see the company as a dangerous monopolist, just as they have seen Microsoft or, in an earlier era, IBM. (Microsoft's own objections to the Google/Doubleclick deal are disingenuous.) Advertisers worry that Google can raise its prices on a whim and thus make customer acquisition suddenly more expensive, wiping out profits. There is already grumbling that Google's prices are rising too fast.

In this context, I find it ironic that Google has become such a proponent of network neutrality - the notion that Internet access providers like AT&T or Comcast should be forced to guarantee carriage to any Internet content producer (including Google). If Google grows more dominant in search and ad placement I could easily imagine advertisers and content-makers applying the same argument to it - to say Google is becoming an essential facility for commerce that must be required to make available affordable and even-handed access to its services for all comers.

And I can imagine regulators being sympathetic. Jimmy Wales, creator of Wikipedia, believes that such a critical capability for modern society as search ought to be transparent in its processes and dedicated to serving the public good. Being an entrepreneur, his response is to spearhead a project to develop a completely open-source search service. He's not there yet. Microsoft and Yahoo may yet make big inroads into the search ad market. Yahoo's new Panama ad auction system looks promising. And Microsoft is demonstrating its own resolve (and that it doesn't need anybody else's money - my headline is completely facetious) with its stunning $6 billion purchase of ad-targeting company aQuantive.

Meanwhile, as I have argued in other columns, Facebook and MySpace could - eventually - turn their increasingly-enormous "social graphs" of individual social network profiles into a gold mine for targeted ad placement that could offer advertisers a real alternative to search. But so far this potential threat to Google's hegemony remains theoretical.

Any time one company controls too much of a market people get worried. It's starting to happen with Google, with the livelihoods of many millions dependent on this one service. I don't blame Google for being good at what it does, but can't somebody give these guys a run for their money before the Feds start knocking on the door?