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Yahoo-Yelp Partnership and “Coopetition” in Online Markets

· February 11, 2014

Citing inside sources, the Wall Street Journal reported yesterday that Yahoo and Yelp have agreed to a partnership where Yahoo will show Yelp listings and reviews of local businesses in its search results.  Although this has yet to be officially confirmed by the companies, it makes perfect sense.

Too often commentators stovepipe “Internet verticals.”  It’s easy to become fixated with static market definitions: Facebook is a social network that competes with Twitter, Google is a search engine that competes with Bing, Yelp enables user-generated local business reviews that competes with Foursquare, etc.

In reality, however, the Internet marketplace isn’t about a compartmentalized series of vertical markets competing with one another.  The Internet is a hypercompetitive online space (for why, see this blog post) where markets blur and evolve continuously.  The rapid pace of progress in the online ecosystem means that there is a constant churn of not only innovation, but also alliances, deals and strategic relationships.

An abridged history of the last couple years of just a few of the major players in the Internet space points to the dynamism of both competition and the relationships between companies.

  • In 2010 Facebook and Bing partnered to make “search more social,” allowing Bing searches to incorporate personalized information from Facebook in returning results.

  • In 2012 in an effort to drive more traffic to its platform, Instagram (owned by Facebook) stopped supporting Twitter Cards technology, which had allowed Instagram photos to be displayed directly in Twitter feeds.  Yahoo, who had recently revamped its Flickr mobile app to compete with Instagram, advertised its Twitter compatibility as a competitive feature.

  • In 2013 Yahoo struck an agreement to incorporate users’ Twitter feeds directly into their Yahoo homepages’ newsfeeds.

  • In 2013 Bing and Pinterest strike deal to allow Pinterest picture collections to appear in Bing searches.

Previously on DisCo, I discussed how it is better to view the Internet ecosystem as a “market for answers.”  With some time to reflect on that, it may be more useful to abstract that as the market for information, how you package it to your users, and how easily you let them do useful things with it.  Of the companies above, each one has a competitive advantage over the others in some aspect of the “information” generation, organization and use.  To oversimplify a bit, Google has the most popular search engine, Facebook has the most complete social network, Twitter has the biggest repository of real-time information, Pinterest has a huge cache of personally appealing visual content, and Yahoo and Microsoft have a huge network of compelling content and services that they offer their users.

Companies are trying to build platforms that provide their users the most utility, while at the same time taking into account the strengths and weaknesses of their rivals.  The selection of partnerships bulleted above illustrates this.

Although this is probably a topic for a blog post of its own, it may be more helpful to think about international relations theory rather than Economics 101 when contemplating competition online.  In December 2012, the Economist published a perceptive article using Game of Thrones as an extended metaphor to describe the competitive landscape of the Internet.  Besides just being a catchy angle to draw in eyeballs, it was an astute observation about how different companies are using their unique competencies to compete with one another.  However, if I had a small criticism of the article, it is that it didn’t go as deeply into the complex and often synergistic relationships between the companies themselves, much like the frequent scheming, banner pledging and loyalty swapping that occurs in Westeros.

Instead of all-out warfare, competition (or, more accurately, “coopetition”) online is much more akin to the chess game continuously occurring in the international arena.  As the delineated partnerships show, corporate strategies oscillate between balancing and bandwagoning, direct attacks, diversionary marches, and alliance construction and destruction.  When one company becomes too powerful, the company’s competitors often team up to rival the leader in any one market segment.  When companies, such as Twitter, grow from a sideshow to the main event, they reevaluate their relationships and become more independent.

It’s not surprising that international relations resembles Internet competition, as both involve strategies for thriving in an anarchical world.  Luckily on the Internet, anarchy is a good thing, and the “warfare” and scheming it brings is just a metaphor for a socially beneficial phenomenon: competition, which propels innovation and increases social welfare.

Yelp and Yahoo are both allies and competitors.  It looks like they have struck up a mutually beneficial relationship, where Yahoo is seeking to bolster its competitive position in search vis-à-vis Google (and its Zagat property) and Bing, and Yelp is seeking to attract new users through increased exposure in Yahoo’s search results.  How long this lasts depends not only on how well the deal works, but also how each company’s relative positions, and business strategies, change over the upcoming years.

One thing is for certain though, this won’t be the last time two major Internet companies join forces to compete with their rivals.  So, when thinking about competition online, it helps to zoom out a bit and think not only of those competing directly with each other on the same vector, but also the complex web of relationships, and potential relationships, that exist between rivals in adjacent market sectors.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.