Return to search

Google’s free Web analytics threatens startups: But the potential market for the sector remains largely untapped.

Google Inc.’s announcement last week that it will provide its Web analytics services free, will invariably drive many Web analytics companies out of business.

But entrepreneurs and VCs who’ve made bets in the space are spinning the news as a positive development for what looks to become an enormous industry.

“On one level, there’s a huge validation that we get from having a free Web analytics product out there. It ends up educating people on what analytics is,” says John Marshall, founder and CEO of three-year-old ClickTracks in Santa Cruz, Calif.

Google’s free Web analytics service is based on technology from San Diego-based Urchin, which Google acquired in March for an undisclosed amount. The service allows website operators to measure precisely from where visitors come from, what links get clicked on the most, how long visitors stay, which products are sold and where people give up when it comes to a multiple-step checkout process.

Google Analytics (as the service has been dubbed) has also been integrated with Google AdWords so that marketers can use it to track email, banner ads, and the paid and non-paid search ad campaigns of other ad service providers. Also, the service imports the cost data for ROI reports, which allows advertisers to see how much they are paying for keywords, as well as how much they’re making from them.

The idea is for marketers and publishers to better understand what online customers want, helping drive smarter advertising and website design.

Google, which previously charged $199 a month for the service (down from the $495 that Urchin charged its customers before it was acquired), competes against an array of companies, including ClickTracks, which has been bootstrapped, though Marshall says that he has been approached previously by VCs.

Others in the space include:

San Diego-based WebSideStory (Nasdaq: WSSI), which received funding from Summit Partners and others before it went public.

WebTrends, of Portland, Ore., which private equity firm Francisco Partners bought in March for $94 million in cash from public company NetIQ.

CoreMetrics of San Mateo, Calif., which has raised about $90 million over 10 rounds from Highland Capital, General Catalyst Partners and Accel Partners, among others.

And Omniture, an Orem, Utah startup that has raised $54.5 million over two rounds from Hummer Winblad Venture Partners, BA Venture Partners and Attractor Investment Management.

Altogether, there are an estimated 200 startups in the space, according to market researcher Jupiter Research. And considering the potential customers for which they are competing, it’s little wonder.

“If you add up the active customers among the market leaders, you’re probably looking at between 25,000 to 35,000 companies, out of 250,000 candidates for such services in the U.S.,” says Jupiter senior analyst Eric Peterson, who covers the space.

In short, the potential market remains largely untapped. Web analytics companies have reason to think that they will come into greater use, too. To wit, total online advertising and paid search revenue is expected to approach $13 billion this year, up from $9.7 billion in 2004, according to eMarketer, a New York-based online marketing research firm.

Of course, Google’s announcement has dramatically changed who will make what from whom.

Startups as well as many established Web analytics companies that cater to small and medium-size businesses – which aren’t typically willing to spend a lot on analytics- are probably toast, says Peterson.

“My experience with companies suggests that companies that aren’t using the full breadth that [a larger, more established, more expensive analytics service provider] offers are going to use Google instead,” he says. “In fact, my suspicion is that Google immediately surpassed every other vendor’s penetration in the first 24 hours after it announced its free analytics.”

Even Marshall of ClickTracks, which Peterson calls one of the top-tier players in the space, agrees. “There are a large number of people who won’t buy any kind of product in this space,” Marshall says. “Budgets for analytics stretch from zero to upwards of $500,000 a year, depending on need.”

It’s hard to know now how Google will impact the analytics business, but certainly, some companies may benefit from its bold move.

Omniture, for example, caters to large corporate customers, such as America Online, Wal-Mart and eBay. Those large businesses are looking for a level of involvement that Google can’t, and isn’t interested in, offering, says Sharon Weinbar, a managing director at Omniture investor BA Venture Partners. “Google’s service is for small sites. Larger sites use sophisticated programs and algorithms that manage their bidding processes and which track ROI by keyword,” Weinbar says.

Companies that employ analytics as merely a piece of a larger business may also benefit. Kara Nortman, a senior associate at Battery Ventures, says that in making its Web analytics free, Google is helping prove out the benefits of keyword search.

“It’s generally a great thing,” Nortman says. “A lot of VCs have spent time investing in lead-generation companies, and data that proves that it’s working is positive not only for Google, but also for startups with a lead-generation component.”

Nortman sits on the board of New York-based Web marketing and analytics software developer Blue Flame, which received a $6 million Series A funding from Battery in mid-August.

What Google’s announcement will mean for the “outcomes” of companies such as Omniture and WebTrends remains to be seen. (Weinbar didn’t comment on Omniture’s exit strategy, and a call to Francisco Partners wasn’t returned).

But one upshot of Google’s announcement is clear. It’s a bad time to be a venture-seeking Web analytics startup. Jokes Peterson, “I suspect we’ve seen the end of Web analytics fundings. What is an entrepreneur supposed to say to VCs: Hey, give me a few million, one of my competitors is Google.'”