Search engine costs inhibiting competition

Venture capitalist Peter Thiel has stopped investing in search technology because the costs of operation are so high.

Thiel, who was one of the earliest investors in Facebook, said at the Farsight 2011 conference in San Francisco that the huge fixed costs of running an efficient search engine make it impossible to make money without at least 35 per cent of the market.

"Search is a classic natural monopoly business. It's hard to have a technological breakthrough; Bing will copy Google, Google will copy Bing. But with fixed costs of $5bn to $10bn [£3bn to £6bn] a year, Microsoft is the only company with the resources to compete," he said.

Thiel explained that the only search related technologies he is funding are those that lower the cost of entry into the market, adding that server requirements need to be reduced from 10,000 to 100 in order to get competition.

However, Rich Skrenta, co-founder of the Blekko search engine, disagreed, and insisted that a search engine can be set up for around $25m (£15m). Blekko spent about $5m (£3m) on the hardware required to run its engine, he said.

Skrenta explained that Blekko is working on new ways to beat the problems of web search spam, and had blocked the top 20 content farms from its results, including ehow.com and allexperts.com.

"Blekko has shown that with funding and brains you can build a search engine, " he said. "We should have more Blekkos. There are only two search engines in the market."