When Amazon.com CEO Jeff Bezos got word of a project at Google to scan and digitise product catalogues a decade ago, the seeds of a burgeoning rivalry were planted.
The news was a "wake-up" call to Bezos, an early investor in Google. He saw it as a warning that the Web search engine could encroach upon his online retail empire, according to a former Amazon executive.
"He realised that scanning catalogues was interesting for Google, but the real win for Google would be to get all the books scanned and digitised" and then sell electronic editions, the former executive said.
Thus began a rivalry that will escalate in 2013 as the two companies' areas of rivalry grow, spanning online advertising and retail to mobile gadgets and cloud computing.
It could upend the last remaining areas of cooperation between the two companies. For instance, Amazon's decision to use a stripped down version of Google's Android system in its new Kindle Fire tablet, coupled with Google's ambitious plans for its Motorola mobile devices unit, will only add to tensions.
The confrontation marks the latest front in a tech industry war in which many combatants are crowding onto each others' turf. Lurking in the shadows for both Google and Amazon is Facebook with its own search and advertising ambitions.
"Amazon wants to be the one place where you buy everything. Google wants to be the one place where you find everything, of which buying things is a subset," said Chi-Hua Chien, a partner at venture capital firm Kleiner Perkins Caufield & Byers. "So when you marry those facts I think you're going to see a natural collision."
Both companies have a lot at stake. Google's market capitalisation of US$235 billion is about double Amazon's, largely because Google makes massive net earnings, expected by analysts to be US$13.2 billion this year, based on a huge 32 percent net profit margin, according to Thomson Reuters. By contrast, Amazon is seen reporting a small loss this year.
Amazon shareholders have been patient as the company has invested for growth but it will have to start producing strong earnings at some stage - more likely if it grows in higher margin areas such as advertising. Google's share price, on the other hand, is vulnerable to signs of slowing margin growth.
Not long after Bezos learned of Google's catalogue plans, Amazon began scanning books and providing searchable digital excerpts. Its Kindle e-reader, launched a few years later, owes much of its inspiration to the catalogue news, the executive said.
Now, Amazon is pushing its online ad efforts, threatening to siphon revenue and users from Google's main search website.
Amazon's fledgling ad business is still a fraction of Google's, with Robert W. Baird & Co. estimating Amazon is on track to generate about US$500 million in annual advertising revenue - tiny, given it recorded US$48 billion of overall revenue in 2011. By contrast, 96 percent of Google's US$38 billion in 2011 sales came from advertising.
But Amazon's newly developed "DSP" technology, which taps into the company's vast store of consumer purchase history to help marketers target ads at specific groups of people on Amazon.com and on other websites, could change all that.
"From a client's perspective, the data that Amazon owns is actually better than what Google has," said Mark Grether, the chief operating officer of Xaxis, an audience buying company that works with major advertisers. "They know what you just bought, and they also know what you are right now trying to buy."
Amazon is discussing a partnership with Xaxis in which the company would help Amazon sell ads for the service, Grether noted.
Amazon did not respond to an email seeking a comment.
Read on for more... why Google is now investing in e-tail...