Zeev - on google
"but if they already have 100,000 advertisers, how many more can they get?"
The answer is many hundreds of thousands more. Paid search is the most dynamic and effective advertising investment on a dollar for dollar basis today. Unlike "big" advertising, it requires virtually NO capital outlay to create. Small businesses typically don't consider television b/c of the high cost of entry (even though cable offers reasonable packages if you want to go for a narrow audience, there is the cost of creating the ad), radio has a lower cost to produce, but it is difficult to calibrate the relationship between dollars invested and response. Same goes for print. If your business doesn't have graphics in-house, it costs. To create the content, to decide how and where to place it, etc. With Google's paid search, there is virtually NO content generation costs. But that's only half (or less) of what makes it so attractive.
It's not just that you do not have to eat huge up-front costs to reach enormous audiences, it's that your ads are (1) aimed and focused directly at an audience that (2) is already actively searching out an associated need (as opposed to traditional advertising which is both diffuse in coverage, and suffers by being aimed at an audience that is not paying attention and isn't in "meet my need" mode). Because it's all per-click, you only pay for results, and you can directly quantify the return on investment.
That's why the number of businesses using paid search like Google offers is going to go through the roof in the future. 100,000 businesses is only the beginning.
BUT ... having said that, you have hit on the key problem -- margins. There is no business outside a monopoly software company that can maintain 80% margins. Yahoo isn't going to just roll over and die on this.
More importantly, while Google's owners clearly are a far cry better than Jim CLark in having a clue how to monetize and compete, when Microsoft goes after them (it's not a question of if, but when), they will be at a disadvantage -- not because they will lack capital, creativity, first-mover advantage, be less constrained by corporate bloat, etc. ... but because search is conducted from inside a browser and Microsoft owns the browser.
To understand this advantage, one need look no further than Apple's Safari browser. In the toolbar at the top of the browser interface is a "Search" window already built in. Apple's deal is with Google. Microsoft will undoubtedly replicate this (don't they always?!!), but replace it with their own search engine. The average PC user will not want to go search via a 2-step process (going to the Google site, then searching), they'll just type their search right into the browser.
Microsoft has been working on their competitor for some time now, and there's nothing that would lead one to believe that the Google team is capable of generating algorithms that MS engineers couldn't, nor to believe they could patent them to protect a competitive advantage.
Yahoo is likely to get there first and start hacking away at Google's margins first, but the big wave crashes over Google when the 800 lb. gorilla from Redmond makes its entry.
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