Powerset, a natural language search engine startup announced a deal with Xerox PARC to acquire its Natural Language Processing (NLP) technology. VentureBeat has seen a demo and  is very impressed. VentureBeat says "The technology, developed at Palo Alto Research Center (PARC) in Silicon Valley, seeks to understand the meanings between words, akin to the way humans understand language — and is thus called “natural language.” It has been thirty years in the works."

The New York Times has a lengthy article with particulars about the deal with Xerox, Powerset's VC investors, and quotes from Google. But, not much insight there.

Danny Sullivan, a world renowned search engine analyst, is skeptical, and tired of the hype such startups receive from the press. Danny says "Natural language search makes a compelling pitch for those who really don't know search or haven't heard the natural language mantra before. I've seen the pitch time and time again."

I was also skeptical the first time I heard about Powerset. I must disclose that a long time friend who I worked with at AltaVista is now working at Powerset. The addition of technology and people from PARC certainly enhances Powerset's position and credibility in the technical community. Winning the hearts and minds of consumers is an entirely different problem.

OK readers, so do you want some insight and opinion? This will take about 5 minutes. So sit back and take your finger off the delete button. :-)

How do you beat a giant like Google? The same way Google beat AltaVista, Yahoo, Excite, and AOL more than 6 years ago. Change the game.

Google was a clutter free white page with just a search box, when everyone else was a portal with tons of content, news, sports, weather, maps, services, partnerships, flashing banner ads, and....oh yes, I almost forgot, a tiny little search box. Google focused on search while everyone else was trying to be a portal like AOL.

Google also changed the advertising game. Everyone else had random, non-targeted, banner ads, flashing gifs, pop-ups, and interstitial. It was disgusting. Google popularized small text ads, similar to newspaper classified ads, that were targeted to your search query, and placed them on the right side bar out of the way. The ads were actually useful and relevant...and people clicked on them.

Google changed the revenue model. All the other portals (with a search box) were selling sponsorships and display advertising deals. Companies like E*Trade would pay $10 million to sponsor the Finance section. Then a mortgage company would pay $40 million to be the exclusive sponsor. Hilton Hotels would pay millions to sponsor the travel section. You get the idea. Google popularized the ad auction model where millions of small advertisers made bids to win a particular key word. It turns out that there is a "Long Tail" of advertisers too...who are willing to pay a lot of money to be found.

What does all this have to do with Powerset? It is a reminder that winning isn't all about the technology. In fact, Google didn't invent search, didn't invent classified advertising, and didn't invent the ad auction model. They changed the game with small innovations that made a big difference to users and advertisers.

What should Powerset do? There no easy and obvious answers...they only appear easy 10 years later. Powerset's strength in Natural Language Processing, or understanding the meaning and context of words. Lots of words like those found in a magazine, text book, or newspaper article.   Rather than focusing all this NLP power on understanding the typical 2 or 3 word search query, why not help advertisers better target their ads on unstructured content?

What is Yahoo's problem? Untargeted traffic. Yahoo has tons of traffic to its home page and Yahoo Mail, but no way to effectively target ads. AOL, MSN, and every other portal has this same problem. So they all end up selling low cost, low margin, CPM ads rather than high margin Pay Per Click (PPC) ads like Google. If Powerset technology could be used to "understand" the context and meaning in an email message they could effectively target ads...and triple the portal's revenues. If Powerset could scan a portal's dynamic home page, or each users personalized home page, they could better target ads.

Where else is ad targeting difficult? Social networking sites like MySpace, discussion boards like Yahoo Groups, news sites, sites with lots of consumer generated content, blogs, sites with lots of photos and videos, all have an ad targeting problem. Remember Google collected $10 Billion in revenues for targeting ads...not for providing a cool user interface and experience for users.

Powerset can change the game by focusing their power on the advertising problem. That is where the money is...and quite frankly, it is easier to convince  thousand of advertisers that you have the next big thing, than it is to convince hundreds of millions of consumers. Remember my favorite cliche "In a fight between an alligator and a grizzly bear, the terrain determines the victor". If Powerset (alligator) takes the fight to Google (grizzly bear) on their turf...Powerset gets eaten alive. If Powerset stays in the water...they have a much better chance of winning.