A couple of weeks ago the market was abuzz with private placement of Facebook’s shares which valued Facebook at a whopping $50 bn. Bears equated it to the repeat of a dot com bubble while bulls saw it as a precursor to the end of Google’s web dominance.
An interesting question investors are pondering is if history would repeat itself as Facebook threatens Google (GOOG) just as Google's rise threatened Yahoo (YHOO). Let’s analyze how Facebook is becoming a real threat for Google.
Facebook Web Activity Now Exceeds Google’s
Facebook’s market share in terms of global pageviews has increased from 4.7% in 2009 to 8.6% in 2010, based on global comScore data. In the same timeframe, Google’s market share (in similar terms) has decreased from 10.2% to 9.6% (see figure below). Facebook’s close to 600 million users accounted for 9% of global pageview activity in 2010, roughly in line with Google’s 10% share. Moreover, in the month of November, Facebook toppled Google as the most trafficked site.
This is important because if advertising is your main revenue model, pageviews is one thing you can’t afford to lose. And Facebook is a clear winner in this "battle of page views". So, what's next? A direct attack on Google’s core competence- search, but with a modified offering in the form of "social Search.
Social’s Search
Facebook’s search partnership with Microsoft’s (MSFT) Bing is likely to bring together elements of algorithmic search with social search which might increase the relevancy of search results and produce customized results for an individual. Presently, Facebook only offers brand searches. However, it is expected that it would be extended to other product categories also in 2011.
To get an idea of what social search means one can look at brand searches which Facebook currently offers. Facebook users can search and express their “likes” for a specific brand. By searching for a brand, one can view the number of Facebook members who have expressed interest in a brand, including who among one’s own friends “like” the brand. This helps as it increasingly facilitates sharing and discussion around member purchases thus driving commercial activity (and advertising) to the Facebook platform.
Facebook social search initiatives, if worked out properly, are likely to provide a more relevant search offering. So, Facebook has something better in terms of value add to the users. And it has a better value proposition for advertisers too in the form of higher ad relevancy.
Higher Ad Relevancy
Facebook users provide their explicit preferences ( “Shares,” and “Likes”) in addition to their profile information (age, sex, location, occupation, etc.). This data provides Facebook with the potential to deliver higher relevancy ads. Thus, generating yield advantages for advertisers more than what Google’s algorithmic ad ranking methodology offers. For example, ads for a products explicitly “liked” by users or friends is likely to be of more relevance than one generated by an algorithm alone on basis of some search words. This higher ad relevancy is likely to drive higher ROI, pricing and volumes for Facebook advertisers. Thus, it places Facebook in a sweet spot to gain online advertising share from its rivals.
To summarize, Google is losing its market share in terms of total page views; Facebook is developing a better social search service for the users; and Facebook offers a more relevant advertising options for its customers. In addition, Google is loosing significant talent with talented Googler’s going to Facebook. Does this story sounds familiar? Like when Yahoo was on the decline and Google on the rise? Yahoo was losing its market share in terms of total page views; Google had a better search algorithm for its users; and Google pioneered a more relevant Cost Per Click option for its advertising customers. In addition, Yahoo was losing significant talent in the form of employee attrition to Google.
Will the history repeat itself with Google at receiving end this time? There is definitely a chance and we will have to wait and see. However, it would be interesting to see how long Google would be able to manage its premium PE multiple as the Facebook threat becomes increasingly imminent.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
