One of the questions any investor in Internet stocks must come to terms with is the future of Google Inc (NASDAQ:GOOG), and how it will be impacted by the rise of Facebook Inc (NASDAQ:FB).
Should you bet on the search giant or the social networking giant? Can Facebook ever be as good as Google in terms of monetization?
Facebook’s latest move to mirror or move key websites like Nytimes.com and Nationalgeographic.com onto its own servers gives a clue about how the social networking giant could outmaneuver the long-reigning king of the Internet, and practically own the Internet in five years.
CAPTURING INTENT
One of the biggest problems that a ‘passive’ website like Facebook or Nytimes.com must deal with is the question of capturing intent. Unlike on Google, on FB, a user does not usually type or ‘input’ anything that can be used to guage what he wants to do.
Of course, users may search for a long-lost friend or crush occassionally, but that is not really as monetizable as, say searching for the latest GM car model is.
As a result, there is no obvious advertisement strategy to be adopted to monetize the user at a given point.
Facebook has tried to get over the difficulty by building a brand image of the person by using his likes, the groups he is a member of, his educational and professional background, location, age sex and behavioral aspects such as his commenting patterns.
So, someone who likes Ford cars, and has just got his first job may be of interest to Ford and so on.
In addition, this digital profiling helps Facebook sell targeted local ads – such as restaurant promotions etc.
In a way, in local and ‘impulse buy’ advertisement, FB may actually be superior to Google simply because it doesn’t have to wait for a user to search for “best discounts in town” before targeting him or her.
But still, for the vast majority of advertisements, Google is simply unbeatable.
OPEN Vs PROPRIETARY INTERNET
So, how does FB take on Google?
This is where the concept of a ‘parallel Internet’ or ‘walled garden Internet’ comes in.
Imagine if most of the Internet was running off Facebook’s servers, and FB could restrict Google from crawling the content? Where will you go to search that content?
Also remember that Google serves search ads in two ways – on its own pages (google.com pages) and on third-party websites where the user goes to, after having successfully located some information via Google search.
This is possible as the vast majority of the websites out there incorporate Google’s Adsense advertisement code that allows Google to continue to target the user with ads related to his search query even after he has left Google pages and moved on to a blog or a news-website or a how-to website.
If these third-party websites are located on FB’s network (on its servers), it is very, very likely that they will be ‘incentivized’ to run FB’s ad network rather than Google’s ad code.
With this two-pronged attack, Google’s hegemony in the online ad world will be under threat.
NEW REVENUE OPTIONS
Of course, this is not to say that FB will be entirely dependent on ads to make its money. Over time, nearly every website will either mirror its content on FB servers or move their entirely and exclusively.
This will drive more and more users to start their browsing with Facebook.com, and this in turn will lead even more websites on to FB’s servers – a virtuous cycle caused by the ‘network effect’.
This will open up a second revenue source for FB which may eventually turn out to be more lucrative than the ad business – hosting revenue.
If being hosted by FB becomes a precondition to reaching customers, websites will have to move their content to FB servers. Now, like any web hosting company, FB can charge for hosting.
However, unlike other web-hosting companies, FB’s position will be unique, as it is providing not just a web-hosting solution, but also a ready set of customers who cannot be reached outside of its network.
As a result, it will be able to charge higher hosting fees from websites and content companies without the risk of the content company cancelling the arrangement and leaving its network.
If you thought that FB’s monetization avenues have ended with ads and hosting, think again. Now that it is hosting practically the entire Internet, it can negotiate with wireless providers and Internet service providers for cheap access to its network. Cheap or free access to FB network will in turn disincentivize consumers from using the ‘regular’ Internet, and they are more likely to use FB’s Internet.
Of course, all this begs the question of why Google cannot also play this game. For example, Google can start its own “instant articles” hosting service, justifying the move on the need to provide articles immediately to customers.
It can later say that it will give a slightly higher ranking to websites hosted on Google’s ‘instant articles’ network as they load faster. This will ensure that a large number of websites mirror their website on the search giant’s servers. This will ensure that FB will not be able to ‘cut’ it out from indexing content later. It can also supplement its ad revenue with hosting revenue.
In other words, Google can ‘copy’ the entire Internet on to its servers to ensure that it can still access the same.
However, Google will not do any of the above, because it is a victim of traditional thinking about concepts like ‘open Internet’ etc.. Google, in fact, owes its growth and emergence to the open Internet, and therefore the concept is intrinsically embedded into its business ethos. As a result, it will not be able to adjust to the era of ‘proprietary Internet’. [socialpoll id=”2271941″]