Facebook’s demolished stock caught a minor lift this afternoon when Josh Constine of TechCrunch reported that the company is getting ready to launch a Facebook-specific type of search ad.
This news reminded investors of what they were thinking when they plunged lock, stock, and barrel into Facebook’s IPO three months ago–which is that the company has a massive global platform on which it should be able to layer on lucrative new products.
Alas, it quickly became clear that the search ads Facebook will be rolling out are designed merely to help increase traffic within Facebook.
So, once again, Facebook investors lost hope.
But investors shouldn’t forget about this one completely.
Facebook does, in fact, have a huge opportunity in search.
And with the company’s stock price now half of what it was only three months ago, even the adamantly idealistic Mark Zuckerberg might be tempted to rake in some easy money from search–especially when raking in this money won’t in any way hurt the Facebook user experience.
In fact, improving search might help the Facebook user experience.
Because Facebook users, just like other Internet and mobile users, often search for things. And the things they’re searching for aren’t always on Facebook.
Sometimes, for example, Facebook users search for products they want to buy.
So instead of (or in addition to) trying to dream up ever-more-clever ways to place “social ads” in front of users when they’re not interested in seeing ads or buying anything, maybe it’s time for Facebook to take advantage of the fact that its users actually sometimes do want to buy things.
Because, after all, that’s the magic that allows Google to generate more than $40 billion in annual revenue–about 10-times what Facebook makes from its annoying little display ads.Google doesn’t hang its advertisements on the walls at a party, which is effectively what Facebook does.
Google doesn’t hang its advertisements anywhere, in fact, until its users tell it what they want to buy.
Then Google gives its users ads that might help them buy what they’re looking for.
That’s why Google is the most successful ad-driven company in history: Because its ads are mind-bogglingly targeted and relevant, and they’re shown to users only when users want to see them. Facebook users, meanwhile, want to do everything but look at ads–Facebook users want to keep socializing with their friends. (SEE: “Like Hell Facebook Will Kill Google“)
So, why doesn’t Facebook just start doing the same thing Google is doing?
Yahoo, which is imploding, still generates nearly $2 billion a year from search revenue. And it’s almost all profit.
AOL, which is also imploding, also generates nearly $500 million a year from search revenue. And it’s almost all profit.
Microsoft, which is in the software business, generates about $2 billion a year from search revenue. (Unlike the other search players, Microsoft is hemorrhaging money, but Facebook wouldn’t have to do that.)
Why does Facebook have such a huge opportunity in search?
Because 500 million people a month live on Facebook.
They don’t visit Facebook.
They live there.
They start at Facebook, communicate through Facebook, and quickly return to Facebook every time they stray away.
So maybe it’s time Facebook helped them to start searching at Facebook–and not just for things that are on Facebook. Facebook should help its users start searching for everything.
(If Facebook is really clever about this, and can figure out ways to use the immense amount of data it already has about its users to make its search tools even more useful, it could actually build a better search engine.)
Make no mistake: One of the reasons Google is so obsessed with Facebook (see Google +, etc.) is because Google knows that Facebook could one day threaten its core revenue engine. If Facebook focused on search, it could make it so people had no reason to go to Google to search for anything–because they’re already on Facebook. And Google obviously knows that.
How much revenue could Facebook generate from search?
Well, according to Andrew Lipsman at Comscore, Facebook is already doing 1.6 billion web-based searches a month.
That’s 3-times as many as AOL.
It’s one-fifth as many as Yahoo (which no effort whatsoever).
Yes, it’s only 1/100th as many as Google, but, again, Facebook is generating those queries with no effort whatsoever.
So let’s assume that Facebook could go do a search deal with Google that paid it as much as AOL gets paid per search. This would allow it to instantly generate ~$1 billion of annual search revenue tomorrow.
And then let’s say that Facebook actually made it a priority to boost search as a Facebook service and revenue stream and increase its number of search queries.
Given the amount of time people spend on Facebook, as opposed to the amount they spend on Yahoo, I hope it’s not disrespectful to Yahoo to suggest that Facebook could–in relatively short order–amass as many search queries as Yahoo.
And if Facebook did its outsourced search monetization deal with Google instead of with Microsoft, Facebook could probably get much better monetization per search than Yahoo does.
(This is important: Facebook doesn’t have to go build a search engine. It just has to do a bigger deal with one.)
So it doesn’t seem unreasonable to suggest that, with Yahoo’s 10 billion queries a month, Facebook might be able to generate $3 billion of annual search revenue.
This $3 billion of annual search revenue, importantly, would be almost 100% profit.
Because Facebook wouldn’t be incurring any costs to build its search engine–it would simply be working with Google.Google would charge advertisers, say, $1 per click, and Facebook would get $0.90 of that.
That’s exactly how Google works with AOL.
It’s exactly how Microsoft works with Yahoo.
In other words, there’s no reason for Facebook to have to completely reorient itself as a company to cash in on search. It just has to pick up the money sitting in the corner.
$3 billion of pure-profit search revenue would quickly double Facebook’s annual operating profit.
The launch of an exciting new Facebook revenue growth engine, meanwhile, would get investors so excited about Facebook again that they would suddenly be eager to pay a lot more for the stock.
So, between incremental earnings and multiple expansion, it seems reasonable to think that an aggressive move into search could eventually triple Facebook’s market cap.
So, how about it Facebook?
Do you maybe want to pick up the huge pile of search money sitting in the corner?
Or are you going to stubbornly keep focusing on “social ads?”