2011 is expected to bring a second round of confrontation between Google and Facebook. First round happened about 2 years ago when rumors suggested that Google tried to acquire Facebook for $1.5 Billion and many people (including myself) thought that this was an outrages amount. But Facebook said “no thanks” and that was even more surprising.
The first round was about the Goliath trying to get the little David out of the game. The second round is much more interesting. Google is still the Goliath but the battle now is on revenue, more specifically about Facebook eating into the big fat Google revenue and Google struggling to come up with an answer. At this point, the odds are favoring Facebook.
Let me try to explain the dynamics. Google’s business model is very simple and can be sum up in one line:
“We deliver free services and charge for advertisement embedded in these services”
Search is the most dominant service, but other older and newer services follow the same model, from email to mobile operating system, it is all about free service with embedded ads. Google is making about 95% of their revenue from advertisements, and expects to reach the $25 Billions from advertisements in their 2010 reports. The key for that revenue is that consumers spend a lot of their time in front of a Google free service.
To compete on that revenue, one does not need to develop a better search engine with some visual effects that will attract consumers (as Microsoft repeatedly tried), but rather one needs to deliver any kind of free service that consumers will spend time watching. That is what Facebook did over the last few years, they have convinced many consumers to use Facebook as a gateway for web surfing and spend more time looking at the Facebook screen compared to Google. Consumers have already switched. According to Experian Hitwise, in 2010, “Facebook was the top-visited Website for the first time and accounted for 8.93 percent of all U.S. visits between January and November 2010. Google.com ranked second with 7.19 percent of visits” (see complete article here).
As soon as the companies that buy the ads understands the real power of Facebook targeted advertisement they will start to bring more of their advertisement budget to the new platform and that is a direct hit at Google’s business model. This is a real, hard money risk and a real disrupting trend. I am sure that Google’s management are seeing this data as well and are trying to come up with their strategy how to regain the first position in terms of site visits and time spent in front of their free services, mobile operating system is one approach Google rightfully is targeting but by itself may be just not enough to change the trajectory.
If we add to this trajectory the conversations about a possible IPO for Facebook during 2011, it seems that this year is going to be a very critical year for both companies.