Facebook is leveraging yesterday’s report that its traffic grew 89% year-over-year with a not-so-coy post by Aditya Agarwal on its blog asking whether it should a) invent its own search engine, b) tap into open source ones or c) partner up.
If you read between the lines, option d) is sell to one of the players in search.
It published some interesting stats which suggest it would be a Top 20 search engine if it wanted to. Some highlights:
Naturally, while the bloggers are singing the praises of Facebook, cynics would suggest that history will be the judge of the wisdom of passing up offers reaching as high as $2.5B last year. After all, monetizing social networking sites is not obvious, as we’ve pointed out, but monetizing search is braindead easy.
People search is a different beast indeed, but given that we have a tendency to search quite a bit for others, you can assume this is a large segment that Facebook has a lead in as the Database of Connections. Last year we mentioned that MySpace was the directory of people but MySpace dropped the ball there (disclaimer: Myspace is part of News Corp., my former employer). Facebook does not hitherto allow Google to index it, so this gives Facebook as advantage over Google, one of the many parties looking to buy it.
Today’s post suggests that Facebook is once again willing to listen to offers, perhaps one last time, before it files to go public. Because once it goes public, its financials will be made public and trust me, I don’t think its long term sustainable revenues are a match for its traffic.
When you see how much Google is building market share and winning points from Yahoo!, MSN, Ask.com and AOL.com, you have to wonder how much publishing this post will encourage one of these players to add a premium to Facebook. Don’t forget one major fact: these interested parties are guessing about what Facebook’s revenue will be from advertising as a social networking site (oh I meant “social utility) but as a search engine, that is easy.
There are reasons why Facebook should invest in search:
I’ve long said that any new media company that relies 100% on a partner is foolish, because search is strategic. The first asset we invested in was MetaMojo.com, then we completed the spectrum by creating communities and properties around it. Of course, the bulk of the value in Mojo Supreme is now WatchMojo.com, and StreetMojo.com and BloggerMojo.com add value too, but having MetaMojo.com is strategic and adds value as well.
In Facebook’s case, it will be a distraction for sure, but it will add considerable IP value and make it a complete media company. Look at Yahoo! and how long it took to build and acquire search, it was by using Google that it created its headache.
There are reasons why Facebook should partner:
- It will save time and money
- It can tap into existing database of ads
- It can monetize search queries overnight, strengthen its revenue base and revisit investing in inventing.
That being said, Facebook is clearly seeing itself as a competitor to Google, even though MySpace remains bigger. Investor Peter Thiel has said he wants $8B for Facebook, and Jim Breyer has said “they’re not for sale”. Both men are being coy, of course.
The flip side is that Microsoft has an advertising deal in place with Facebook, while there is a rumored $10M breakup fee, I am pretty sure that this is one area Facebook will have to tread carefully because just because you add a search box does not mean you will generate revenue a la Google. Google’s text ads command anywhere from 1 to 30% click-through-rate, whereas Facebook ads will garner much, much less.
If I search for someone, say John Smith, and he happens to be in LA, I will probably click on his profile and not the ads. It could be argued that if I have to fly to meet him, I’ll click on an ad for a hotel or plane tickets… but lay off the koolaid and ask yourself how common this Alice in Wonderland scenario will be relative to the sheer percentage of people who search for one another in the same city!
All in all, this seems like Facebook revealing that it remains an M&A target despite our prediction that it’s on the IPO route some time in 2008.
Related:
- Facebook 100M users, a matter of when, not if.
- Facebook OS: Be careful what you ask for.
- Facebook: IPO vs. M&A.
- Facebook’s 2008 to do list: File for an IPO.
- Should MSFT Turn its Attention to Facebook?
- Peter Thiel: Facebook is Worth $8B.
- Murdoch: “MySpace worth $6B”, if so, then break up FIM!
- Facebook to be worth $2.35B by 2010.
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