Facebook Inc (FB)’s Search Ambitions: Microsoft Corporation (MSFT), Yahoo! Inc. (YHOO)

With more than a billion users, Facebook Inc (NASDAQ:FB) is effectively the third largest country in the world. The amount of user information the social media giant knows about its users is just staggering. As a result, the revenues of the company have been growing rapidly, primarily driven by the display ads shown to users in its user-driven ad model. And earlier this year, Facebook Inc (NASDAQ:FB) unveiled the workings of a search function in its vast platform, which has potential to not only transform the search market, but also multiply the company’s top line revenues.

Going after a Big Market

Facebook Inc (NASDAQ:FB), armed with loads of user data, has already begun the process of developing its search engine. Progress towards building a search platform that utilizes user data and gives out very solid search rankings is in the works.

If the organic search on Facebook doesn’t have meaningful results, the outside search will be backed by Microsoft Corporation (NASDAQ:MSFT)’s Bing search engine. The impact of implementing a search function in Facebook’s ecosystem can translate into hundreds of millions of incremental advertising dollars stemming from search ads.

Creating a Whole New Category

Facebook Inc (NASDAQ:FB)’s foray into this new social search has aspects, which can be very useful for the end-user, and can take away a lot of traffic from other competing social media sites like LinkedIn Corp (NYSE:LNKD), Yelp Inc (NYSE:YELP), etc. Users can look up places their friends have visited, or even read restaurant reviews. While these functions are in their early stages, it should be noted that Facebook has in excess of 12.8 million local businesses with fan pages, which can be a very good breeding ground for adding these social tools and monetizing with sponsored stories.

Also, other information consisting of videos, news, photos etc. shared on Facebook Inc (NASDAQ:FB) from the millions of other third party sites through the Facebook Connect tool, and the ones generated by users themselves, all combine into gigantic proportions of data, which will enable the creation of the structured Graph Search.

As people tend to rely on the advice and information gathered from their trusted friends and family, as opposed to taking it from complete strangers. The usage of filters and the social context of graph search makes it a very useful one for users.

Early Stages

Mark Zuckerberg thinks Graph Search has great monetization potential for the long haul, but in the short-term the company will be more focused on developing better ad products and a better social experience on Graph Search. The structured search tool that enables users to find people, places, photos and other content has launched along with a new home page which incorporates a more social look on Facebook.

However, Facebook intends to take time to build this tool steadily and doesn’t expect it to be a major revenue driver in the near-term. But in the long-term, this will be a major cornerstone for Facebook Inc (NASDAQ:FB)’s revenue fortunes. Right now, Facebook is rolling it out to collect more data, and then use that data from the users to improve the rankings and do a much broader full-fledged roll out.

Microsoft is No. 2 and Effectively No. 3; Makes A Perfect Partner for Facebook

The search engine marketplace is a very lucrative one for both the companies and for the advertisers. And the market is heavily dominated by Internet giant, Google Inc (NASDAQ:GOOG) for years. Google’s market share of the global search market has been consistently above 65%. And in the U.S. Google’s market share for search was roughly 67.5% in February 2013, according to comScore.

Google keeps on gaining ground at the expense of Yahoo! Inc. (NASDAQ:YHOO) . The struggling Yahoo lost even more ground with only 11.6% market share in February, down from 12.1% a month ago in the U.S. Not to be outdone, Microsoft Corporation (NASDAQ:MSFT) also gained market share and now holds second place in the U.S., with 16.7%, according to comScore.

In addition to its own organic search platform, Microsoft Corporation (NASDAQ:MSFT)’s Bing has a search sharing agreement with Yahoo! Inc. (NASDAQ:YHOO) under which Bing powers the search results on Yahoo! Inc. (NASDAQ:YHOO)’s properties. Yahoo gets to keep 88% of the revenues generated. Yahoo’s search revenues have been rather steady in the last few quarters, because Microsoft Corporation (NASDAQ:MSFT) guarantees a large portion of search revenues under a previous agreement. However, this agreement in North American locations will end in March 2013, and might impact Yahoo’s search revenues going forward.

But Microsoft Corporation (NASDAQ:MSFT) has search intelligence data from its own organic platform as well as of Yahoo! Inc. (NASDAQ:YHOO)’s. For Facebook, Microsoft is pretty much the perfect partner for powering outside search results.

Only Facebook Can Pose a Meaningful Threat for Google

Facebook’s installed user base of more than 1.06 billion monthly users, along with heaps of user data makes it a wonderful ecosystem for the build-out of a search engine. Facebook Inc (NASDAQ:FB) also has the infrastructure and engineering capabilities for the launch, and the partnership with Microsoft also aids substantially under which users won’t have to step outside Facebook’s platform.

All the big technology companies including Google, Microsoft Corporation (NASDAQ:MSFT), and Facebook are ramping up their efforts to monetize their mobile presence. On mobile, Facebook Inc (NASDAQ:FB) has an edge with a huge audience of more than 680 million users of which most are daily users. Google’s search presence on mobile is not as strong compared to desktop, as consumers increasingly use apps to access and search for information. Facebook’s Graph Search with social features and business listings will enable the company to place sponsored ads below search results and monetize just like paid-search ads on mobile.

The Takeaway

Facebook Inc (NASDAQ:FB)’s graph search capabilities have the potential to pose a strong material threat for Google. A regular user base of 1 billion and counting, will aid substantially for this structured tool to gain momentum and widespread user acceptance. Facebook’s revenue dependency on display ads alone will go down substantially, as Facebook can earn a lot from search advertising.