War of the Web Giants

There are some rivalries that are legendary. Take for instance, Pepsi and Coca-Cola or the Celtics and the Lakers. The new rivalry to watch is that between Google (Nasdaq: GOOG  ) and Facebook, the two most visited pages online.

Deja vu
Some people believe that what Google did to Microsoft (Nasdaq: MSFT  ) years ago is exactly what Facebook might be doing to Google right now. Examine the rather stunning fact that the typical American today spends six times as much time on social networking sites than for their searches. This gives Facebook more than enough leverage to become the default web conduit for the lion's share of Internet users in the very near future, a title that was, and probably still is, enviably ruled by Google.

The upper hand
Facebook's had a good year, undoubtedly. The movie based on Facebook, "The Social Network," was a blockbuster. Mark Zuckerberg was named Time's Person of the Year 2010. Amid phenomenal publicity, increased valuation, and anticipation of an IPO, Facebook has emerged as a tremendous marketing platform. Clearly, this is not coming as friendly news to many destination portals on the net including Google, Yahoo!, AOL (NYSE: AOL  ) , Microsoft, and even MySpace owned by News Corp (Nasdaq: NWS  ) (Nasdaq: NWSA  ) . All of these companies (and many more) are getting squeezed for eyeballs now.

Rivalry for top-notch engineers
To add insult to injury, Facebook is also poaching talent from Google and Microsoft. For example, the brains behind Google Maps and Gmail -- who went ahead and created real-time search engine FriendFeed (which Facebook bought) -- are now an integral part of the Facebook team. Top Ad Executive, Carolyn Everson recently left Microsoft to join the Facebook legion. In fact, according to LinkedIn, Google has lost more than 200 employees to Facebook.

Why Google should worry  
But a lot of that news is somewhat ancillary to the fact that social networking has been touted as the future of the Internet -- and Facebook is dominating it. Google tried its hand with various products in the sphere and so far has been unable to nail it, first with Orkut  and then with Buzz and Wave. Meanwhile, 7-year-old Facebook has revolutionized the social networking landscape and is still the biggest there is.

Advertising was long considered Google's domain, but Facebook has slowly tiptoed onto its turf. Now that Facebook has officially arrived on the advertising scene, marketers want to be a part of its success story; the site now boasts of more than 600 million registered users. Also, Facebook has the knack for picking up random technology and pushing it into popular use. Cases in point: FriendFeed's news feed, Delicious' link sharing, Flickr's photo tagging, as well as status updates. Facebook also launched virtual currency called Credits, which it uses for some of its online games. But Zuckerberg loosely hinted that they might choose to do a lot more with it in the near future. According to Hitwise, Facebook generated 25% of all page visits in the U.S., which was more than double of Google and its YouTube destination put together.

Yahoo!, unable to compete with Facebook, seems to have thrown in the towel and is already befriending the social network. The company plans to bank on Facebook's massive user base to attract more traffic. Sleeping with the enemy? May well be.

The Foolish bottom line
From a Foolish perspective, Google clearly has a lot to lose in terms of advertising revenue, Internet time, and usage before it becomes a very serious issue for shareholders. But with the world seeming to be restructuring itself around social media, Google may find it difficult to keep up with the Joneses. The war is being fought today for the spoils of tomorrow. In this case, I fear Google's long-term position is in serious doubt thanks to all of the fine work that Facebook is doing today.

It may not be wise to be optimistic about Google's fate, unless it can come up with a game-changer soon with the very abundant capital it has at its disposal. In the meantime, I'd watch out for the Facebook IPO scheduled for sometime in 2012; the company was already valued at $50 billion at a recent round of funding by Goldman Sachs (NYSE: GS  ) (which, as a testament to the company's value, invested $450 million of its own money). Some believe Facebook could be worth a whole lot more.

Aditi Baid doesn't own shares of any of the companies mentioned in the article. Google and Microsoft are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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