Targeted Advertising: Here's Why Google Is Superior to Facebook

Since Facebook's (Nasdaq: FB  ) IPO last May, it appears both Wall Street and retail investors have gone antisocial -- that is to say, the social media industry (Facebook, Zynga, Electronic Arts, etc.) is serving time in the penalty box.

Since its IPO, Facebook has lost close to half of its market value (-44.03%), sending many retail investors running for the hills. Even on Wall Street, Facebook's slide is hard to comprehend as it remains primarily the same company it was in January when it received the massive media attention and hype from its underwriters. So why do we see Facebook falling short of its legend? Simply put, Facebook offers an inferior alternative to Google (Nasdaq: GOOG  ) .

The error may be because of the fact that Facebook is misclassified. Since Facebook does not derive revenue directly from social networking but rather from targeted advertising, it should therefore fall under the umbrella of the advertising industry. Though this shift in perspective may seem immaterial, it does change the list of companies, and what divisions of those companies, Facebook is in direct competition with, and how the company competes.

For example, Facebook competes with Google in social networking, but Google Plus' 100+ million users are no match for Facebook's 900+ million. Clearly, Facebook is the social networking king. However, in the realm of targeted advertising, Facebook lacks both the revenue growth and the platform necessary to demonstrate that it can compete with Google in such an industry.

Without speculating on the substantive value of the information Facebook collects about its users, I'd like to highlight why Google promotes a more favorable interface and database for clients seeking to target consumers through online advertising.

The three things most sellers want to know about prospective buyers are: 1) What are the interests of my customer; 2) of those interests, what do they purchase; and 3) what is the price point at which they decide to purchase good A over good B? These three criteria are essential in targeted advertising for obvious reasons.

Facebook may know that Joe Schmoe loves Bob Dylan, clothes fresh from the dryer, and has 453 friends, but Facebook does not know what Joe Schmoe purchases, or how much Joe Schmoe is worth. Does Joe purchase Brillo or the generic alternative? Is Joe Schmoe a farm-to-fork gourmet guy, or is he a Costco lover? Though Facebook is trying to grow its user to user generated market interface, Facebook does not know, and will not know what Joe Schmoe executes on in the same way Google can and does; this makes their overall advertising platform less attractive to prospective clients. In addition, not only does Google have some of the best targeted advertising software, Ad sense, but it also has Google Wallet -- a modern substitute for its soon-to-be archaic leather predecessor.

Google Wallet, recently launched in the U.S., is very successful overseas in places like South Africa and other developed economies. It allows consumers to purchase anything, anywhere (not just on the internet) in a secure and efficient manner through a software platform on their cellular phone and Google account. Resembling the magnetic credit card technology "Blink," Google has created the ultimate bridge between e-commerce and real commerce.

Google can effectively and accurately determine not just a user's interests, derived from web-surfing and searching for various merchandise, but it will also know exactly what Joe Schmoe purchases and his relative price points. The three criteria: What one wants, what one buys, and what one is willing to pay are essential to producers looking to market and sell their products. This positions Google to become the most effective targeted advertising provider -- armed with the ability to not only collect valuable data on consumers, but also interpret it effectively.

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Though Facebook is essentially the gold standard of social networking, Google is the gold standard of targeted advertising. Facebook has consistently demonstrated slowing growth in its advertising revenue -- its life source -- over the past four quarters, while Google has been crushing it. In the second quarter of 2012, Google posted record highs pertaining to the targeted advertising side of their business. Clicks on ads surged 42% year over year from the same time in last June.

On the contrary, the revenue Google claims per-click on one of its target ads is 16% lower over the same time frame. The falling price producers are willing to pay for such a service becomes more of a threat to Facebook's already shaky revenue stream than it does to Google for reasons mentioned above. In short, if you wish to be involved in the targeted advertising business, Facebook is a poor alternative to Google.

If you are a fervent believer that social media will learn how to return shareholders with positive year-over-year earnings growth, I recommend examining social media ETFs that will provide a diversified play on the industry as a whole so one doesn’t have to lose their shirt like the buyers of FB did back in May.

Use the Turbo Chart to compare stock performance of GOOG, FB, and Global X Social Media Index ETF (Nasdaq: SOCL  )


Written by Kapitall's Mark Blumenfeld, who does not own shares of companies mentioned above.

The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services have recommended buying shares of Facebook and Google. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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