Should Facebook Investors Want a Search Partnership?

Facebook (Nasdaq: FB  ) recently denied reports that it's in talks to partner with Yahoo! (Nasdaq: YHOO  ) on a search platform. The company reiterated on Nov. 19 that it's working on its search capabilities, and that it realized search was an important function for its users that hasn't yet been mastered. 

How far could Facebook go with a better search functionality? Could the social-networking giant use a partner to improve that aspect of its business?

A powerful platform
First of all, let's take a quick glance at Facebook to see what the company already has going for it. We all know that social networking is what Facebook does, and does far better than anyone else; people are downright addicted to it. The site currently has more than 1 billion (with a "B") users worldwide. For some context, it had 1 million (with an "M") users in 2004. And not only has Facebook been able to rapidly expand its user base, but that user base is engaged as well. In 2010, for the first time ever, people spent more time on Facebook than they did on Google. What's that dynamic like in 2012? In May, Facebook users were spending nearly eight hours a month on its site. Googlers? They stuck around for only two hours a month.

A massive market
Although Google (Nasdaq: GOOG  ) may not consume as much of people's time, it still absolutely dominates its market and rakes in business like crazy. More than two-thirds of all search queries in the U.S. are done on Google, and the company took in nearly $40 billion in revenue last year. While Google doesn't limit itself to only search by any means, its search business remains the primary breadwinner by a long shot. Search has become a massive industry, and when you consider that Google (and Facebook, for that matter) doesn't have a Chinese presence to speak of, that pie looks even larger. Chinese search giant Baidu (Nasdaq: BIDU  ) grew revenues at more than a 90% clip last year. 

Despite its size, Facebook is still dwarfed by Google. It had about a tenth of the revenues that Google did last year, with just under $4 billion in sales. 

So what is Facebook doing about search today?
The reach of Facebook's platform and size of the search market combine to form a massive opportunity for the social-networking all-star. No one else is positioned in quite the same way. Although it already uses Microsoft's (Nasdaq: MSFT  ) Bing to power its Web searches, Facebook hasn't made search a focal point of its business. Back in September, CEO Mark Zuckerberg said in an interview that it was doing "a billion queries a day, and we're basically not even trying." That's just scary.

There is a caveat, though. A majority of those billion searches are simply searches for other users on Facebook. Facebook will need a major overhaul before users start to think of it as a legitimate search engine in its own right. In the meantime, Facebook would rather emphasize its bread-and-butter social functions. If you've ever seen The Social Network, you'll recall that one of Zuckerberg's main concerns was keeping Facebook "cool," which still seems to be the de facto philosophy of the company.

Still, Zuckerberg did say in his September interview that the company had "a team working on search," implying that perhaps Facebook is starting to try a little harder in that space.

It's just difficult to tell how hard it's trying. Looking at its most recent quarter, Facebook spent 19% of its revenues on research and development, compared with 11% in the same quarter just a year ago. Surely some portion of this spending is going into improving its search capabilities, which isn't a bad idea. After all, major improvements -- in business, or in life -- don't just magically manifest themselves without some sort of sacrifice or investment. The fact that Facebook is increasing its focus on R&D is an encouraging sign of future innovations at the company. 

Zuckerberg has expounded on his vision for what a Facebook search functionality could ultimately provide to differentiate itself. The CEO gave an example of someone looking for a good sushi restaurant and being able to cull results from what his friends liked. Looking for a job? Users could search a company and see if any of their friends work there. 

Perhaps Facebook should search solo
Facebook is concentrating on what it does best, and it's hard for me to fault Zuckerberg & Co. for that.

Search remains a promising area that could eventually become very lucrative for Facebook if it decides to pursue it wholeheartedly. The question remains, though: Would it be in Facebook's best interest to partner with another company (like Bing or Yahoo! -- it's hard to see Facebook and Google kissing and making up) as it seeks to master search? A partner would bring experience, technology, industry knowledge, and lots of data to the table, that's for sure. But Facebook is able to attract some of the world's top talent on its own. Plus, when it comes to data, Facebook has many years' worth of it, on hundreds of millions of users. Facebook might just be well positioned enough to do this all on its own.

After the world's most-hyped IPO turned out to be a dud, most investors probably don't even want to think about shares of Facebook. But there are things every investor needs to know about this company. We've outlined them in our newest premium research report. There's a lot more to Facebook than meets the eye, so read up on whether there is anything to "like" about it today, and we'll tell you whether we think Facebook deserves a place in your portfolio. Access your report by clicking here.


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  • Report this Comment On November 28, 2012, at 10:02 PM, edpeters2000 wrote:

    Facebook should look @ MIMVI, a pure play in mobile app search. I have to believe apps will be the new websites and search and apps will merge as one.

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