Is Google's Facebook Nightmare Beginning?

In April 2011, Google  (NASDAQ: GOOGL  ) CEO Larry Page made a move that left no doubt how serious the company thought of social media as a threat. He sent out a companywide memo announcing that 25% of the bonus for all employees, no matter their department, was based on the company's success in social. 

Google clearly sees social and Facebook  (NASDAQ: FB  ) as one of the great threats facing the company. With Facebook launching its Facebook Home user interface, which sits on top Android, how threatened should Google feel? While Facebook Home still operates on Android, it also makes Facebook the center of mobile devices. The scary thought for Google is that early versions of Facebook Home are just examples of "toeing the water," and future releases could go deeper into minimizing Google's own services while featuring Facebook's. 

Facebook Home in action. 

Is Facebook becoming the realization of what Larry Page fears? Is search even the main battleground that will emerge between these companies in the next couple years? Let's take a look at Facebook Home and the threats facing Google today. 

Google's best weapon: being the best
Back in 2011, when Page went all hands on deck in the battle against Facebook, Google was scared. It was scared because the identity and user habits provided by all the actions taken within Facebook has the potential to be such a strong determinant of search quality. While many see Google now as an entrenched habit of users -- it's not uncommon to say "just Google it" when referring to broad search -- the threat is twofold. 

First, if social search could better tap into user habits to offer more relevant results, the company is more susceptible than ever to competitors. The most common threat mentioned when it comes to Google is Microsoft's (NASDAQ: MSFT  ) Bing, but that threat might be too obvious.

Instead, consider the recent reports from The Wall Street Journal that Apple  (NASDAQ: AAPL  ) is in negotiations with Yahoo! to feature its content in more iOS applications. The reports note that Yahoo! has been contemplating ways to strengthen a search alliance with Apple, but one of the major sticking points is that leaving Google would "sacrifice the quality of search results." Google's greatest threat right now isn't necessarily Microsoft; it's the frayed relationship it has with Apple.

Apple is a company that would love to abandon Google from a strategic standpoint but doesn't have options to do so. Google's greatest weapon remains not its brand, but its quality and lead in search. 

The early innings of Facebook and search
A second idea that's connected to the first is how much time users spend on Facebook. Not only does that allow Facebook to collect excellent data on user habits, but it also means Facebook can offer search or other products without needing to boot Google out of being the default search on a browser. If a user is frequently on Facebook and the company offered a unique search offering, it could display a search box prominently within the content of the page.

That may not be enough of an advantage to get most users to turn away from Google, but it's enough to start building momentum behind a Facebook search product. We know that Facebook is interested in doing more with search, as the company unveiled its Graph Search in March 2013. The product isn't a Google replacement as it stands now, but it does show that Facebook is testing the search waters. Oh, and it's also leveraging Bing instead of Google for some search results.

 

The future of search, or just a test?

Facebook and mobile: friend or foe?
Yet it's important to note that both Google and Facebook have what the other wants. If Google's all-hands-on-deck moment was the emergence of Facebook and social, then Facebook had its own epiphany of a coming threat with mobile early last year. At first, Facebook devoted relatively light resources to its mobile unit, seeing it as an extension of its dominance on the desktop. In early 2012, reports were that just a couple dozen of Facebook's engineers were working on mobile. 

However, the rapid rise of not only mobile, but also competing "complementary" products around Facebook forced the company to do a 180 and make mobile its singular rallying cry. In February of last year, the company announced plans to begin offering sponsored ads on mobile. By summer, sponsored ads on mobile were ubiquitous. By the fourth quarter of the year, mobile was 23% of Facebook's advertising revenue, up from zero percent at the start of the year. 

In April of last year, Facebook bought Instagram in a move that was generally panned as a waste of a billion dollars. Instagram had no revenues and merely a dozen employees at the time, and it was purchased for what amounted to a billion dollars! What Facebook saw was complementary services slipping away from it. While the company has become the central hub for uploading and sharing photos on PCs, it had lost its edge in mobile. In future months, Facebook's fears around photos were realized in areas such as messaging, where WhatsApp shot up the download charts.

The implication is that while Facebook is a central hub for often-used actions such as messaging and images on the desktop, on mobile these actions were fragmenting. These are actions that not only tie an identity to Facebook but also drive engagement. Users sit on Facebook browsing images and messaging friends and family. To lose functions like these is to remove the legs from the throne with which Facebook rules as the next great Internet company. 

Facebook Fights Back
Facebook began fighting back early last year by not only buying Instagram but also by shifting hundreds of software engineers to work on its mobile efforts. The first step was a complete rebuild last August of its mobile application, which focused on speeding up Facebook so actions like uploading mobile photos was easier. 

Yet the key idea remained. Facebook on mobile was just one icon among many, and services surrounding it threatened to take away many of its key features. Building a better app could help Facebook in the short run, but it was more of a tactical maneuver. The long-term strategy that could eliminate this threat would be owning the mobile experience. That way, a phone's photos could link directly to a Facebook account. Where a default messaging tab is displayed right now could sit Facebook's own messenger. Contacts could be synced with existing friends in a manner that Facebook controlled. 

At first, Facebook considered building its own phone. However, such an action seemed unnecessary, with so many willing partners such as Samsung, HTC, and Acer all looking for a way to diversify themselves from their Android dependence. Instead, Amazon.com (NASDAQ: AMZN  ) illustrated an intriguing pathway to more relevance in the mobile world that Facebook could easily lean on after testing more small-scale ways of becoming the center of the mobile experience. 

The great Amazon fork of 2011
In September 2011, Amazon took the wraps off its Kindle Fire tablet. The eye-opener for many was the price: starting at just $199, versus the iPad's $499 starting price. Yet price is easily copied when you have a competitor more concerned with market adoption than with hardware profits. By the next summer, Google had released its own Nexus 7 at the $199 price point. 

Instead, what was remarkable about the Kindle Fire was that Amazon had pulled off a tremendous feat and managed to remove all traces of Google from Android, the operating system it had created. The company had "forked" Android and created a separate version. The upshot was that Amazon could put all of its own services on the device, such as its own App and music store. The downside is that it lost access to certain key applications from Google, such as Maps.

Does this look like Android to you?

The key idea was that Amazon showed a way to make another company the strong center of Android. Companies such as Samsung, which layer on their fair share of tweaks to Android, didn't follow Amazon, because losing access to the Android app store and other applications such as Maps is too big a risk -- not to mention the frayed relationship it'd cause with Google. Yet for Facebook, the company could now take a measured approach that allows it to first embrace Android, and then determine its own path later.

Facebook Home: This is just a test
The basic idea is that Facebook Home is just merely an interface layer on top of Android. It sits somewhere between interface adjustments found on Android phones like Samsung's TouchWiz or HTC's Sense and a full-blown fork of Android found on Amazon's Fire devices. 

There's really no reason for Facebook to go all in with its own phones when it can test out riding on top of Android. A key advantage here is that Android is already the most popular mobile operating system; it's a lot easier to get existing Facebook users to download a layer for the phone they already own rather than buying a brand-new one centered on Facebook. This essentially gives Facebook a large sandbox in which to begin getting traction with almost no risk to the company. If Facebook Home fails to attract broad interest, it's back to Plan B with mobile. However, in the meantime, the company didn't go through the tremendous efforts of forking Android and the tremendous development effort that would require for a first-class phone experience. 

If Facebook Home is succeeding, then Facebook can pour more resources into the project and expand its influence. At a logical extreme, it could follow the path of Amazon and build out its own Android phone that emphasized its own services. However, Facebook now has key options of either being able to work within Android to build out its influence or take the full measure to be at the center of the mobile experience. 

This is really a no-lose situation for the company, and in the meantime it gets to play "frenemy" by riding atop Android while it evaluates its next steps. It could all lead to nothing, but it's really a low-risk, genius way of attacking Facebook's greatest weakness. 

This ain't your father's threat, Google
The great fear for Google is that it no longer faces a great plodding dinosaur like Microsoft, a company that took years determining its path in search while Google gained an insurmountable lead. Instead, Facebook is dynamic, willing to take chances and pivot the entire direction of its business in a heartbeat. This isn't a company afraid of failure; it's one that's young and taking risks. 

Google's great fear with Facebook began with search. However, with Google owning Android and banking on it as a key to the company's success over the next decade, the greater threat than having Facebook launch a search is what happens from within the Android ecosystem. Facebook knows that to live up to its full potential and head off threats, it needs to be more central to the mobile experience.

That puts it on a collision course with Google and its control of Android, but only at its own pace.

Want expert Facebook advice?
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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