Will Google Always Dominate Search Advertising?

Google has enjoyed an unassailable moat in search advertising for years, but this could soon change with competition from Facebook.

Feb 13, 2014 at 7:00PM

A search-related alliance between Microsoft (NASDAQ:MSFT) and Yahoo! (NASDAQ:YHOO) was established in 2009. The relationship has been a little rocky over the years, to say the least. Last year, Yahoo! CEO Marissa Mayer felt the partnership wasn't producing enough (financially) for her company. There was also a lawsuit to delay the transition to Bing Ads technology in Taiwan and Hong Kong. This year, however, she changed tune, saying that: "We like the Microsoft relationship. It's worked well for us. We're eager to start this new era with Microsoft." 

In last year's lawsuit, Mayer and Co. apparently questioned the level of commitment that would be exerted when Steve Ballmer left. Now that Satya Nadella is Microsoft's CEO, this probably eases the uncertainty, as he ran Bing's engineering team. 

The effects of partnering-up
The benefits of the partnership for Yahoo! are questionable, as Bing has essentially gained market share at the expense of its partner, and not Google (NASDAQ:GOOGL). Yahoo!'s underlying search technology is provided by Bing, which also helps power the joint advertising platform that competes with Google AdSense.

Besides indicating that the Microsoft partnership was still intact, Mayer also reiterated that Yahoo! was "long on search." It seems her company is still attempting to discern itself from Bing and Google, after signing a deal with Yelp to provide better local results.

In February of last year, Yahoo! announced an advertising partnership with Google as well, but for non-exclusive, contextual ads that will appear throughout its properties and certain co-branded sites. Its exclusive deal with Microsoft, which includes algorithmic and paid search plus the contextual advertising network it opened in partnership with Bing and Media.net, won't expire until 2019, however.

The Google deal will utilize AdSense for content ads and AdMob for mobile ones. This brings us to Google's continued dominance. 

Any serious competitors?
AdSense is, by far, the gold standard in online advertising, complimenting Google's 67% market share in search. Bing, for comparison, owns around 18% of the search market, with Yahoo! at 10.8% as of December 2013. The Yahoo! Bing Network Contextual Ads program seems to be more of a Frankenstein alternative than a serious competitor to AdSense. This doesn't necessarily mean Google won't ever have any serious competitors, however.

Looking to launch its own ad network, Facebook (NASDAQ:FB) is coming for Google's crown. This could be a very legitimate threat, one that would cause direct competition with AdSense in mobile. Facebook, with over 1.2 billion users globally, is specifically targeting the fast-growing mobile ad space, which is projected to be worth almost $42 billion by 2017. Roughly 30% of Facebook users are on mobile.

With such a large user base, and more importantly, a large user base that it knows well, Facebook is one of the few companies that might be able to steal away significant share from Google. Facebook has a big edge -- it knows pretty much everything about its users, from relationship status to "likes" and interests.

This in-depth knowledge will be priceless in assisting the advertising network in targeting the right ads. It will also theoretically generate higher clicks on ads, as well as higher payouts for everyone from the publisher to the network itself. 

The bottom line
Facebook tried to launch its own ad network before, but failed. This time will probably be different. After acquiring Atlas from Microsoft in 2013, Facebook now has stronger technology to help it further monetize its treasure trove of user data. Right now, the company is running small tests, but the implications are huge. The key for Facebook now is finding a way to successfully develop its own ad network. It would provide a new lucrative revenue stream to help the company diversify outside of just its own sites. If it can pull this off, it could also be a big source of growth that will likely come at Google's expense, especially in mobile advertising.

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Joseph Harry owns shares of Microsoft. The Motley Fool recommends Facebook, Google, and Yahoo!. The Motley Fool owns shares of Facebook, 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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