Google Trumps Facebook ... Again

Google makes another visionary acquisition.

Apr 14, 2014 at 7:00PM
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U.S. stocks managed to cling onto the day's gains after briefly falling back to breakeven within the last hour of trading, as the benchmark S&P 500 closed up 0.8% on Monday. The narrower Dow Jones Industrial Average (DJINDICES:^DJI) rose 0.9%. The technology-heavy Nasdaq Composite Index (NASDAQINDEX:^IXIC), which has been highly volatile recently, gained 0.6%, edging away from correction territory. One technology heavyweight, Google (NASDAQ:GOOG)(NASDAQ:GOOGL), was grabbing this afternoon's headlines with the acquisition of a small company that Facebook (NASDAQ:FB) was first to court, but there's another news story pitting these two rivals that received much less attention -- even though it's a lot more significant to their core business.

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First things first: Google is acquiring Titan Aerospace, a New Mexico-based company that develops high-altitude drones. You might be wondering what this has to do with the company's core search/advertising business. The purchase is consistent with one of Google's forward-thinking ventures: connecting people to the Internet in areas where such connectivity does not currently exist. Google says that Titan will collaborate with its Project Loon, which is seeking to increase Internet availability via high-altitude balloons. Titan's drones are solar-powered and are conceived to fly autonomously for years.

There is also the possibility that Titan's drones could collect real-time high-resolution images of the earth, which could complement Google Maps and Google Earth. However, the bigger stakes could be owning the gateway to the Web in developing nations in which existing infrastructure is currently insufficient to provide widespread access.

Facebook, with its mission to "connect the world", would certainly like to be that provider. In fact, according to The Wall Street Journal, Facebook had been in talks with Titan Aerospace for weeks before Google got involved, saying it could beat whatever Facebook was offering. The talks with Facebook collapsed and the social networking company ultimately acquired English drone maker Ascenta for $20 million last month.

Uber-VC Peter Thiel (an early Facebook investor and current board member) has remarked that the technology industry lacks ambition and vision; the homepage of his Founders Fund website laments: "What happened to the future? We wanted flying cars; instead we got 140 characters" (140 characters refers to the maximum length of a message on Twitter). However, it's hard not to be impressed by Google's drive and imagination (and also, perhaps, slightly uneasy with the breadth of that ambition) -- that seems to be rubbing off on Facebook through competitive drive.

But back to the more mundane topic of online advertising -- which is, after all, how Google and Facebook make the bulk of their revenues and profits. Bloomberg reported today some pointed and revelatory comments from the chief executive of travel site Priceline.com. In an interview, Darren Huston told Bloomberg: "For Facebook and Twitter, we have endless amounts of money. But we haven't found anything there." In other words, Priceline would be happy to pour copious amounts of advertising dollars into Facebook and Twitter, but they simply have not seen the sort of return that would justify the investment. Priceline represents roughly 3% of Google's total ad revenues.

I've never thought that Facebook was anywhere near as effective an ad platform as Google. Perhaps this is my singular experience, but I have never once bought anything based on an ad on Facebook -- it simply isn't the reason I visit the site. That's not the case with Google, and I'm a power-user of both sites.

Facebook appears to be executing well and it seems to have gathered genuine momentum both in terms of its relationship with major advertisers and refining its ad products. Nevetheless, social networks remain relatively immature platforms relative to search; I can't help but wonder whether we will witness a shake-out once advertisers' curiosity and enthusiasm is replaced with hard-nosed return on investment calculations.

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Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (A and C shares), Priceline Group, and Twitter and owns shares of Facebook, Google (A and C shares), and Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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