For years, Facebook (NASDAQ:FB) posted Microsoft's (NASDAQ:MSFT) Bing search results right alongside social queries on its site. But that arrangement recently came to an end when Facebook dropped Bing results, presumably to clear the way for its own search engine, Graph Search.
Facebook's Graph Search lets users quickly sift through friends' profiles and previous posts. It also lets users ask natural questions -- like "Show me pictures of Jack Brown" or "Find restaurants in Manhattan" -- and pulls results from a user's Facebook connections instead of the web. While this is a neat feature for users, it's also a powerful analytics tool that can help businesses craft better targeted ads for specific demographics.
What Graph Search means for Microsoft
Microsoft has been Facebook's strategic partner for several years. Back in 2006, Microsoft sold banner ads on Facebook's U.S. site. The following year, Microsoft acquired a 1.6% stake in Facebook for $240 million, which entitled it to split overseas banner ad revenue with Facebook. Then in 2010, Facebook replaced Microsoft's banner ads with Bing search results instead.
The loss of search results from Facebook's 1.35 billion monthly active users will likely impact Bing's market share. Bing processes 14.3% of the world's web searches and 29.4% of U.S. searches, according to tracking sites Net Market Share and comScore.
Microsoft is cagey regarding how much revenue comes from Bing, but we know that its D&C (Device and Consumer) Other segment -- which includes Bing, Windows Phone Store, Xbox Live, and Office 365 Consumer revenue -- posted 16% year-over-year revenue growth to $1.81 billion last quarter. Search advertising revenue from Bing rose 23%, but Microsoft didn't disclose exact revenue figures. The entire D&C Other segment accounted for just 7.8% of Microsoft's revenue last quarter, so it's unlikely that the Facebook split will make a huge impact on Microsoft's top line.
What Graph Search means for Facebook and Google
Facebook is the second most visited website in both the U.S. and worldwide behind Google, according to Alexa. However, daily page views per visitor have declined 14.6% to 12.7 over the past three months, while daily time spent on the site has decreased 23% to 21 minutes and 10 seconds. Therefore, it makes sense for Facebook to prevent users from leaving via Bing's external links. Graph Search could also lock in users for extended periods of time as they search through old photos and posts.
Google should be worried for three reasons. First, two former Google execs, Lars Rasmussen and Tom Stocky, helped develop Graph Search for Facebook. Second, Graph Search demonstrates Facebook's ambitions to develop its own "socially powered" search ecosystem. Google lags behind Facebook in social media -- tracking site We Are Social estimates that Google+ only has around 343 million active accounts.
Last but not least, Facebook clearly wants to launch its own mobile operating system to challenge Android. That's why it released the Facebook Home launcher last April and why it forced mobile users to download a separate Messenger app with intrusive chat heads. Facebook could pull these pieces together to launch a fully formed Android OS -- similar to Amazon's FireOS -- for smartphones.
Launching a mobile OS would be a major leap for Facebook, but it could work if more Facebook users become dependent on Graph Search, instead of Google, to search for local businesses and events.
The long game
Facebook's Graph Search highlights Facebook's ambitions to become much more than the world's largest social network.
Facebook, as a search engine, represents a new way to filter information based on social connections. It's a powerful tool which pulls the most personally relevant search results to the top of the pile. Google tested out this strategy by floating Google+ influenced results to the top of search queries, but the idea can't reach its full potential unless the user is active on Google+.
Graph Search probably won't make a noticeable financial impact on Google's ad revenue over the next few years, but it could help Facebook widen its defensive moat against Google and possibly even evolve into a formidable rival search engine.