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3 Reasons Google Inc. Should Fear Facebook Inc.

By Leo Sun – Mar 31, 2015 at 11:01AM

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Facebook could soon prove that Google isn’t invincible.

Google (GOOG -1.98%) (GOOGL -1.82%) and Facebook (META -0.54%) are the two most popular websites in the world, according to Amazon's Alexa web traffic tracker. Google is the world's top search engine, controlling 88% of all queries, while Facebook is the top social network in the world with 1.39 billion monthly active users.

Google and Facebook both generate most of their revenue from advertising, but Facebook has big plans to disrupt Google's entire ecosystem. Let's take a closer look at three of these strategies, and how they could impact Google's long-term plans.

Facebook CEO Mark Zuckerberg. Source: Flickr, Brian Solis.

1. Facebook's "invisible" OS
Unlike Google, Apple, and Amazon, Facebook lacks a mobile OS which can be monetized by app and media sales. Two years ago, Facebook took a baby step toward building a mobile OS with Facebook Home, its replacement launcher for Android, but the app failed to turn Android devices into "Facebook phones."

Therefore, Facebook focused on building an "invisible OS" comprised of connected services instead. In 2013, it bought Parse, an mBaaS (mobile backend as a service) that provides apps with Facebook connections, user authentication, push notifications, and data analytics across multiple mobile platforms. Parse, a freemium service which becomes paid at higher volumes, was integrated with Facebook's mobile app install ads in its News Feed.

By charging iOS and Android developers simultaneously for News Feed ads and mBaaS subscriptions through Parse, Facebook gained an alternative way to profit from app sales. Since Facebook acquired Parse, its hosted apps rose from 60,000 to over 500,000.

2. Facebook's ecosystem is growing
With that foundation in place, Facebook its turning its Messenger stand-alone app, which has over 500 million active users, into a platform for dedicated apps. Facebook recently unveiled a payments feature for Messenger, which will let it directly compete against eBay's PayPal/Venmo, Square Cash, and Google Wallet. That enhancement could help Facebook Messenger mimic the success of Asian messaging apps like Tencent's WeChat, which have established mini-app ecosystems within Android and iOS.

Facebook Messenger chief David Marcus at F8. Source: Flickr, Maurizio Pesce.

An essential part of this push is Facebook's SSO (single sign-on) strategy, where third-party apps and sites use a Facebook login to simplify the sign-in process. Both Facebook and Google rely heavily on SSOs to craft targeted ads, since traditional tracking cookies can't "follow" users across devices.

Facebook's SSO strategy exploits Google's weakness in social media. Google's social answer to Facebook, Google+, appears to have 2.2 billion users, but most of those are inactive accounts that were registered to activate Android devices. According to analytics and visualization blogger Kevin Anderson, just 9% of those users, or 198 million people, have posted any public content on Google+. Only 6.6 million of those users appeared to be active as of January 2015. Thanks to the strength of Facebook's social backbone, its SSOs will likely remain more useful than Google's for social sharing.

Lastly, Facebook is taking aim at Google's YouTube by letting users embed Facebook videos in external websites. This move could make it tough for YouTube, which still isn't profitable after nearly nine years, to retain its presence on third-party websites.

3. Quality over quantity
In the fourth quarter of 2014, Facebook served 65% fewer ads than the prior-year quarter, yet the average cost of those ads soared 335%. This was due to Facebook's decision to reduce the number of available ad spots per quarter, which the company states emphasizes quality over quantity in ad placements.

This is the opposite of Google's old-fashioned strategy of squeezing in more ads to generate more revenue. Last quarter, Google's paid clicks rose 14% year-over-year, yet cost per click (CPC) declined 3%, meaning that its ad traffic rose while its revenue per ad fell.

In terms of total ad revenue, Google still tops Facebook. Last quarter, Facebook's ad revenue rose 53% year-over-year to $3.59 billion. Google's ad revenue rose 15% to $16.1 billion. Nonetheless, Google's slower year-over-year ad revenue growth and declining CPC indicate that Facebook's strategy of limiting ads could be an effective long-term one.

Could Facebook take down Google?
Facebook probably won't disrupt Google's core search business, but it could curb the growth of its ecosystem. Google might hold the keys to the Internet with its dominant search engine for now, but Facebook is slowly creeping up on Google with its stealthy ecosystem of SSOs, developer services, and apps.

Leo Sun owns shares of Apple and Facebook. The Motley Fool recommends, Apple, eBay, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of, Apple, eBay, Facebook, Google (A shares), and Google (C shares). 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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