Monday, January 30, 2012

Is Facebook Killing Google? No, But…

 When a few weeks back my friend and occasional interviewer, Henry Blodget, the CEO of Business Insider, tweeted word of a new BI piece defending Google (with the characteristically understated headline, “Like Hell Facebook is Killing Google”), I tweeted back to Henry that I’d be happy to take the other side of that argument.
 “Awesome!” he responded, “Would love to hear details.”
 It’s been a month, but with quarterly earnings report season winding down, the daily torture of listening to so-called analysts pestering men and women busy running billion-dollar global enterprises in a time of unprecedented volatility and competitiveness with questions no deeper than “how should we think about your tax rate?” and “how should we think about sales this month?” and “how should we think about margins this week?” is almost over, and the hype about Facebook’s impending IPO is heating up…so here goes.

 In “Like Hell etc etc,” which you can read here, Henry correctly points out that Google is currently 10-times larger than Facebook, revenue-wise, and then argues Facebook won’t be able to close the gap as quickly as Facebook fans presume, for a very simple and logical reason:
 Because as the current revenue levels for both companies are demonstrating, search is a vastly better advertising product than social networking.
 Vastly better.
 So much better, in fact, that, when it comes to head-to-head business competition, the two companies aren't yet even in the same league.
 And why is search such a better business than social networking?
 Because search is the best advertising product in the history of the world….it is advertising space that can capture the consumer's attention at the exact moment that the consumer is looking for something to buy.

As for the advertising potential of Facebook’s social networking structure, Henry likens it to “hanging signs on the wall of a house during a party and sending sales reps to mingle with the crowd”:
 Yes, you can target which parties you pay to hang your signs on the walls of.
 Yes, you can make those signs appealing to those at the party.
 But the fact remains that the people at the party, who are sharing stories and photos and news and gossip, are not at the party because they want to buy something.
 They're at the party because they want to socialize.
 And any time you do more than passively hang in the background at the party, they will likely be annoyed by your intrusion. And, annoyed or not, when they do notice your ads, their reaction will most likely be,  "Cool--if I ever decide to buy a car/boat/stereo/meal/flowers/bull-whip, maybe I'll look at that kind." Then they'll go right back to their party.

 Henry’s argument has crisp logic to it—as you would expect from a guy who was one of the very first to recognize the ultimate potential of Amazon.com at a time when that potential was not obvious to many.
 Still, I’ll take the other side of it, with just as simple an analogy: Facebook is the Cable Television of the Internet.
 To put this is terms of Henry’s “house party” analogy, television is akin to “hanging signs in rooms” where people are doing something that has nothing to do with buying something: they are simply watching the signs, i.e. the TV sets.
 Moreover, television advertisers—especially cable television advertisers—know precisely which room will be occupied by which type of people, and will happily pay to advertise in one room or another, regardless of whether the party-goers are thinking of actually buying something at that moment, because, eventually, they will.
 After all, young men don’t watch TV thinking, “I need to watch this football game to determine which beer will make me attractive to women,” but the fact is that young men with a surplus of testosterone tend to be watching those games, so Budweiser showers cash on ESPN.
 And nobody watches “Top Chef” thinking “I need to determine which food processor they use so I can buy one,” but the food processor company knows that “Top Chef” viewers tend to be the ones who buy that stuff.
  And while Google search is, indeed, as Henry points out, immensely effective when it comes to advertising products and services to people who are looking for something, the fact is that only a very tiny percentage of people doing searches on Google are looking for anything other than how to spell a word, or get directions somewhere, or look up a crossword puzzle answer, or finish their history paper with the help of Wikipedia, or check a restaurant menu…none of which has anything to do with ordering something online.
 So, while Google is a company I’ve admired from Day One for many of the reasons Wall Street distained it early on (including a management team totally focused on the long run, paying almost no attention to quarterly earnings), Facebook will, absolutely, hurt Google.
 In fact, it already has, if my own experience advertising a similar product using both Google AdWords and Facebook is any indication.
The product advertised is “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks on Investing, 2011).  My publisher advertised the earlier, print version on Google, and the more recent e-book on Facebook.
 And while both Google’s and Facebook’s platforms are similar in form, ease of use and detailed statistical reports, Facebook created demand I could monitor on Amazon.com in near-real-time, while Google’s impact was hard to see and impossible to value.
 In short, Facebook proved far better than Google AdWords.
 Here’s how they work.
 Google Adwords is elegantly simple: you write a headline, a brief description, and copy-and-paste the URL you want the ad to click through to.  Then you tell Google which words you want your ad to appear with, pick a country or city or town where you want the ad to be triggered, and Google suggests a price-per-click to pay, which you can accept or not.  (Google’s algorithms know what they’re doing so it’s easiest to go along with them.)
 Obviously, I picked words like “Warren Buffett,” “Buffett” and “Berkshire Hathaway” for my “AdWords.”  When those words were searched for, our ad would appear—assuming our price-per-click was in the range.  If somebody clicked through, we’d get billed.
 Sounds logical, and it is.  But there was a glitch: it turns out most people don’t know that “Buffett” is spelled with two “Ts”—so Google suggests you buy other words. “Buffet,” for example.  And “Warren” with one “N.”  And phrases that wouldn’t necessarily cross your mind, such as the following, none of which I am making up (including the spelling):
“What is warren buffet buying” [he never discusses what he’s buying]
“Books by warren buffet” [he has never written a book]
“Autobiography of warren buffet” [there is no such thing, but people search for it anyway]
“Where does warren buffet live” [this is where it gets creepy…]
 So you add more words and phrases to your list than you might think, to cover all the bases, and provide a credit card and a daily dollar limit or time limit or both for the campaign.  Google takes care of the rest, allowing you to monitor the results on your AdWords page with slick charts and tables showing all kinds of statistics—the main one being how many people actually click on your ad.
 The problem is, while you can and will initially see a lift from folks who “click-through” your Google ads, the odds over time run against a small advertiser, because, unless you're a bottom-feeding trial lawyer looking for "mesothelioma" clients, click-through rates can be pathetically low.
 After all, people looking for a Buffett book will simply get on Amazon and search for “Buffett” (or “Buffet,” but not, likely, “where does warren buffet live”…) there.  And people searching Google to figure out where Warren Buffett lives aren’t necessarily interested in buying a book about him—nor would I want them to buy my book.
 The result, in any event, was no discernible sustained benefit to book sales.

 Facebook’s advertising platform, meanwhile, proved very similar to Google’s, mechanics-wise: you create a brief headline, a brief description, select a picture or a graphic, select your parameters, and name your price.
 But it is those parameters that make Facebook geometrically more useful than Google.
 For while Google allows you to narrow down the geographic territory in which your ad will appear, Facebook allows you to pick the type of person who will see your ad.
 And that is why I think of Facebook as the Cable TV of the Internet.
 Right now, for example, “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks on Investing, 2011) is being advertised to college graduates in India, Dubai and Israel, which possess a growing base of investors who admire Warren Buffett.  
 Since Secrets was and remains the only Buffett book to not only spell out how truly extraordinary Buffett's investing track record is, but also to dispassionately point out certain blind spots in Buffett's world-view, we’re also advertising to college graduates in the United States who identify themselves as “liberals” or “conservatives” now that Buffett has interjected himself into the U.S. Presidential campaign in a way that has made him a hero to the left and a self-loathing billionaire to the right.
 The benefits—unlike Google AdWords—are discernable: “Secrets…” is regularly one of the two most-downloaded Kindle books on Warren Buffett, alternating in the top slot with “Snowball,” which has rather a fancier advertising budget than yours truly.
  But the magic of Facebook’s targeting doesn’t stop with countries or education.  If I wanted to, I could advertise to all 10,141,480 Facebook users with birthdays that happen in a week or less.
 Think about that.
 And if you really want your head to spin, think about this: according to a friend in retailing, the average Facebook woman updates her relationship status to “Engaged” within two hours of the guy actually proposing…so Facebook sells that relationship status information to retailers who have bridal registries.
 As my pal told me, “We’ve been looking for this for fifty years.”

 Now, for the record, I have no investment in Facebook shares, and this blog is not a recommendation or endorsement of, in ANY way, Facebook stock, which may turn out to be the biggest disaster since eToys.  It is, merely, one individual’s view of Facebook’s business model based on real-world experience.
 Indeed, to the question, “Is Facebook going to kill Google?”
 I’d say, “No.”
 But, to the question, “Is Facebook the next Google”?
 I’d say, “Almost certainly.”


Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at Amazon.com

© 2012 NotMakingThisUp, LLC
                                   
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.

NOTE ON COMMENTS: We abide by one rule on the comment pages here, and that is NO “Yahoo Message Board-Type Language.”  So whatever you write and whether or not you agree or disagree with something, spell it correctly and keep it clean, and no personal stuff.  And if you think we won’t enforce that, well, we have over 300 comments that never appeared because they were sloppy, obscene, or personal. —The Management

20 comments:

Rich said...

Great analysis and comparison between Google and Facebook from a customer perspective.

If it happened now instead of a long time ago, my now-wife would probably have changed her FB status to "Engaged" via her iPhone as I was popping the question!

Ben said...

Jeff, can you see direct linkage between the downloads on the Kindle and your Facebook ad? My experience is that I don't know anyone who actually looks at the ads on Facebook. Are you tracking this or just inferring the downloads are because of Facebook.

I wonder if people are downloading the Kindle book more because you are such a great writer with a great reputation. :)

Jeff Matthews said...

Ben,
Much as I'd like to say, "Halt the presses, this blog is wrong! It's the quality of the book, not the advertising!" the fact is that while the book has become a steady seller on its own (thanks, everyone), the ads have an impact depending on when they start and when we try a new country or demographic, along with a new ad design.
The impact is far more apparent than it ever was with Google. Hence, the blog.

Thanks,
Cheers,
JM

Unknown said...

Definitely excellent analysis. The sort of analysis that Wall Street should do, but rarely does.

I never click on Google ads. Well, maybe I do, but only because the site I want is listed at the top of the search results and might be a paid ad.

The only time I knowingly click on paid ads is at highly targeted sites such as ones that cater to my hobby, flying rc planes and helicopters. So I guess that's more of a Facebook type ad, although I never use Facebook - who has time to update all that useless information.

Anonymous said...

stop the press!!!

goog;e "facebook clickthrough rate" and you'd find countless articles bemoaning that facebook ads have a lower clickthrough rate than standard web banner display ads.

while i'm glad that facebook ads work for you, the plural of anecdote is not data.

Jeff Matthews said...

Anonymous needs to use something besides an iPhone to post comments.

Mis-pellings aside (and the comment verged on the kind of sloppy Yahoo message-board stuff we don't tolerate here), the basic message is inconsistent with itself: we are supposed to Google a phrase to discover anecdotes about click-through rates on Facebook being lower than comparable web banner ads...but not pay attention to anecdotes about higher click-through rates on Facebook.

Besides, we we're comparing click-through rates on display ads: we were comparing them to AdWords. And FB wins, for us, hands-down.

JM

Anonymous said...

Jeff - I think you make a very good point. My only question is whether, at some point, people will recognize that having this much personal info online is probably a bad idea. And I've been watching that car insurance commercial where people are "liking" the company on Facebook. And I wonder why....

Jeff Matthews said...

Good point, but, well they're comfortable with putting that information out there, and have been, for years.

You and I hand waiters our credit card without thinking about it...that's a lot of information to hand somebody who a) may not like you, and b) tends to hold the job less than 6 months.

JM

Anonymous said...

One thing missing in your analysis and the comments so far: privacy. And that applies to both companies, but more so to Facebook. There's been a tremendous push back against using personal information, especially without clearly notifying users. The (admittedly useless) annual audit that Facebook will go through for the next 20 years is just one such example.

I would not be too surprised if the opt-out (or even opt-in) mechanisms for targeted advertisement will be mandated by law, spelling trouble for any social network based ads, be it Facebook or Google+. Facebook is in more of a danger here, since social networking is all it is and it has a horribly spotty history with privacy protection, repeatedly opening itself to criticism, investigation and sanctions.

I agree about the level of usefulness that Facebook (or any social network) can provide to advertisers, but I think the mechanics will be challenged through laws in the near future.

Skyman123 said...

This is direct anecdotal experience but from peers of mine, it's pretty widely reflected. I am the actual CEO of one company and I have a side business that I own that is very local. My marketing experience in both I think are pretty illustrative of the arguments.

My Google ads FAR outpace my Facebook ones. I mean the results from Google are staggering in both companies. In the local one I carefully had customers leave reviews, filled in all the Google info for place, and have very targeted ads. We get most non-referral business from Google hands down. Same for the big company. The leads from Google are on a logarithmic scale compared to Facebook.

However, when I first started the local business I spent on Facebook and had dramatic connections until I hit a plateau about 2 months after I opened. And a funny thing happened. The responses went off a cliff, but the people who engaged, really SOCIALLY engaged with our Facebook site. We SOCIALLY engage with it. We post things, we have threads of comments running...it's like a community. And it attracts others. But it's a finite community and the ads no longer produce or pay.

So here's the rub: Henry's example is true to a point. You have to throw a party on Facebook and then people attend. They've stopped caring about the "product" and are now part of the party. My other company? No use for Facebook as we're not tossing a party and we're international anyhow. So unless we broke down our business into little cells, I'm not sure people would "connect" with us on Facebook. Just my .02. And, btw, no one pays attention to product tweets except for Customer Service. Period. I have more data than you can imagine on that point.

NotMelol said...

My recent experience with Google is VERY bad:

1. Google took away my Hulu account band made me create a Google account in order to log in to my new account and rescue my old Hulu account. So I did. BUT THE SIGN IN BUTTON WILL NOT OPEN. That is, I can go to Hulu, I can hit Hulu links on my Google account page but all to no avail. The buttons do not work. And there is no way to tell Google about this ridiculous glitch.

Perhaps Google is falling apart technically.

2. When I doi a Google search, Google refuses to connect me to any site on yahoo, even though the yahoo source may be the best for the topic I am looking into. I have to copy and paste the address into yahoo.

As a result I am teaching myself not to use the Google search engine.

Perhaps Google is falling apart technically.

Anonymous said...

Wait, checking a restaurant menu has nothing to do with buying something? What?

Jeff Matthews said...

Skyman 123 leaves us with excellent, real world data.

For the record, I've gotten private emails from small retailers echoing the lack of response from Google AdWords and a switch to FB. Clearly there is room for both.

As for tweets--I haven't figured that one out.

And regarding Anonymous' question about whether looking up restaurant menus doesn't involve purchasing anything...in my experience, you Google the restaurant you want, look at their menu and decide whether to go there or somewhere else. That's not a purchase via Google--it's not a "click-through" on an ad. It's merely looking up info, as you'd look up a crossword puzzle answer.

JM

Bizthinker 2020 said...

Ok Let's assume Facebook is on target to be the next $300B market cap company unless there is a paradigm shift of some sort. My question is while Google organized information, Facebook is organizing people. Why are people going to continue to let themselves be organized for the financial benefit of Mark Z.? Why can't somebody create a sort of mutual Facebook. Call it Upsidebook, where the members share 98% of the stock and happily share all their info and click thru and purchase from advertisers. What's to stop this from eventually happening? Doesn't this make more evolutionary sense given how early we are in the Internet age? Sorry if this is a bit off topic.

Jeff Matthews said...

BizThinker2020 makes the mistake of taking this discussion as a commentary on Facebook's valuation.

It is not. It is about Facebook's business model.

That said, Upsidebook sounds good to me...but why doesn't he or she get started programming it?

JM

Fox Undercover Facebook said...

I guess the question can be answered in several ways. Do we mean killing their popularity or their business. Google has a far sounder profit strategy than Facebook does. They are literally built around a profit model, whereas Facebook is built around social networking and then finding ways to profit consequentially. Don't get me wrong: Facebook is doing it and doing it well, but what they do is far easier to duplicate than what Google does.

Mark said...

Clearly both Google and their approach and Facebook with theirs are going to continue to be successful for years to come. Both work. Also, both will not remain static and will continue to innovate to increase their share of the ad revenue market.

Several young companies, including Ubokia, Taskrabbit, and Zaarly, that allow the buyer to broadcast what they want to buy are a new generation that doesn't require the sellers to guess what the buyer's intentions are. All three are gaining good traction and are likely to be an alternative way for people to buy, which will attract sellers.

farmland investing said...

As a Brit living in the US, whilst I admire Facebook as a business, I guess I have never been entirely sure about why Facebook is so popular. It does not seem logical to me I guess that people would want to have that much personal information online. Having said that however, there is no doubt that Mr. Zuckerberg will go down in the annals of business for his creation, right up there with the Google guys, and maybe in 20 years who knows, perhaps even Jobs or Gates. However, from a purely investing perspective, I just cannot see how a US$100 billion valuation is justified, as it assumes amazing growth rates. And even then, what is the true upside - based on rational analysis at least - for growing beyond the 100 billion. I think the value creation of Facebook has largely been as a private company, whilst when Google went public much of the value creation was still ahead of it.

Jeff: Its time to ask the question - is Facebook a SHORT once it starts trading?! I shall check back here in a day or two and see if anyone answers me:) Again, I am not questioning the amazing business story of Facebook, just its upcoming potential as a publicly traded company. Had it gone public three years ago at a 5 or 10 billion valuation, I'd be buying hand over fist as then it would have Google potential a la 2004. I stand ready to be attacked for such heresy:)

Michael M said...

My concern with FB is that they will see a similar fate as Yahoo - a place you once went for everything until other more specialized competitors started chipping away at search, mail, weather, gossip, news etc.

As an example it could be Instagram chipping away some of the photo uploading or could be hundreds of other apps/companies each taking a small bite.

DVWilliams said...

I think that the advertising strategies complement different types of business. For products and services where the consumer knows that they need it and need it now, Google Ads are probably best. If you need your windows replacing or your antique chair re-upholstering, you're going to do a Google search. It seems less likely that this business could target customers sufficiently well on Facebook.

However, for things that people don't know that they need or for brands that have a target demographic, Facebook seems to offer better propspects. It's easier to market your clothes range aimed at a 18-25 year olds through demographically tailored Facebook ads to get awareness of the brand, whereas Google Ads might be more hit and miss.

The major concern I have about Facebook is that if advertising starts to become to prominent on the site to increase revenues then the user base will disappear rapidly, never to return. Increasing monetisation of the site should be done slowly with a lot of consultation with the hard core of heavy users, something that the company hasn't been known for in the past.