Facebook (NASDAQ:FB) recently unveiled its new ‘Graph Search’ functionality that it expects to become one of the key features of its business in the future. However, the usability of graph search is restricted due to privacy of user data as well as inconsistent levels of activity across Facebook users. In order to make it successful and make money from it, Facebook will need to make some serious efforts to encourage users to frequently use the ‘like’ feature as well as try to integrate some sponsored search links within the results of graph search.
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Limitations of Graph Search
Graph Search is essentially a structured way of displaying what your friends like. Users can only search the information that they already have access to. This implies that the privacy settings can greatly impact the results, which can vary by a great degree across users.
However, Graph Search has a social element to it and Facebook is banking on the idea that its users will value the results based on their friends’ recommendations. This is absolutely no competition to Google (NASDAQ:GOOG) or other search engines in the near term, which offer more accurate and comprehensive results. For instance, you may use graph search to see what restaurants your friends like in a particular city. However, this will not be an accurate picture of the restaurant’s quality and you will probably be better off using a more comprehensive search engine such as Google, or a specialized website such as Yelp (NASDAQ:YELP).
Also, the results of Graph Search will depend on the activity of your friends. If they tend to use the ‘like’ feature a lot, the results are likely to be more meaningful. Such activity varies greatly across users.
What Facebook Needs To Do To Make Graph Search Successful
Facebook needs to do two things. One, it needs to make sure that its users use Graph Search as often as possible. Second, it needs to ensure that it can make some money from this usage.
To address the first point, Facebook will need to make the search results more meaningful. This can only be done by including a larger data sample. While Facebook may not tamper with the privacy aspect which greatly limits the usage of Graph Search, it may certainly encourage its users to “rate” and “like” the content on Facebook. Various companies and businesses will also have the incentive to encourage their customers to like their pages, promotions or products in order to appear prominently in Facebook’s graph search results.
Let’s address the second point now. How can Facebook make money off the Graph Search?
One way to think is that graph search can make it easier for users to navigate to popular company, music or product pages. These pages could feature ads and promotions that Facebook can charge advertisers for. However, the real money could come from using sponsored links within the search results, or on the side of the page, similar to what Google does. Given that most of the usage occurs on the mobile platform, Facebook could utilize Graph Search as a channel to ramp up mobile advertising if it can include sponsored search results. Growing mobile advertising is key to Facebook’s future, something that has been a cause of concern for investors in the past.
Our price estimate for Facebook stands at $25, implying a discount of about 15% to the market price.