Google (NASDAQ:GOOG), which competes with Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO) and AOL (NYSE:AOL) in the search advertising market, may also face competition from Facebook. We believe Facebook’s ‘Like’ feature and its search partnership with Microsoft could threaten Google in the long term.
Facebook recently passed Google to become the most visited Internet site in the U.S, with a market share of around 7%. However, we believe that Facebook does not pose an immediate threat to Google’s search business. Google’s momentum and superior search technology will likely ensure that it remains the preferred search engine in thee near term.
Below we explain why Facebook could threaten Google’s search dominance over time.
1. “Like” feature as search engine
Facebook members use the ‘Like’ feature to indicate that they endorse a certain link or message. These recommendations are intrinsically more credible than algorithmic search results because they come from real people. For example, a Facebook user who needs a hotel room in New York City will tend to trust first-hand recommendations from other Facebook members who have stayed at various hotels in the city.
2. Facebook/Microsoft partnership
Facebook and Microsoft recently announced a partnership in which Microsoft’s Bing search engine will power search on Facebook. Given that Facebook currently has around 500 million registered users, a Facebook search option could realistically divert search traffic from Google long term.
Can Facebook take share from Google?
We estimate that Google search accounts for 67% of $725 Trefis price estimate for Google’s stock. We believe that Google will continue to increase its market share, from 65% in 2009 to 73% by the end of the Trefis forecast period. However, there could be a downside of more than 5% to the $725 Trefis price estimate for Google’s stock if its market share only reaches 67% at the end of our forecast period due to increased competition from Facebook.