Google (NASDAQ:GOOG), which competes with Yahoo (NASDAQ:YHOO), Microsoft (NASDAQ:MSFT), AOL (NYSE:AOL) and New York Times Company (NYSE:NYT) in the online advertising market, has another major threat in the making in Facebook. Although Google’s revenues are much higher than the estimated revenues for Facebook,   Facebook’s fast growth in the online advertising world could be a threat to Google in the long term. Google has a large set of users, but these are spread across Google Search, Gmail, Android and Google TV.
We believe that if Google can understand its users’ interest and preferences better by stitching their information across different platforms to build a profile, it could provide better targeted ads to its users. It will then bring about higher ad user engagement levels, which will in turn improve Google RPS (Revenue per 1,000 searches). RPS is a critical parameter for Google and its improvement could provide some lift to the $632 Trefis price estimate for Google stock, which is close to the current market price.
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The Threat From Facebook
According to Hitwise, Facebook became the most visited site in the U.S. for the first time surpassing Google and Yahoo.  What could Google do in this situation? As mentioned above, Google could improve its users ads engagement in order to compensate for the loss of user visits to Facebook. Google could track the user’s Google Search history to understand their interests and preferences. It could also leverage the growing Android user base,  Gmail’s growing popularity  and the potential that Google TV possesses. 
If Google can successfully tap the users’ information on these different platforms, it could certainly bring about better targeted ads. Targeted ads helps increase the click through rates of the ads, which help the advertiser in realizing higher conversion rates. Google’s RPS could certainly benefit from that. The RPS has declined from a peak of $23.50 per 1,000 searches in 2008 to an estimated $14.70 per 1,000 searches in 2010, and we expect it to continue to decline to around $9.50 by the end of Trefis forecast period.
If Google can stop further RPS declines, and if it is able to maintain it at 2010 levels of $14.70 throughout the Trefis forecast period, there could be an upside of 35% to our estimate for Google stock.Notes:
- Google’s revenues could be around $29 billion for 2010, which is estimated from the quarterly filings of the first three quarters of 2010 [↩]
- Facebook’s revenues are estimated to be $2 billion for 2010, Bloomberg, December 2010 [↩]
- Facebook accounted for 8.93% of all U.S. visits between January and November 2010. Google.com was ranked second with 7.19% U.S. visits [↩]
- Android OS market share in global smartphone market has increased from 3.5% in Q3 2009 to around 26% in Q3 2010 [↩]
- Gmail’s visitors numbers increased by 22% in July 2010 over last year, IBTimes, September 2010 [↩]
- There are 4 billion TV users compared to 1 billion PC users, Techcrunch, May 2010 [↩]