The Telegraph reports that Yahoo and Facebook are talking about teaming up on their own search engine.
Good!
This would be a smart strategic move for both companies. It could also drive billions of dollars to both companies' bottom lines.
And it would finally allow the world to create a strong No. 2 to the Google search juggernaut, which would be excellent for consumers, marketers, and third-party distribution partners alike.
(If Facebook and Yahoo don't actually want to build their own search engine, they could also just switch to Google for monetization. This, too, would radically increase their bottom lines.)
We'll run through some numbers below. But first, here are some broad strokes:
- Search is the best advertising business in the history of the world, by a mile. It is a vastly better business than the digital brand advertising business that Facebook and Yahoo are currently in, though that's a good business, too.
- Search is also a fantastically profitable business when you have built-in distribution--but the key is that distribution. Google has distribution: Most people think "Google" when they search. That's why Google's minting money. Microsoft doesn't have distribution for Bing, so it has to buy it from Yahoo, AOL, etc. That's why Microsoft's getting killed.
- Together, Yahoo and Facebook have huge global distribution. If both companies made search a priority in their products, they could grab a significant chunk of the market.
- Unlike Microsoft, Yahoo and Facebook--especially Facebook--also have excellent positions in mobile, which is where the digital world is going. Microsoft is nowhere in mobile. Facebook is used by 500+ million people per month on mobile. Yahoo Mail and Yahoo are used by several hundred additional million people.
- Microsoft is impressively dedicated to search, but it has lost more than $10 billion on its search business so far and it seems extremely unlikely that search will ever become a meaningfully profitable business for the company. This will be especially true if Yahoo and Facebook team up together. If that happens, Microsoft's search business is toast.
- Instead of continuing to bang its head against the wall, Microsoft should contribute to the Facebook-Yahoo partnership by contributing its technology in exchange for stock.
The details of who would actually be responsible for a Facebook-Yahoo search engine--who would pay for and manage the technology and engineering, who would manage the relationships with advertisers, etc.--would be critical to any successful effort. If the companies partnered and did a half-assed job, the effort would fail miserably.
But many ideas are doomed to failure even before you get to execution.
This one isn't.
This is a great idea. If Facebook and Yahoo can find a way to work together well on this, and perhaps include Microsoft in the deal, this could be huge, both financially for the companies involved and for the industry.
A Successful Search Engine Could Quickly Double Facebook's Profit
For a quick indication of the financial impact a great search engine might have on Facebook, just look at what happens to Facebook's stock every time someone mentions "search."
Mark Zuckerberg mentioned "search" at a conference a while back, and Facebook's stock immediately jumped 15%.
Search is also extremely profitable and important for Yahoo. So if Yahoo could leverage a partnership with Facebook into a more financially successful search engine than its current partner, Microsoft, a search deal could also be huge for Yahoo.
Here's a quick look at what search could do for Facebook...
Facebook users, just like other Internet and mobile users, often search for things. And the things they're searching for aren't always on Facebook.
Sometimes, for example, Facebook users search for products they want to buy.
That's the magic that allows Google to generate more than $40 billion in annual revenue--about 10-times what Facebook makes from its annoying little display ads.
Advertising on Google is like advertising in a store: Potential customers tell you what they want to buy, and you then show them ads to help them narrow down their choice and buy it.
Advertising on Facebook, meanwhile, is like advertising at a party. You might reach the right people, but they may not be in the mood to even think about buying.
In short, Google gives its users ads that help them buy what they're already looking for.
That's why Google is the most successful ad-driven company in history: Because its ads are mind-bogglingly targeted and relevant, and they're shown to users only when users want to see them. Facebook users, meanwhile, want to do everything but look at ads--Facebook users want to keep socializing with their friends. (SEE: "Like Hell Facebook Will Kill Google")
This is why Facebook should absolutely go into the search business. Just look at what this business is doing for other companies:
- Yahoostill generates nearly $2 billion a year from search revenue. And it's almost all profit.
- AOL also generates nearly $500 million a year from search revenue. And it's almost all profit.
- Microsoft, which is in the software business, generates about $2 billion a year from search revenue. (Unlike the other search players, Microsoft is hemorrhaging money, but Facebook wouldn't have to do that.)
Why does Facebook have such a huge opportunity in search?
Because 500 million people a month live on Facebook.
They don't visit Facebook.
They live there.
They start at Facebook, communicate through Facebook, and quickly return to Facebook every time they stray away.
Make no mistake: One of the reasons Google is so obsessed with Facebook (see Google +, etc.) is because Google knows that Facebook could one day threaten its core revenue engine. If Facebook focused on search, it could make it so people had no reason to go to Google to search for anything--because they're already on Facebook. And Google obviously knows that.
How much revenue could Facebook generate from search?
Well, according to Andrew Lipsman at Comscore, Facebook is already doing 1.6 billion web-based searches a month.
That's 3-times as many as AOL.
It's one-fifth as many as Yahoo (with no effort whatsoever).
Yes, it's only 1/100th as many as Google, but, again, Facebook is generating those queries with no effort whatsoever.
Facebook's current searches could help it instantly generate ~$1 billion of annual search revenue tomorrow.
And then let's say that Facebook actually made it a priority to boost search as a Facebook service and revenue stream and increase its number of search queries.
It doesn't seem unreasonable to suggest that, with Yahoo's 10 billion queries a month, Facebook might be able to generate $3 billion of annual search revenue.
This $3 billion of annual search revenue, importantly, would be almost 100% profit.
Why?
Because Facebook wouldn't be incurring any costs to build its search engine--it would simply be working with a partner like Yahoo.
Yahoo would charge advertisers, say, $1 per click, and Facebook would get $0.90 of that.
That's exactly how Google works with AOL.
It's exactly how Microsoft currently works with Yahoo.
In other words, there's no reason for Facebook to have to completely reorient itself as a company to cash in on search. It just has to pick up the money sitting in the corner.
$3 billion of pure-profit search revenue would quickly double Facebook's annual operating profit.
The launch of an exciting new Facebook revenue growth engine, meanwhile, would get investors so excited about Facebook again that they would suddenly be eager to pay a lot more for the stock.
And Yahoo investors might get quite excited about it, too.
SEE ALSO: Marissa Mayer And Sheryl Sandberg Are In Secret Talks About A Search Engine
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