How Facebook Inc. Could Steal Billions From Google

By Markets Fool.com

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Facebook's hackers have taken aim at Google, yet AdSense remains untouched. Credit: The Motley Fool.

Given the rise of Facebook and Twitter , among others, I think it's fair to sayGoogle has missed the social media revolution.

Yes, I'm aware of Google+, which I find to be highly useful. The trouble is that G+ doesn't drive revenue. Ads aren't part of the equation, nor are sponsored posts or similar "monetization" techniques.

When it comes to cashing in on social media, Facebook leads the pack while Twitter continues to find its way. Yet neither of these social stars have made a move on the rest of the online world,where Google nets $1 billion per quarter through its AdSense program -- for placing ads on websites owned and operated by others:

Metric
Q3 2014
Q2 2014
Q1 2014
Google AdSense revenue $3,430 $3,424 $3,262
Traffic acquisition costs $2,421 $2,400 $2,387
Revenue ex-TAC $1,009 $1,024 $875
AdSense gross margin 29.42% 29.91% 26.82%

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Source: SEC filings. Dollar figures in millions.

Facebook can and should compete for a piece of this pie by creating an AdSense alternative.

Making cents out of AdSense
Google introduced the idea of allowing bloggers and operators of third-party websites to share in ad-profits when AdSense went live in June 2003.

Today, there are millions of blogs on the Internet, and new ones pop up all the time. Google gives these entrepreneurs the opportunity to cash in on their scribblings by signing up for AdSense, even if it can take a year or longer to earn the $100 minimum the search giant requires before cutting a check.

What's interesting to me as an investor is that if you're doing business online, chances are you're also heavily involved in social media for distributing your products and ideas. You want Facebook and Twitter to bring you customers, which, in many cases, is going to be great for Google.

Think about it. Every new browser increases the odds of collecting pennies from clicks on AdSense ads, and a substantial portion of them arrive via social media.According to Shareaholic, Facebook accounted for over 20% of referral traffic to the 300,000-plus sites it studied in last year's second quarter. Overall, social media referrals accounted for 30% of traffic.

This, in a nutshell, is why Google isn't rushing to make Google+ more than it is. Facebook, Twitter, and others are doing perfectly well at feeding the search company traffic it can convert into revenue via AdSense.

An AdSense for social media?

Now imagine what happens if Facebook goes after AdSense by agreeing to share ad revenue with creators of well-designed pages hosted within Facebook. Would bloggers be as motivated to keep their own sites? Would would-be bloggers choose to turn to Facebook instead? My guess is "no," and "possibly," if only because we're seeing just this sort of behavior on Twitter.

Take Kim Kardashian. The reality television star earns an estimated $20,000 per tweet about the brands she supports. Sister Khloe gets $13,000. Other celebrities who get thousands for tweeting include Jared Leto and Melissa Joan Hart, according to data supplied by IZEA. Think of it like AdSense, only with someone else other than Google acting as middleman.

Everyday Twitter users can employ the same strategy, of course, but without the hope of being paid nearly as much. Facebook would be a better platform for them -- especially if there were an AdSense alternative. Here's how I would design it:

  1. Take the idea of sponsored stories and extend it to brand pages. Specifically, each Facebook Page owner would be given the option of opening his or her feed to ads from outsiders. Right now, Facebook monetizes pages by enticing owners to buy ads to attract more views to their pages.
  2. Provide some measure of control. Only ads in approved categories would be allowed. Page owners could also specify which, if any, companies they would bar from showing ads. A feedback mechanism would allow owners to mark shown ads as undesirable, inappropriate, etc., in order to make the system smarter.
  3. Introduce a more generous revenue split. Facebook could steal some of Google's AdSense billions by promising page owners a higher percentage of the revenue from paid ad clicks, encouraging more activity on participating pages and thereby increasing the validity of the ads served. Everyone -- except for Google -- wins.

Sound too far-fetched? Perhaps, but at last count there were over 25 million active small and medium-sized business pages on Facebook -- and perhaps much more than that in terms of individual brand pages. That's quite a well still waiting to be tapped.

And it doesn't have to end there. Facebook could further entice brand page owners by giving them the option of running targeted ads on their own blogs, earning revenue in two places. Implementing the strategy would take some time, certainly, but we know that the social network already collects petabytes of information about users' browsing habits. Applying that knowledge to take a chunk out of AdSense is the natural next step.

The article How Facebook Inc. Could Steal Billions From Google originally appeared on Fool.com.

Tim Beyers owns shares of Google (A shares) and Google (C shares). The Motley Fool recommends Facebook, Google (A shares), Google (C shares), and Twitter. The Motley Fool owns shares of Facebook, Google (A shares), Google (C shares), and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.