Facebook and Google both recently reported surprising fourth quarter earnings. Whereas Facebook topped Wall Street's estimates on both the top and bottom lines, Google missed on both -- indicating that the two tech titans might be headed in opposite directions.
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Google's revenue, minus traffic acquisition costs (the revenue it shares with ad partners), came in at $14.48 billion for the quarter, missing the consensus estimate of $14.61 billion. While Google's paid clicks rose 14% year over year, its cost per click (CPC) slipped 3%, meaning that Google's traffic rose but its profitability per ad declined. While Facebook doesn't report CPC, its average price per ad surged 335% year-over-year despite selling 65% less ads, which boosted total advertising revenue by 53% to $3.59 billion.
Facebook CEO Mark Zuckerberg. Source: Wikimedia Commons, Brian Solis.
Investors might think that Google, as a larger company, is merely posting lower growth as its search engine and ad network run out of room to expand. But there are other less obvious issues throttling Google's growth and boosting Facebook's profit which investors shouldn't overlook.
Google vs. Facebook: The sign-in wars
A closer look at how Google and Facebook track their users -- a key requirement used to craft profitable ads -- might help explain the stark earnings difference.
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Google has traditionally tracked users with cookies, the tiny bits of information which cling to web browsers and let websites identify you. But there were three problems with cookies: they can be manually cleared, they can't be transferred between devices, and mobile manufacturers like Apple actively block them.
To counter these problems, Facebook and Google introduced single sign-ons (SSO), which let third party apps and sites link their accounts to Facebook or Google to instantly sign on.
Signing in with Facebook tethers your apps and sites to Facebook's main site, which lets it craft targeted ads and gauge "ad to action" conversions. Signing in with Google, on the other hand, connects the app or site to Google's main ecosystem (YouTube, Gmail, Search), to track actions and craft targeted ads. Google's sign-in also acts as a unique ID that allows Google's additional ad platforms on other sites -- like AdSense, AdMob, and DoubleClick -- display the right ads.
Simply put, Facebook and Google are trying to conquer the Internet by "recruiting" third-party apps and websites.
Why social networking matters to Google
These different SSO strategies, however, might result in faster growth for Facebook's third party network compared to that of Google.
To be fair, Google is good at the "stealth" SSO. New owners of Android phones must sign up for a Google account before accessing the Play store, users signed into Chrome can synchronize bookmarks between their PCs and mobile devices, and logging into one Google site keeps users logged into all of the sites, including its search engine. But if a user signs out of Google's system, the company's ability to deliver targeted ads declines.
On the other hand, Facebook convinces users to use its SSO on apps and sites by promoting social interactions with friends. When people download new mobile games, they are often inclined to use the Facebook sign-in instead of the Google one, since it connects them to Facebook friends who are playing the same game. So while Google's network might be bigger than Facebook's, it lacks a central social sharing hub like Facebook's main site.
That's not to say Google hasn't attempted to address this problem with its Google+ rollout. Google+ reportedly has over a billion users, but social network tracker We Are Social reports thatonly around 35% (360 million) of those users were active as of last February. Meanwhile, Facebook's monthly active users rose 13% YOY in the fourth quarter to 1.39 billion. And while, according to Alexa, the average user spends about 20 minutes per day on Facebook, the average Google+ user spends a mere 7 minutes per month on the site, according to Marketing Pilgrim.
As long as Facebook keeps crushing Google+, more people will link their sites and apps to the former instead of the latter, disrupting Google's "Manifest Destiny" for the Internet.
Google isn't invincible
Facebook will continue to capitalize on its social networking advantage by investing in smarter ad-based revenue initiatives.
In early January, Facebook acquired QuickFire Networks to improve its video streaming capabilities. That move will enhance its video and graphical ads, which already generate three times as much revenue as Google does on mobile devices. In 2013, Facebook launched Home, a thinly veiled test run for a Facebook mobile OS, and Graph Search, which lets users and marketers search through its user base for social and advertising purposes.
Facebook Home. Source: Google Play.
Several years ago, few investors believed that Facebook could topple Google, but Facebook is quickly becoming a disruptive threat for Google and its shareholders.Looking ahead, I expect Facebook's SSO strategy to fuel fresh user growth while tethering more users to its ecosystem. That could mean big trouble for Google investors, since the search giant still lacks a meaningful defense against Facebook's social networking advantage.
The article Has Facebook Found Google's Achilles' Heel? originally appeared on Fool.com.
Leo Sun owns shares of Apple and Facebook. The Motley Fool recommends Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). 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.
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