Google Goes After Facebook With a New Kind of Search

By Markets Fool.com

Google has a new search product that could put a dent in Facebook's business.

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Late last month, the company announced it would begin testing sponsored search results in its Android app store, Google Play. The product remains in its infancy, but if it becomes a viable advertising outlet, Facebook's business could struggle.

Google Play -- now with advertisements
Google monetizes its Google Play app store in a fairly straightforward manner -- it takes a cut of the revenue from every dollar spent in its store. Unfortunately, Google does not break out the exact amount of revenue Google Play sales actually generate, instead lumping it into its "Other" business segment. However, in its earnings release in January, it singled Play out as the key driver behind Other's revenue growth -- which in its entirety was up 19% year over year.

Google could boost those revenues even further by applying its advertising technology to its Play store. The Play store contains some 1.4 million apps in total, and though Google offers search and a level of curation, it's still difficult for users to find apps that may interest them -- and for app creators to find users.

Google is already running sponsored app searches to a limited extent (searching for "hotel app" or "coupon app" in the Google Play app store will result in some promoted apps showing up at the top of the list), and it should roll out the program more aggressively in the months ahead. In the future, app creators will be able to promote Android apps of all kinds by paying Google for keywords.

Facebook's reliance on mobile ads
If Google's app ads work well, it could pose a threat to Facebook, which is currently deriving some portion of its revenue from app ads.

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Facebook's recent share price appreciation has been driven, largely, by its ever-growing mobile ad mix. Last quarter, 69% of Facebook's advertising revenue came from mobile -- and much of these mobile ads are for apps. How many, exactly, is difficult to say, as Facebook hasn't disclosed it, but in the absence of other compelling mobile advertising avenues, companies have turned to Facebook to promote their apps.

Some, including Snapchat's Evan Spiegel, have argued that Facebook's reliance on mobile app ads -- particularly apps made by risky, venture-backed companies -- makes it susceptible to the bursting of a tech bubble. Facebook's management has attempted to alleviate these fears, noting that its app ads are purchased by a wide variety of companies, but that doesn't remove the threat of competition in the space.

Google Play ads can't fully replace Facebook
Google app ads would represent major competition, as Facebook would have to compete with Google for app-related advertising dollars.

Of course, the efficacy of Google Play ads is far from established -- they may prove less compelling than Facebook's offering. At the same time, they have an obvious limitation: Given that they live on Google's Play store, they are limited to users of the Android operating system -- iOS developers looking to target owners of Apple's devices won't find much value in a Google Play ad. Given that iOS users, on average, tend to spend more money on apps, Google Play ads won't be wiping out Facebook's mobile business anytime soon.

Nevertheless, investors should still view them as a legitimate, long-term threat to Facebook's business.

The article Google Goes After Facebook With a New Kind of Search originally appeared on Fool.com.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of 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.