Why Google Should Be Worried About Facebook

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I have written a few columns questioning Facebook’s long term value. And amidst all the recent news about the company’s IPO woes, it seems like investors may be skeptical as well.

Even though I may have a conviction that a scenario might play out a certain way, I believe it is important to examine all sides. So today I would like to explore the flip side of the arguments I’ve laid out in past columns.

Let’s explore what Facebook could do with its ad model.

Why Ads Don’t Work on Facebook

My overall skepticism with Facebook’s business model and overall value is based on the assumption that its advertising strategy is limited to Facebook – its only asset to date.

There’s no question that the company is gathering a database of extremely detailed information about Facebook users. The assumption has been that Facebook would use that detailed user profile data to match advertisers up with the right consumers as folks use the service.

But if you look at mediums where advertising is successful, it becomes clear that it works best when the advertising is related to the content. When I read a magazine like Men’s Fitness, advertisers know they have the attention of someone interested in fitness and health. When I read GQ, advertisers know they have the attention of a reader interested in fashion.

(MORE: Could What Happened to MySpace Happen to Facebook?)

When I spend time with a medium related to my interests, I’m much more open and attentive to advertising. The reason consumers use Facebook’s service is different from other services or content they consume where advertising actually works. This is why I’m convinced that Facebook itself is not the right medium for advertising to work well.

That being said, if Facebook were to create an advertising network similar to what Google does with AdSense, Facebook could potentially take a big chunk of Google’s business. This would allow the company to use the valuable user data it’s been gathering and offer that data to partners who have relevant, specific content where advertising may be better received.

One Ad Network to Rule Them All

Google has built its ad network by linking advertising up with related searches. This makes a great deal of sense and works quite well. Google uses its own services like Gmail, Android, Picasa and more to try and glean information about people in order to sell targeted ads. However, for Google to even come close to knowing intimate details about me and my life, I would need to use all of Google’s services — something that’s not common.

However, for Facebook to know all the intimate details of me and my life, I only need to use Facebook. Therefore, Google derives most of its targeted advertising value from knowing what was searched, but Facebook can base its targeted advertising on knowing more about the searcher.

Google still has an advantage is in its algorithm’s attempt to understand the searcher’s intent while searching, so in this scenario, I don’t think that Google’s search business is in trouble. But its AdSense business could flounder since it already has a love/hate relationship with many online publishers.

If Facebook created a service like Google’s AdSense, the company could extend its extremely targeted advertising strategy beyond the walls of its social network. Given that many websites which require you to log in to sign up for a service have the option of logging in with your Facebook credentials, there are myriad ways Facebook could leverage its consumer profiles with all its online partners.

Extending value to advertisers and brands beyond the walls of Facebook is key to Facebook’s value, in my opinion. This model could be completely disruptive to not only Google, but the vast majority of advertising networks.

The Broader Opportunity

Even if Facebook employed this strategy, displacing something like AdSense is no easy task — yet the upside is significant. Whether it’s publishing sites or communities based around specific interests, I believe those are the places where targeted advertising can thrive and return value. Facebook either needs to figure out how to create these niche communities within the walls of its social network or do what I propose and give outside sites built around specific interests access to some sort of Facebook ad network.

What makes this strategy so interesting is that if it were done right, then Facebook as a service could exist solely to collect key data needed for advertisers. If Facebook could succeed in building an ad network and monetizing it primarily with partners, then Facebook itself could potentially be advertising-free. Right now, ads on Facebook clutter and detract from the experience that brings me there in the first place ( I also believe they are useless in their current form). I truly believe that if Facebook is set on trying to only make money within the walls of Facebook, the company will make compromises that will seriously detract from the Facebook experience and will ultimately drive consumers away.

Lastly, the broader opportunity becomes even more interesting as we think about mobile and emerging platforms like the television. Facebook may very well have more data about me to pitch to advertisers than any other company; if TV networks could partner with Facebook, for example, they could begin to deliver some of the most valuable rich-media advertising due to the amount of information they know about me. If you think about the ads you see today on TV, in print and online, it’s clear that very few of them have to do with your actual interests.

Facebook, in my opinion, is the only company today that’s in a position to completely change all of this. However, it depends on Facebook thinking bigger than itself and the destination it built.

(MORE: 6 Reasons Apple Is So Successful)

Ben Bajarin is the director of consumer technology analysis and research at Creative Strategies Inc., a technology industry analysis and market intelligence firm in Silicon Valley.