Battle of the online giants: Why Facebook continues to surprise its many critics

BEFORE Facebook surprised the market with a 53 per cent rise in second quarter revenues to $1.8bn (£1.2bn), the social network had had a wretched few months.

It was forced to admit it hands data to the US National Security Agency – stirring up privacy concerns. In May, Nissan and Nationwide pulled ads after they appeared alongside offensive posts. Facebook Home, the new homescreen that was meant to be an answer to its perceived weakness on mobile, met with a dismal reception. Only last month, its shares were languishing below $23, 40 per cent below last year’s listing price.

The contrast with Google could not have been starker. Google is worth $300bn. To add to its dominance of searches, its Android mobile operating system has surpassed Apple’s early lead in smartphones and tablets. Each month, Android users download 500m more apps than iPhone and iPad customers. It is also the world’s largest media company by advertising revenues, according to ZenithOptimedia.

But there is room for a different view, as Wednesday’s results from Facebook now make clear. Google is losing its ability to see and understand what is happening on the web, and it is Facebook that is poking out its eyes.

Facebook’s advantage is based on the richness of the data its users give it. Consumers prize choice and selectivity, and Facebook is gathering information that will enable advertisers to satisfy needs more accurately.

Google’s search box is currently the best interface to put advertisers in front of consumers, but this won’t always be true. Google is only 15 years old, and its success rests on its ability to connect advertisers with qualified leads – people who searched for a Thai restaurant in Glasgow, or a Samsung Galaxy S4. But instead of deducing our wishes from search terms, a better approach would be to make consumers offers based on who they are, what they like, and what they are doing. The company with the best data wins. That company is now Facebook.

Facebook holds information on over 1bn people. It knows what books and music we like, where we’ve been on holiday, who our friends are. Over 750m users access it on mobile phones or tablets – providing valuable location data to Facebook and its advertisers. Now 41 per cent of its advertising revenue comes from mobile devices, up from a third three months ago.

It could create highly-targeted offers that are likely to be more effective for advertisers, and more appealing to users. On an evening out to see a film – arranged over Facebook’s messaging system – an advertiser, knowing you like Japanese food, might offer a discount at a sushi restaurant. This solves a problem, and saves you money.

And as more online activity takes place within Facebook, the value of its data rises. Worst of all for Google, much of this data is invisible to its search engine. Its web crawlers can’t track this freely-disclosed information, which provides so many clues to who we are and what we want. It is in this sense that Google is going blind.

Google will continue to dominate information-based searches. But it is possible to imagine a future in which Facebook becomes the best source for consumer information. And that is more commercially valuable.

Paul Cooper is partner at Clarity, the media and technology corporate finance adviser.

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