Search Is a Huge Deal: What You Need to Know about Facebook's Newest Project

Simon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Two weeks ago, Mark Zuckerberg invited a select few members of the media to their headquarters to 'come see what we're building.'  Speculation ran rampant, as the tech-world scratched its head trying to figure out what Facebook (NASDAQ: FB) could possibly be up to.

Last week, Facebook finally unveiled the curtain.  The name of the project behind its biggest secret is called Graph Search.

Graph Search is essentially a way that users can utilize the nearly one trillion friend connections to search for various information.  The search feature will be broken down into four main areas (with a potential example given for each):

  • Photos - find which pictures of you that are posted are most liked by your friends
  • Interests - search for the movies that your friends like the most
  • People - find friends, or friends-of-friends, that are single and live in a certain area
  • Places - find local places of interest that have recently been checked into by your friends

Why this is a huge deal

Let's skip past the details and jump to the chase of why this search feature matters so much.  Social media has something very important that is envied by all businesses on the planet.  Trust.

Companies are constantly trying, in any way possible, to establish trust with their customers.  They build loyalty programs that give us free flights or cash back in exchange for using their credit cards.  They monitor our buying behavior to give us coupons for groceries that we've been buying.  They establish memberships to build camaraderie and make us feel like we're part of an elite group.  They'll do anything they can to build trust, because once consumers trust a business, we keep coming back.  And then we start to recommend you to our friends.

In social media, trust is embedded in the friend connections.  Would you rather trust a new restaurant that you see on TV or one that comes recommended by your friends?  After all, why would your friends steer you wrong?

Initially, Facebook had huge implications that was focused on businesses.  Companies hired social media teams and set up Facebook pages so that they could be 'liked' by friends.  This built credibility and was tremendous marketing that has an excellent return on a somewhat inexpensive investment.

But now, there's a whole new Pandora's box that's being opened.  Facebook search brings the trust aspect into multiple new potential pathways.  Dating.  Recruiting.  Photos.  You name it.  It basically allows you to put your entire life up on their site and then search through it for anything you want to find.  It's not just about recommending businesses any more.

Investors have been trying to encourage the company to find ways to diversify its revenue stream.  Concerns about whether the company could effectively monetize mobile advertising caused a sell-off in the stock late last year.  The social empire proved the skeptics wrong as it is now expected that  nearly 25% of revenue comes from mobile devices in 4Q'12.  There are also new ways that Facebook has been able to monetize its site.  Recently, users can give their friends credit to Starbucks for their birthday by using only a single-click.  Starbucks gives Facebook a chunk of the sales and keeps the branding and advertising as a bonus.

But from a financial perspective, I'm inclined to believe that Graph Search was launched to continue to improve Facebook's core advertising cash-cow.  Advertising is now worth $1 billion per year to Facebook and accounts for 86% of their total revenues.  They know where the money comes from, and Graph Search aims to make it even better.

Beta testing

In 2010, I got the chance to personally tour the Facebook building.  While there, I took the opportunity to ask them how long their typical product lifecycle was.  How long did it take from the conception of a brand new idea to a full-scale roll-out of a beta to the site.  Being a progressive social media company who operates almost entirely online, I expected their answer to be relatively quick..maybe a month or two to sort everything out. 

Their response amazes me to this very day.  "Twenty minutes."

Facebook's 'hacker-mentality' makes them masters of beta testing their new services.  They roll out their new products (i.e. Timeline, Places, and now Search) and then continually optimize as they review how the first users navigate through them.

A limited beta of Graph Search began last week.  Zuckerberg expects a slow roll-out, which means that "only" a few hundred thousand users will initially see the new search feature.  Facebook will then continue to make the tweaks and eventually launch it to the rest of the site.

But the pillars are already in place. And, as always, Zuck will be looking to optimize the user experience.

The competition

For good reason, there has been a lot of chatter about how Facebook's Graph Search will stack up against the competition.  Quite commonly it has been referred to as a "Google Killer."  But let's be clear:  Graph Search will not have a significant impact on the business of Google (NASDAQ: GOOG)

Google's search algorithm uses the entire world wide web as its playground.  It looks at the interactions between websites and is highly optimized, taking into account your search history and location.  Microsoft (NASDAQ: MSFT) took a shot at competing directly with Google in this arena when they rolled out Bing in 2011.  Mr. Softy had released previous search engines and web crawlers before (such as MSN or Windows Live Search), but Bing was supposed to be their head-to-head challenge to displace the incumbent Google.

But Google had already built up too strong of a following and wasn't about to be replaced.  Bing never reached more than the mid-teens of market share in the core search arena, where Google was used for over 60% of searches.

Facebook realizes that it shouldn't be going head-to-head against Google in searching the internet.  Instead, Facebook has a niche in social media -- exploiting the interactions between friends rather than websites.  Zuck's goal in launching Graph Search is to encourage more connections between its users, which improves the recommendations within its site and continues to attract advertising dollars.  It's optimized, in its own way.

Foolish bottom line

That optimized user experience is building an incredibly strong competitive advantage for Facebook that is getting stronger every day.  The more people that use the site, the more content is shared amongst friends.  And now, with the search function in place, the content can be share or utilized more efficiently, which makes Facebook even stronger. 

2012 will be remembered by Facebook shareholders as the year of its overpriced IPO.  Thus far, 2013 is looking to be remembered by something much more important.


TXinvestor82 owns shares of Facebook and Microsoft.  The Motley Fool recommends Facebook, Google, and Starbucks. The Motley Fool owns shares of Facebook, Google, Microsoft, and Starbucks. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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