Facebook's New Graph Search Is Google's Nightmare Come True

Although the stock market yawned at Facebook's announcement of "Graph Search," its new search service, with investors wagering it would only hurt smaller, vertical search services like Yelp and Linkedin, the truth is that it is potentially much more significant than that.

For the last several years Google's management has had two nightmares. The first focused on the mass migration in internet usage from computers to smartphones, a development that threatened Google's core business -- search engine advertising -- because phone makers (read: Apple) had no incentive to integrate Google's ads (as opposed to its search results) into their handset displays.

Google's second nightmare is about Facebook. Increasingly, the digital universe consists of two internets: The vast universe that Google is able to index and search; and the walled-off portion, accounting for some 20-30 percent of total internet usage, represented by Facebook -- which Google most definitely is not able to index and search.

In this nightmare, Mark Zuckerberg calls a press conference one day to announce that he has launched his own search engine that does everything that Google does -- plus, its searches include all relevant content on Facebook (which is not only off-limits to Google, but, given the nature of social media, could generate the most useful and user-specific search results of all).

Facebook's launch of its Graph Search tool, in combination with its announced alliance with Microsoft's Bing search service, is Google's nightmare come true. Facebook + Bing = a much enhanced version of Google. While Google has been able to neutralize the smartphone threat with the development of its Android operating system for phones, it will have a hard time matching that feat against Facebook's invasion of Google's search business.

Anticipating Facebook's latest move, Google has invested heavily in its own social media business, Google+. But Google+, despite its early growth, impressive technology and considerable promise, is still dwarfed by Facebook and its one billion active users.

For Google, Facebook (together with Bing) is an even more formidable rival than Apple. Apple's revenue is concentrated in hardware sales, not advertising. But both Google and Facebook derive most of their revenue, and nearly all of their profit, from advertising. Each succeeds at the expense of the other.

And even if Facebook fails to trigger a mass shift in ads from Google's platform to Facebook's, its presence almost certainly will bid down the price of internet search advertising, which will hit Google's profits even if Google manages to hold on to its dominant market position.

Google is going to have a hard time finding relief from its Facebook nightmare. Win or lose, it now confronts a much bigger Facebook challenge than is generally realized.

This story appears in Issue 33 of our weekly iPad magazine, Huffington, in the iTunes App store, available Friday, January 25.
Peter Scheer is executive director of the First Amendment Coalition, a nonprofit dedicated to free speech and government transparency. The views expressed here do not necessarily reflect the views of the Coalition. Scheer is a regular user of both Google and Facebook.