Is Facebook Now The Yelp Killer?

  • Facebook has launched a new service that allows users to search for local businesses a la Yelp.
  • How big a threat is the new service to Yelp stock?
  • More importantly, what is the opportunity for Facebook here?

Facebook (NASDAQ:FB) has launched a searchable directory of local service providers or services such as repair shops, electricians, spas, and vets. Users can browse through different category listings that provide addresses, phone numbers, average Facebook review ratings, and links to a provider’s Facebook pages. Apart from standard local service providers, the new search service turns up listings of local businesses such as bars, restaurants, and hotels. Some analysts have observed that Facebook could be leveraging existing user data to optimize search results.

Monetizing search

As is the norm with new product launches, Facebook (NASDAQ:FB) will not be monetizing the service for now. But it’s not hard to see that directory ads and local business search ads would be a very natural fit for the service. Facebook recently said that it has more than 50 million active business pages that collectively receive more than 2.5 billion monthly comments from its users.

Quite naturally, leading business review site Yelp (NYSE:YELP) is directly threatened by the new tool. Yelp stock sold off by nearly 10% when the new development hit news feed, before paring back some of the losses as investors took time to digest the news. Yelp stock has taken severe beating this year. The stock is down almost 50% YTD. Yelp CFO Rob Krolik had this to say about Facebook’s new service:

"While [Facebook] has many local advertisers and 45 million with Facebook pages, it has not historically had a dedicated site to find local providers...."

Mr. Krolik has a valid point here. Review sites usually thrive because of the huge volume of reviews on their site. People tend to trust a hotel reviews if say 50 people have reviewed it as opposed to say 5-7 people only. Yelp has accumulated more than 100 million reviews on its site, and remains the most popular business review site on the planet. People go to Yelp when they need to learn more about their local businesses. It’s more likely that people will use the new Facebook search tool as a complimentary service for Yelp reviews rather than a substitute for it.

So the new service might not exactly become a Yelp killer, though pressure will remain on Yelp stock. But this won’t stop Facebook from making money from the search service anyway. Facebook (NASDAQ:FB) recently made more than 2 trillion posts on its platform available for search. Using the diversified search tool, Facebook users can use their keywords of choice to pretty much access all posts on the platform. The new business search service is therefore more like a refined value-added subset of the wide search tool.

Facebook did not mince words about its intention to monetize search when it said this during the launch of the expanded search service about six weeks ago:

“Because the business model for search is so well understood, we know it will come when it makes sense.”

There really is nothing to prevent Facebook from displaying ads alongside search results just like Google Alphabet Inc-C (NASDAQ:GOOG) does with its search engine. Google reportedly handles more than 3 billion searches every day. Even though this is an enormous volume, Facebook is well capable of matching those numbers. After all, Facebook has close to a billion daily active monthly users on its platform. If each of these performed 3 searches every day, Facebook could quite easily hit Google’s search numbers.

The only big difference between the two search platforms is that Facebook is not likely to make as much money from search as Google does due to its nature as social platform. Google displays ads next to search results in a complimentary and even helpful way that helps users learn more about what they are searching for. In contrast, people do not go to Facebook and other social media sites expecting ads to be shoved into their faces. Social sites such as Facebook have to perform a delicate balancing act between displaying enough ads to help them monetize the platform but at the same time limiting the number of ads to avoid cluttering the site with ads and devaluing it to users.

Facebook ads, on the other hand, tend to be better optimized than Google ads and therefore command better CPM rates from marketers. Assuming Facebook has roughly the same number of searches on its platform as Google, displays ads for 10% of its search results, and its ads command about twice the CPM rates of Google ads, then Facebook can realize as much as 20% of Google’s $50 billion in search revenue per year, or a revenue of $10 billion.

Monetizing search is therefore a real revenue opportunity for Facebook and a positive for Facebook stock. Yelp stock price will continue to experience downside pressure.

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