Facebook (
FB
) recently unveiled its new 'Graph Search' functionality that it
expects to become one of the key features of its business in the
future. However, the usability of graph search is restricted due to
privacy of user data as well as inconsistent levels of activity
across Facebook users. In order to make it successful and make
money from it, Facebook will need to make some serious efforts to
encourage users to frequently use the 'like' feature as well as try
to integrate some sponsored search links within the results of
graph search.
See our complete analysis for Facebook
Limitations of Graph Search
Graph Search is essentially a structured way of displaying what
your friends like. Users can only search the information that they
already have access to. This implies that the privacy settings can
greatly impact the results, which can vary by a great degree across
users.
However, Graph Search has a social element to it and Facebook is
banking on the idea that its users will value the results based on
their friends' recommendations. This is absolutely no competition
to Google (
GOOG
) or other search engines in the near term, which offer more
accurate and comprehensive results. For instance, you may use graph
search to see what restaurants your friends like in a particular
city. However, this will not be an accurate picture of the
restaurant's quality and you will probably be better off using a
more comprehensive search engine such as Google, or a specialized
website such as Yelp (
YELP
).
Also, the results of Graph Search will depend on the activity of
your friends. If they tend to use the 'like' feature a lot, the
results are likely to be more meaningful. Such activity varies
greatly across users.
What Facebook Needs To Do To Make Graph Search
Successful
Facebook needs to do two things. One, it needs to make sure that
its users use Graph Search as often as possible. Second, it needs
to ensure that it can make some money from this usage.
To address the first point, Facebook will need to make the
search results more meaningful. This can only be done by including
a larger data sample. While Facebook may not tamper with the
privacy aspect which greatly limits the usage of Graph Search, it
may certainly encourage its users to "rate" and "like" the content
on Facebook. Various companies and businesses will also have the
incentive to encourage their customers to like their pages,
promotions or products in order to appear prominently in Facebook's
graph search results.
Let's address the second point now. How can Facebook make money
off the Graph Search?
One way to think is that graph search can make it easier for
users to navigate to popular company, music or product pages. These
pages could feature ads and promotions that Facebook can charge
advertisers for. However, the real money could come from using
sponsored links within the search results, or on the side of the
page, similar to what Google does. Given that most of the usage
occurs on the mobile platform, Facebook could utilize Graph Search
as a channel to ramp up mobile advertising if it can include
sponsored search results. Growing mobile advertising is key to
Facebook's future, something that has been a cause of concern for
investors in the past.
Our price estimate for Facebook stands at $25
, implying a discount of about 15% to the market price.
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