How Facebook's New Email Service Threatens Google's Mobile Ad Revenues

Last Updated Nov 17, 2010 9:28 AM EST

Facebook's new email offering -- I know, we're not supposed to call it email, whatever! -- sets up a nicely defined conflict with Google (GOOG) over the future of advertising on mobile devices. Will Google (or Apple, for that matter) be content to let Facebook sit on top of its Android operating system for free if Facebook starts to steal a significant share of the mobile ad market? It is difficult to understate the future importance of mobile advertising to both Google and Facebook:
US consumers increased their time spent per day with mobile by nearly 40% in 2009, while online activities saw a 17% drop and TV and video experienced a 32% decrease. Mobile advertising spending is likewise increasing at a faster rate: a projected 48% in 2011, versus 8.4% growth for online, according to eMarketer.
Facebook's new messaging system rearranges the competition with Google on mobile devices roughly like this:
  • Mobile service: Google, Facebook
  • Ads: Yes, No
    Facebook's Android app currently carries no ads, although its regular web site is on course to generate more than $1.2 billion from ads this year. At some point, Facebook will want ads on its mobile apps.
  • Email: Yes, Yes
    Both companies now provide competing email services that will function on mobile devices. Both can mine users' message or Gmail information to better target ads.
  • Search: Yes, Kinda
    Google remains the king of search both on the web and in mobile. Facebook has a search function via Microsoft's Bing, but it's not a serious contender either in search or in the ads that accompany search.
  • Mobile: Yes, No
    Google's Android operating system is fast-growing and offering Apple's iPhone/iPad/iAd system a run for its money. Facebook, however, is entirely dependent on Google and Apple to distribute its product on mobile devices.
  • Apps: Yes, Yes
    Both companies have widely distributed sets of apps. Google has more of them, and different kinds, but is there a smartphone owner on the planet who doesn't have apps from both?
Clearly, the "holes" in Facebook's ad business are in mobile advertising and mobile operating systems. As Facebook is not in a position to roll out its own mobile phone operating system -- yet -- the next logical step is for it to start running ads inside its mobile Facebook app, especially if those ads are targeted based on content within users' Facebook messages. It's already running a limited advertising program through its "Deals" function, but that's not the same as Google's Admob system which runs ads in virtually all apps -- except Facebook.

Assume that Facebook rolls ads inside its mobile app, and starts to take a significant share of ads that would normally have run elsewhere on Google's Android/Admob system. How does Google respond? One possible answer is that it should do what Apple does with its apps and iAd: Demand a cut of the proceeds or threaten to boot or disable Facebook from its phones. That, of course, would be a non-threat, because no mobile service would dare face their own customers with devices or a system that couldn't use Facebook.

Nonetheless, it's hard to imagine Google tolerating Facebook getting a free ride on Android if its email system or its apps start to generate significant revenue. Your move, Google CEO Eric Schmidt.

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Image by Flickr user Ian Sane, CC.