Facebook-vs-GoogleIn 1993, The New Yorker ran a famous cartoon with two dogs near a computer, with one mutt telling the other “On the Internet, nobody knows you are a dog.”

Oh, how times have changed.

In the Facebook internet, everyone knows exactly what breed of dog you are.

That was Facebook’s real trick — convincing the world to identify themselves online. They pulled that off by giving net users a place to share photos and pithy updates, when the real purpose of Facebook, it turns out, is to layer identity over the fabric of the web.

For years, Google’s natural enemies seemed to be Microsoft and Yahoo. But as the search giant trounced those giants in the search space battle, it’s been slowly losing momentum in what may turn out to be the real war — the one for the display ad revenues — to an unlikely foe: the dorm-room-born Facebook.

We’ve seen a public pissing fight this week over who owns social network contact information, but that’s just the start.

Today, Facebook is reportedly getting into Google’s e-mail face, mounting a challenge to Gmail, Google’s most successful social product. Users will reportedly get @facebook.com or fb.com e-mail addresses. But more importantly, Facebook already has ranking scores for every one of your relationships with contacts on Facebook and will use that to prioritize your inbox, according to the tech rumors.

That’s an important side battle, but it’s not where this war will be lost or won. That’s not where the money is.

Facebook, which began its life as a small private club for Ivy Leaguers, now has its sights set on what might be the net’s biggest pot of gold yet: a way of placing ads anywhere on the net with a granularity Google can only dream of — in no small part because Google promised its users never to go down that path.

And that’s why Google, the web’s most successful advertising company, sees Facebook, not Microsoft’s Bing, as its biggest rival.

Some tech pundits foresee a Facebook future where friend recommendations replace search, or Facebook gets enough data from what users like to make a more relevant search engine. That’s unlikely, for a number of reasons, including that Facebook profiles aren’t that detailed and that Google is already building social into search (look here if you are logged into a Google account to see a glimpse of what’s going on).

Instead, follow the money Facebook is making now. Depending on how much you have filled out your Facebook profile, you might have noticed that Facebook ads are sometimes eerily too good, as if Eminem’s music label actually knows what kind of music you like.

If you’ve had that sneaking feeling, then you know exactly why Google is trying to play social catch-up with Facebook, and how Facebook could single-handedly save the online publishing industry.

What gnaws at Google is not so much that Facebook users spend a lot of time on its competitor’s site. And it’s not even that Facebook gets so many page views that it now serves up an astounding 23% of the U.S.’s online display ads, according to a recent survey by comScore. That’s more than twice as many as Yahoo server and ten times as many as Google, though Facebook’s rates remain low.

Instead, the search giant is scared by two things it sees as possibly undermining its stature as the web’s top tech company.

One, there’s so much interaction and information being shared inside Facebook that it has become a decent-sized replica of the Web inside the Web. And Google can’t crawl and analyze much of what happens in there. That’s a problem when your goal is to organize the world’s information. Google is blind to this because much of what happens on Facebook remains in Facebook. (Ironically, this is due to users’ privacy settings, which Facebook has relentlessly tried to chip away at over the last four years.)

Two, Facebook knows who you are and has the right to use that information because you explicitly gave it to them. Google has different kinds of data that reveal a lot about who you are and what you are interested in — some of it very private. But very little of that data is information you explicitly told the company to share, and they’ve assiduously promised not to use your search history and e-mail data to profile you.

For years, that’s not been a problem for Google. They made the majority of their $7.29 billion in revenue in the third quarter from little text ads that show up next to and above search results.

Those adds are all keyed off the words you type into that little box. There’s no targeting involved. It doesn’t matter to Google’s AdWords system who you are, what you’ve searched for before, or what you do in other Google services (the only real targeting available in AdWords now is by location).

Google then expanded this program in 2003 to run ads on other people’s sites, its AdSense product, which now includes text and display ads. For years, those ads were also purely contextual, based mostly off the words on the site running the ads. So if you ran a blog about your life as a dentist, your readers would see ads for dental floss and teeth-whitening products.

But then, in search of a new revenue stream, Google bought DoubleClick in 2007 for more than $3.1 billion.

DoubleClick is one of the net’s display ad giants and has been serving banners ads on sites across the net since the early 1990s, using each ad serving spot as a way to track what you are reading to make inferences about your interests and build a pseudonymous profile of you tied to a cookie in your browser.

But despite having a large number of sites running the ads (including Wired.com), AdSense/Doubleclick ads still account for only 30 percent of Google’s revenues. And, surprisingly, the targeting isn’t very good. You can go here to see what Google thinks it can deduce about you just from your browsing.

The problem is that Google built a wall between user search data and advertising — and the mammoth financial success of AdWords proved that the separation was fine at the time. A search query was likely to show intent, and it really didn’t matter to advertisers selling something who the searcher was.

To make display ads better, Google kicked a hole in that wall in 2009 when it started including the videos you watch on YouTube as a way to target display ads ads at you.

Google isn’t talking about how well those ads perform compared to its purely contextual ones. But according to a Wall Street Journal story from this summer, Google is “soul-searching” over ways to turn what you do while logged into Google into data that can be used for targeting ads. That’s agonizing for Google since it’s always promised that it would keep that usage data separate from its ads.

But Facebook has never made that promise, and its users don’t seem turned off by the targeted ads.

They know they gave up the targeting data by typing it into their profile box, by becoming a fan of a company on Facebook or clicking a “Like” button. And now Facebook is training users to stay logged-in to Facebook all the time, for the convenience of logging in to sites or “liking” a story.

Why does that matter?

It matters because now you are your Facebook identity all over the net, telling every site that plays in the Facebook ecosystem exactly which dog you are, that you like playing fetch and what other dogs you run in a pack with.

Which means, it’s a virtual certainty that Facebook-targeted ads are going to start showing up in your hometown’s newspaper, your favorite online music site and hundreds of other sites you visit. And unlike the targeted third-party ad systems run by Microsoft, Google and others, there’s no need to track you around the net to try to infer from your reading and video viewing habits how old you are, where you went to college or what you are into.

As the underdog in this fight, Google’s best weapon will be openness — tying to turn users against the walls of Facebook, while Facebook will try to be just open enough to keep users and partners from revolting.

Facebook knows all of that already because you told them. Facebook touts the story of a wedding photographer in Michigan who’s expanded his business tremendously simply by targeting ads at locals who mark themselves as “engaged.” Gabriel Weinberg, the one-man show behind the search engine DuckDuckGo, went so far as to create an ad targeted just at his wife.

Now, Facebook advertisers don’t actually know anything about you — at least not until you click on an ad, visit their site and handover your e-mail address. Instead, they use a simple panel in Facebook that lets them choose what categories to target, including age, location, education and gender. They can further target ads based on the things you have liked or added to your profile. Facebook runs the ads on a company’s behalf but never turns over a list of who fits the targeting criteria to the advertisers.

As a private company, Facebook doesn’t have to share public numbers, but a spokesman told Wired.com that advertisers are getting comfortable with Facebook, and it has thousands of advertisers. Revenues are estimated at $1.3 billion a year and rising, while investors and secondary markets are valuing the company at more than $40 billion on Sharespost, a private stock market.

That despite the fact that Facebook founder Mark Zuckerberg has never loved ads. He kept them off his site as long as he could, and even the ones that run now are relatively small, given how big and loud ads have gotten on the Web outside of Facebook. Some marketers complain that the Facebook ads just aren’t visible enough on the site, so they concentrate their efforts on getting people to “fan” their pages, in hopes the news that you like “Starbucks” makes it into the news feeds of your friends.

Facebook says it’s not working on any third-party ad system, and right now, it doesn’t need to. It’s flush with cash from investors, who’ve poured hundreds of millions into the company, without Zuckerberg losing control. It can bide its time, making Facebook even more central to the internet, building more relationships with top advertisers and convincing more sites to turn over their login systems to Facebook.

But it’s a near inevitability Facebook takes the same, logical step Google took and starts putting ads on third-party sites, targeting Facebook users reading the Washington Post, The Daily Beast, or your hometown newspaper.

Those ads could be splashy and dominant – the way advertisers like them these days, without distracting from the Facebook experience. They can also be very targeted, without Facebook having to hand over the info about that reader to the website.

It has the potential to be the opposite of Google’s Adwords/Adsense division, with huge profits coming from outside the Facebook walls. Facebook could then grab a giant and dominating slice of an evergrowing online display ad market, while simultaneously making display ads actually targeted.

Facebook even makes the case that its ad system is less creepy than third-party systems that track you, mostly without you realizing it, around the web. While they do see what you are doing around the web when you are logged into your Facebook account and there is a “Like” button on that site, the company says it does not mine that information and deletes it after three months. No other third-party ad network comes close to forgetting so soon.

Facebook’s advantage is that they probably don’t need to do this sort of tracking, given all the profile data, friend connections and likes that you’ve fed into their system. If advertisers and users get comfortable enough with ads based off that data, then there’s no reason that a site such as the New York Times wouldn’t want to turn over at least some of their ad sales to Facebook. Having spent years getting advertisers used to targeting the Facebook generation, Facebook would be able to charge very high rates to advertisers.

That’s because it would not only be able to do very granular ad targeting, but it could do so on a site with the reputation of the New York Times.

Online papers love the idea of targeted ads, because contextual ads just don’t work for news. What ad are you going to put up next to a story about a flood in India? An ad for Indian rugs? What about next to a story about a plane crash? Or even a story about a run-of-the-mill mayoral election?

One hope to fix that giant problem facing the media industry is to know who your readers are.

And that means building identity into the internet.

Facebook’s the only company to have done so, and that’s why Google is fighting to catch up to “social.”

There may not be room for more than one online identity company on the net, but Google has assembled a high-powered team of coders and thinkers, including Slide’s Max Levchin, the open social evangelist Chris Messina and Plaxo’s Joseph Smarr, to take on the Facebook crew.

As the underdog in this fight, Google’s best weapon will be openness — tying to turn users against the walls of Facebook, while Facebook will try to be just open enough to keep users and partners from revolting. The best case scenario? Google figures out how to turn identity into an open protocol like e-mail — something you can host and control anywhere that lets you stitch together whatever services you like.

And if that effort fails, Facebook’s relatively benign child-king will be in control of what you can and can’t do with your identity on the internet.

And Mark Zuckerberg will have built a company worth more than $100 billion — and maybe worth more than Google.

Last week, on Mouse2House blog where I regularly contribute on Technology, I discussed how Facebook is going to kill Gmail and the dorm-room-born company might be the biggest enemy of Facebook. In this post Wired’s Ryan Singel analyzes how Facebook could beat Google to win the net.

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