Facebook has the potential to exceed Google’s market capitalization by tapping into two much larger ad markets than the intent driven, direct-response market Google has captured. Those two markets are branding dollars and local ad spend. 

Today, the online advertising market is about $25B of which $16B is direct response and the remainder is display (loosely speaking). Facebook may not win a larger share of direct response dollars, but they may enable branding dollars to move online.

In the offline world, display advertising is much, much larger than direct response. The TV ad market is $70B alone annually, not counting radio, print and so on. As time on the Internet increases, many are calling for a shift in ad spend from offline media to online.

Because of its scale, Facebook can present a one-stop shop to many advertising agencies looking to shift spend from previously mass market TV to new media. Should this happen, a potentially equally large chunk of ad dollars may end up in Facebook’s coffers because like Yahoo, Facebook can provide the following

  1. A huge audience: largest photo & gaming, and 2nd largest video site on the web with the most amount of minutes of any website
  2. A gargantuan amount of consistently high quality ad inventory (16% of all display inventory according to eMarketer)
  3. Best in class user targeting and demographic understanding
  4. Multi-platform (gaming, photos, etc) and multi-environment (web, mobile, off-Facebook web) targeting
  5. Consistent reporting across all these media

The other significant revenue driver that no one has discussed is Facebook’s enormous local ad opportunity – analyzed here. The local ad market is $133B according to eMarketer.

To wit, Facebook quadrupled the number of advertisers on their platform last year, my guess is entirely due to SMBs moving to the platform. With the the rise of GroupOn (the fastest growing business in the world according to Fortune), the addressability of SMBs and their enormous advertising spend moving online, Facebook’s 150MM mobile users coupled to great demographic data might very well be another huge pot of gold. 

If Facebook can capture even 5-10% of either market, they would be generating between $6-10B annually at a huge CAGR which you could argue the public markets might value at crazy P/E ratios, maybe even the 95+ of the Chinese exchanges, in which case, Facebook’s market cap may approach or pass Google’s.