Google (NASDAQ:GOOG) has proven how hugely lucrative the search business is. And yes, Facebook (NASDAQ:FB) wants to get in on that action. To this end, yesterday it launched its own offering, called Graph Search.
The technology allows Facebook members to make queries based on places, people, photos and interests. So far, it’s available only in the U.S. and will be rolled out slowly.
Yet the impact could be massive. For example, LinkedIn (NYSE:LNKD) could feel some heat. Let’s face it, the process of recruiting is based on leveraging trusted contacts. Wouldn’t it be great to do a search like: “Who is an iPhone developer based in Austin Texas with a background in mapping?”
However, it will take a while for Facebook to reach that point. Keep in mind that Zuck & Co.’s focus is mainly on consumers, not enterprises.
In light of this, the company that should worry the most is perhaps Yelp (NYSE:YELP). It has amassed a database of 33 million third-party reviews of restaurants and merchants. In the third quarter, Yelp had about 84 million unique visitors, up 37% over the past year. About 25% came from mobile apps.
But on news of Graph Search, the shares of Yelp plunged, going from $21.97 to $19.55.
One big issue is that Yelp can’t challenge Facebook’s scale, which is at over 1 billion users, of which more than 80% is in foreign markets. Yelp, however, it has just started to globalize.
But the biggest problem is that Yelp doesn’t have Facebook’s behavioral data. For example, when using Graph Search, a user could ask: “What is the best Mexican restaurant near me?”
The top search results will be based on those from your friends — not on reviews from strangers. The Graph Search system will process such things as comments, Likes and information from the Nearby feature (this allows users to check-in to places and provide a rating).
It’s true that Graph Search will inevitably run into problems. Hey, just look at what happened when Apple (NASDAQ:AAPL) moved into Google’s mapping franchise.
And it will take a while for Facebook to move into the local market. So, the recent fall in Yelp’s stock could make for a short-term trade, especially when the fear subsides. But over the next couple years, Yelp is likely to come under lots of pressure as Graph Search becomes a viable alternative.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.