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First Take: Facebook sets sights on Google's franchise

John Shinal
Special for USA TODAY
A logo of social networking Facebook is displayed on a laptop screen inside a restaurant in Manila.

SAN FRANCISCO — The biggest threat to market-leading tech giants is a rapid change in the technology underlying their most important markets.

Companies like Dell and Hewlett-Packard saw most of their growth dry up once laptops, smartphones and tablets began to replace PCs. That same shift in demand among consumers and businesses also hurt Intel and Microsoft while boosting the fortunes of Apple and a group of Asian electronics makers.

Another big transition is now taking place in the market for digital advertising, where mobile ads are replacing desktop ones and video is rapidly gobbling up more dollars. And that transition has helped spawn the most serious challenge yet to Google's leadership in the business of selling digital ads.

That's because Facebook is snaring an increasing share of what have been Google's fastest-growing markets. The social network co-founded by CEO Mark Zuckerberg has figured out how to place branded video ads into its mobile newsfeeds without turning off users, as some Facebook stock bears once predicted.

The Menlo Park, Calif.-based company reported late Wednesday that its number of monthly mobile users surged 26%, to 1.2 billion, in the fourth quarter. Mobile ads now comprise 69% of the company's advertising revenue.

Facebook's latest quarterly results, meanwhile, topped Wall Street expectations for both profit and revenue. For the full year, Facebook's operating cash flow rose almost 30%, to $5.5 billion. For 2015, Wall Street expects the company's sales to grow 37% to $17 billion.

Google, which reports results late Thursday afternoon, is expected to grow at roughly half that rate, or 18%, to $62 billion in 2015. Part of the reason is Google's larger size, to be sure. And the company has also benefited from the transition to mobile devices, thanks to its Android operating system. For the first nine months of 2014, Google's operating cash surged 19% to a whopping $16 billion.

But Facebook's latest results and Wall Street's latest estimates suggest the smaller company is capturing more than its share of Google's core market. Just as important, the average price of Facebook ads has been rising, while Google's ad prices have been falling steadily for more than two years.

Google is still the larger incumbent. It can use its superior cash flow to beat back Facebook's challenge via growth-boosting investments and acquisitions.

Right now, though, Facebook looks to have the stronger momentum.

John Shinal has covered tech and financial markets for more than 15 years at Bloomberg, BusinessWeek,The San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others. Follow him on Twitter: @johnshinal.

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