Facebook's got Google running scared

Why Google is spooked by Facebook and would dearly love to squash it, says Fortune's Josh Quittner.

By Josh Quittner, Fortune

(Fortune Magazine) -- Google is the elephant in nearly every corner of the Internet, from search and advertising to web-based e-mail, online mapping, and home-brewed video. With its share price setting new highs this fall, its market cap ($188 billion) is now large enough to buy the New York Times, the Washington Post, Gannett, and Time Warner - twice. Or Facebook many, many times over.

The problem is, Facebook's not for sale. And that's got Google running scared. It's an open secret in Silicon Valley that the company has been shopping around a nondisclosure agreement outlining its plan to create its own massive social network - and asking anyone with a pulse to sign it.

Google is losing talent to Zuckerberg's Facebook.

Google (Charts, Fortune 500) has to do something fast, because some of its best talent is starting to head for the exits. In July, Gideon Yu, finance chief at Google's YouTube, left for Facebook. Now other Google guys, stuck in the Googleplex and smelling a Facebook IPO that could turn early employees into early retirees, are also jumping ship.

The latest defector: Benjamin Ling, the top engineer at Google Checkout, its online payment service. A Stanford comp-sci Ph.D., Ling will be overseeing Facebook's entire software platform. Losing finance types is one thing. But smart engineers are the lifeblood of a great tech company, and Ling was worth a pint, insiders say.

Facebook's threat to Google, of course, is bigger than a talent war. In fact, the stakes here are about as high as they get in the Internet business. Something is going on that we haven't seen since Microsoft (Charts, Fortune 500) challenged Netscape and helped define the wide-open web.

Now the social networks are trying to do the opposite - to build what I call the Innernet. It's the place you occupy with family and friends and where you exercise almost absolute control, showing the world only as much of your true self as you care to while protecting you and yours from the evil that lurks on the wider web, from spam artists to identity thieves. Whoever builds that walled garden stands to make the next great Internet fortune.

Facebook, until recently little more than a student hangout, is the odds-on favorite to win that race. In March founder Mark Zuckerberg opened the site to independent software developers, inviting them to write Facebook applications and reap a share of whatever revenue they generate.

Because creating Facebook applets was so easy, programmers could throw lots of stuff at the wall and quickly see what stuck. Take, for example, Super Wall, a little app that lets users add text, photos, video, or drawings to one another's Facebook pages. It took a couple of developers part of a June weekend to write. Within three weeks, two million people were using it. Today, more than ten million do.

That's a real economy (or could be, if someone figured out how to make money from it), and it explains why Facebook has suddenly pulled out of the slipstream of MySpace, growing from 20 million active users in April to more than 45 million today.

More cool apps mean more reasons for people to hang out there - and more reasons for developers to launch new apps. Worst of all for Google founders Larry Page and Sergey Brin: They can't participate - for privacy reasons Google's search engine is barred at Facebook's door like an unwanted encyclopedia salesman.

How does Google plan to fight back? It's gearing up to do for the web what Facebook did for its network, starting with its social networking site Orkut (which is big in Brazil) and extending it to Gmail, You Tube, iGoogle, and so on.

Imagine Google as the command center for your entire social life; you could chat and read your e-mail there, give your closest friends access to your calendar, and get minute-by-minute updates on their whereabouts. All the big social networks were invited to join the new coalition - even, presumably, Facebook. (No one from Facebook or Google would comment.)

Will it work? Google's effort, I'm told, is being led by Joe Kraus, the founder of Excite. Though he is as Web 2.0 savvy as they come, I think Google's plan may be too little too late. Everyone these days is opening up his network - even MySpace.

Besides, there's no compelling reason for users to leave Facebook now. The developers will stay as long as they can reach a mass audience there. Google's trying to fix something that isn't broken - just as Microsoft has been doing for years with search and IBM tried to do with operating systems for PCs. Maybe Google should stick to organizing the world's information, and let this little mouse roar.

Additional reporting by Lindsay Blakely  Top of page