Yahoo Is Afraid of Facebook — And It Should Be

Since they are both giant web companies with a search engine at their core, the assumption is usually that Yahoo (s yhoo) competes primarily with Google (s goog). But the real truth is that Yahoo has more to fear from Facebook — and Yahoo’s straight-talking CEO Carol Bartz admitted as much at an event in New York on Tuesday. Bartz said that the company’s “greatest competitor probably is Facebook, more so than Google,” although she added gamely that “there’s room for more than one of anything” and said Yahoo is trying to add more social elements.

Bartz noted that Yahoo tried to acquire Facebook at one point for $1 billion, but was rebuffed. The social network is now valued at more than $40 billion — based on private trading of the company’s stock through secondary markets and financing that it has raised from backers such as Russia’s holding company (formerly known as DST) — while Yahoo’s market value has fallen by more than 50 percent in the past two years and is now around half of Facebook’s theoretical market value. Bartz, however, said that she was optimistic revenues at Yahoo would start “really taking off” in 2012.

Although no one from Google has been as blunt as Bartz is about the competitive threat from Facebook and other social networks such as Twitter, the reality is that Google has just as much to lose as Yahoo — although it is coming from a stronger position to begin with, thanks to the vast river of cash flow that search-related advertising provides. But just like Yahoo, the search giant is having to compete with Facebook not just for eyeballs and attention, but for the future of socially-based advertising and marketing.

As we’ve pointed out before a number of times — including a GigaOM Pro report that Om wrote (subscription required) — more and more users are finding content via their friends and connections through social networks like Facebook, and that means advertisers are increasingly looking to social connections as a way of reaching those consumers. Google may be trying to add a social “layer” to its services, including what appears to be a sharing toolbar, but it is going to take more than a toolbar to compete with Facebook’s growing army of socially connected users and its growing relationships with advertisers.

Yahoo is even further behind. It has outsourced virtually every part of its business to others — including search, which is now being done by Microsoft — and has been trying to add more social elements to its remaining content businesses, but it simply doesn’t have the momentum or the relationships with users that allow it to capitalize on those attempts. Bartz said that she believes Yahoo will be able to remain relevant by curating content for users, and she is right — but increasingly, users are getting that curation from their friends through social networks, not through non-social portals like Yahoo.

Related GigaOM Pro content (sub req’d):