Facebook and Google don't much acknowledge that they're direct competitors, though there's no question that in many ways they are. Eric Schmidt recently said Bing was it's main competitor, and Mark Zuckerberg said its new messaging system isn't an email killer and that "Gmail is a really good product."
It's true that Bing poses a significant threat to Google's search market share if Microsoft's stars align the right way (Windows Phone is a huge success, people search from within Facebook more, etc.), but it is Facebook that is practically omnipresent throughout the majority of the web. You'd be hard pressed to find many authoritative sites that don't have some kind of Facebook integration, even if it's just "like" buttons. It is all of these many, many integrations together that make Facebook a very dangerous opponent to Google.
More to Google Than Search
First off, it's worth noting that Google has its tentacles planted in many different spaces from search, to business productivity apps, advertising, social media, online video, email, and much more. But Facebook is growing into a monster that could potentially embody many of these same things, and do some of them better. Facebook is not there yet, but it hasn't been around that long yet either, and look how far it's already come.
Out of all of Google's products, it's search and advertising that are the company's real bread and butter. Google has sat safely atop the search market for quite some time now, but the search landscape is shifting, largely in part to social media: people are connecting at levels never before possible, and these personal connections (new and existing) can be one of the most helpful indicators of search relevance - not necessarily for all types of queries, but for many of them.
Facebook as a Search Engine
Facebook, while not generally thought of as a search engine these days (with good reason), has the strongest collection of person-to-person interactions on the entire web. Google covets that, and is still trying to find its strategy to match or better Facebook's. According to Mashable, the "social layer" Google keeps talking about (aka: the "Google Me" initiative) has been pushed back to a possible Spring 2011 launch. On this fast-paced real-time web we have today, that's a long time, though we do see examples of Google tweaking products in this direction on a fairly regular basis already.
Meanwhile, Facebook's head start in building this data with over half a billion people around the globe continues to grow. Ask yourself this: What if Facebook started putting the kind of emphasis on search that Google is currently putting on social? How much easier would it be for Facebook to develop a really useful search engine than it would be for Google to develop a really useful social network?
One key point in the Google vs. Facebook conversation that often goes overlooked is that Facebook recently acquired search company Chai Labs, which was founded by a former Google exec. "Our semantic search platform uses proprietary crawling, artificial intelligence and data mining technologies to analyze and extract insights from millions of real-time data points across the web," the company explains. "Our goal is to give consumers the most comprehensive, unbiased, up-to-date information they need to make informed and confident purchase decisions. We are laser-focused on simplifying complexity due to over abundance of online sources about a specific topic, leading to information overload."
So that's what they're about, and Facebook is ordinarily more focused on talent than products, so it's not out of the realm of possibility that this kind of thing might be integrated into Facebook itself.
So what if Facebook one day decides to make a big search announcement, promote its search feature as a "new and improved" alternative? Remember it still has Bing web results that can fill in the gaps left by its own offerings. Bing and Facebook have already cozied up to each other, and there's no telling just how deep their relationship will get. Bing will no doubt take any shot it can to crack into Google's market share.
Facebook has also been encouraging the addition of different types of information into its network with things like Facebook Questions and Wikipedia-like community pages. Answer site results and Wikipedia entries are incredibly common among the top results for Google queries. With Facebook search, Facebook would likely point you to its similar offerings directly in Facebook.
But would people use Facebook for search? They just might if Facebook promotes it right. They're already trying to get people to set their home pages as Facebook. What if they made the search box a little more prominent? It seems to have worked for Twitter to get people using Twitter search, which has proven to be quite useful for news-related queries.
Former Google AdSense product manager Gokul Rajaram, who Facebook acquired with Chai Labs, is now in charge of the company's ad technology, according to Liz Gannes at All Things Digital. This is very interesting in itself and adds fuel to the fire of speculation that one day Facebook will unleash an AdSense-like network, which could be even more powerful than Google's own in terms of ad relevancy (being how targeting would be based on what users have already told Facebook they like). Facebook has made no indication that it will do this, but it's getting harder and harder to believe that they won't, with so many pieces of such a major puzzle seemingly falling into place, from the acquisition of Rajaram to the saturation of Facebook into the very fabric of the web (Facebook Connect and the Open Graph).
Other Ways Facebook Competes with Google
Right now, Facebook isn't competing much with Google Search or with AdSense. This is all speculative. It's about the potential that is there. Very strong potential.
But there are other ways that Facebook is directly competing with Google already. For one, you have the whole Facebook as a center of communication thing. A couple weeks ago, Facebook announced its new messaging system and email addresses, while Zuckerberg may have downplayed it, this is clearly a competitor to Gmail. Some think Google should be worried about this. Beyond just email, Google has already been trying to transform Gmail into a broader communication center, adding things like chat, voice chat, etc.
Facebook competes with Google's YouTube and Picasa. People can upload videos and photos to Facebook just as easily as they can to YouTube or Picasa, and there's a better chance that their friends will see them if they post to Facebook because they'll go right to their news feeds. Facebook has a long way to go to get to YouTube's status in terms of video, but it's been moving up the charts in this category, and if Facebook were to place the emphasis on search I'm talking about, it could help video views tremendously. YouTube is the 2nd largest search engine.
Google has the browser and the mobile OS. Facebook doesn't need them. Facebook's already everywhere you go when you're using these devices. It's on Android (not to mention every other mobile OS). It's on practically the entire web (as mentioned). Newer browsers that may or may not catch on in the future are even heavily integrating Facebook into their functionality, and on the others, users can opt to do so themselves via add-ons.
Then you have Facebook's Notes to Googles' Blogger. Facebook's Payments to Google's Checkout. Facebook's Applications to Google's Chrome Web Apps. Facebook's Pages and Lists (and news feed) to Google's News. Facebook's News Feed to Google's Reader and Buzz. The list goes on.
Update: Liz Gannes reports that Facebook Engineering Director Aditya Agarwal, whose projects included Facebook's newsfeed, search, and ads, is leaving the company. This could be significant in the company's approach to search and advertising.