Why Facebook might drop $1B on a map service

Acquiring Waze would give the social network added ammunition for advertisers on at least 2 fronts.

By Jonathan Berr May 10, 2013 2:47PM
Facebook logo (© Daniel Acker/Bloomberg via Getty Images)Facebook (FB) is said to be in talks to buy mobile mapping service Waze for about $1 billion. That would make it the largest acquisition since the 2012 purchase of photo-sharing site Instagram. Mapping may seem a stretch for a social media company, but the reason Facebook wants the business is simple: advertising dollars.

Acquiring Waze, which is based in Israel, may help keep users on Facebook site for longer periods -- a key selling point for advertisers -- instead of them going to rivals such as Google (GOOG) and Apple (AAPL), which have both invested heavily in their mapping apps. This also underscores CEO Mark Zuckerberg's philosophy of sacrificing short-term profitability to strengthen the Palo Alto, Calif., company for the long run.

Waze differentiates itself from its rivals with a robust user base that offers real-time reports of traffic jams along with other useful information, such as where to find the cheapest gas. At the end of last year, Waze claimed a community of 36 million drivers.

It has plenty of fans in Silicon Valley. According to The New York Times, Apple and Google "may be interested in a potential acquisition of the startup to improve their own mobile mapping services."

The idea behind an acquisition by Facebook is twofold. First, getting users to remain connected to the site for longer periods would increase the odds that they'd notice ads. This is particularly important in the fast-growing mobile area, which Wall Street is keenly interested in. Facebook's new interface for Android users, dubbed Facebook Home, is designed for this purpose as well.

Facebook could also use Waze to deliver targeted local advertising. People who want directions to a city such as Philadelphia would be served ads for restaurants, motels and attractions they'd encounter along the way. This is a huge market. Researcher Borrell Associates expects businesses to spend $24.4 billion on local advertising this year, versus $18.7 billion last year.

The question for investors isn't whether Zuckerberg will write another huge check to buy a promising startup but when.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.

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