Google and Facebook delivered results that established - as if any further notice were needed - that their dominanceof digital advertising is duopolistic.
Admittedly, Amazon and Apple have yet to focus on this market and time will tell if Microsoft or IBM might yet re-emerge. But as the following article explains, Verizon believes that with its acquisition of AOL and Yahoo, it may be the only credible third competitor in the near term. JL
Richard Waters reports in the Financial Times:
Digital
advertising is expected to top the $200bn global TV advertising market
within the next two years. 72 per cent of the world’s online advertising
already passes through Facebook and Google. Verizon’s acquisition of Yahoo following last year’s purchase of AOL, represents an attempt
to build a third force with the scale to stand up to the dominance of
Google and Facebook. The seismic upheavals that transform entire industries usually take many years to play out. But sometimes, their effects burst through in a single, earth-shaking week.
That was the case in the span of four days this week, when a tremor passed through the digital advertising industry. Beginning with the sale of former internet darling Yahoo to Verizon, then shaking Twitter into yet another setback and ending with surprisingly powerful earnings from Facebook and Google, it highlighted the massive shift in power under way in the advertising world.
And it will continue to reverberate more widely in the traditional media business. Digital advertising is expected to top the $200bn global TV advertising market within the next two years, ensuring the digital media industry’s new duopoly will wield even greater power.
Leaving aside China, where they don’t operate, 72 per cent of the world’s online advertising already passes through the online platforms of Facebook and Google, according to Brian Wieser, an analyst at Pivotal Research. As the digital pie grows, the two are set to take an even bigger slice, rising to 87 per cent by the end of the decade, he predicts.
This will strike fear into browbeaten rivals in the rest of the media world, but advertisers are unlikely to object, says Youssef Squali, an internet and media analyst at Cantor Fitzgerald. Even though advertisers resent Google’s dominance, the sheer effectiveness of the platform has led to a re-acceleration of the company’s search business this quarter, he says.
And as their existing advertising platforms swallow more of the spending by the world's biggest brands, he predicts that “whole layers” of costs will be taken out for marketers through levels of automation that will decimate parts of the traditional advertising world. Verizon’s $4.8bn acquisition of Yahoo on Monday, following last year’s purchase of AOL, represents an attempt to build a third force with the scale to stand up to the dominance of Google and Facebook. Armed with AOL’s advertising technology, Yahoo’s online brand and audience — as well as the data that it owns about its mobile customers — Verizon hopes to build an advertising network that can compete with the efficiency and size of its bigger rivals.
But it is racing against the clock. After staying more or less stable for several years, Yahoo’s net advertising revenues plunged nearly 20 per cent in the first six months of this year as users flocked to mobile devices.The Yahoo sale has served to highlight the importance of Twitter as a clear number four in digital advertising, says Mr Wieser. But a day after the deal, Twitter warned that it was expecting a sharp slowdown in its own advertising business, raising fresh doubts about its ability to survive as an independent platform.Membership of delivery service grew 51 per cent last year. As if on cue, Facebook and Google followed through with quarterly earnings that again demonstrated their dominance of online advertising. Facebook’s 63 per cent growth was three times that of Google — though, with its massive scale, Google still added $3.8bn of extra revenue in the quarter, 50 per cent more than Facebook.Both companies also kept their eyes firmly on a more distant horizon even as rivals strive to catch up. Sundar Pichai, Google’s chief executive, said the search company was on the brink of a transformation that would shape its progress for the next decade, using a form of artificial intelligence known as machine learning that makes almost all its services more effective. And Mark Zuckerberg, Facebook chief, highlighted a pipeline of future advertising platforms, from mobile messaging to virtual reality, that will feed its growth for years to come.Even without such ambitious technology, a boom in mobile advertising in the short term is likely to underwrite their growth even if some limits may be coming into sight. Both companies have been packing more adverts into their core mobile services over the past year, increasing the “ad load” on users — the total number of ads the companies can show on their search or social media pages.
Facebook said this week that it expects to reach the limit by this
time next year, and that its growth would start to slow as a result.
But
Google’s experience suggests that, even without increasing the number
of mobile adverts, there could still be many ways to improve their
effectiveness — and in turn their profitability.
Mr Pichai said
that Google was managing to layer new forms of advertising into its
different mobile services, such as local adverts placed on its maps,
without hitting its internal measures of “user happiness”.
Alongside
the rise of mobile, both companies are also moving fast to position
themselves for an expected wave of digital video ads.
At about
$10bn-$15bn, online video advertising still barely registers compared
with TV, says Mr Squali. But Mr Zuckerberg said this week that Facebook
was remaking all of its apps and services with video in mind, and
suggested that in about five years video may be the main way in users
want to communicate, socialise and be entertained.
“TV is still a
very healthy business — but [the TV industry] should at least be a
little bit worried now,” says Debra Aho Williamson, an analyst at
eMarketer. “The more the Facebook and Google platforms get them into
video, the more options ad buyers will have.”Underpinning many of the new advertising formats, meanwhile, has been
the development of so-called “programmatic” technology that automates
the real-time aggregation and auction of advertising space.
With
better data about their users, along with massive volumes of inventory
that provide liquidity for their markets, both Google and Facebook have
been able to improve the pricing and efficiency of placing digital ads —
though in Facebook’s case, the technology has been limited mainly to
selling its booming internal advertising inventory.
These
programmatic tools could give them an increasing edge as they bite off
new forms of advertising. This week, for instance, Mr Zuckerberg hinted
that Facebook was close to unveiling an advertising service to support
Instant Articles, its mobile partnership with news publishers.
Facebook
has not said how such a service would work or what cut it would keep of
any advertising it places in Instant Articles. But some analysts argue
that the social network’s superior data about its users will make it
more profitable for publishers to take Facebook’s advertising alongside
their articles than sell their own, even after Facebook takes its cut.
If
that is right, one more corner of the traditional media world will have
been sucked into Silicon Valley’s automated online platforms — and
another group of former advertising salesmen will be looking for jobs.
As a Partner and Co-Founder of Predictiv and PredictivAsia, Jon specializes in management performance and organizational effectiveness for both domestic and international clients. He is an editor and author whose works include Invisible Advantage: How Intangilbles are Driving Business Performance. Learn more...
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