Google and Facebook Still Reign Over Digital Advertising

30 Jul 2017

It was a very good week for two of the biggest tech companies on Earth.

Facebook announced it made $9.3 billion this quarter, a 45 percent increase compared with last year, while Google’s parent company, Alphabet, posted earnings of $26 billion in the same time period, a 21-percent jump from a year ago. The vast majority of all this revenue came from advertising—87 percent for Google, and a whopping 98 percent for Facebook. Compare that with its struggling social media brethren: Twitter just had one of its worst quarters ever, with zero growth of monthly users on its service, plus a decline of two million in its most prized demographic for advertisers, American users. And Snap, until very recently the buzziest IPO the tech industry had seen in ages, has seen its stock descend in a clear downward slope since going public.

With that, how Facebook and Google talk about and measure advertising matters, not just because it shows where they're prioritizing money to shape the future of their business. It also gives you an insight into what the web you interact with will be soon, as advertising is perhaps the single most formative force online.

What's clear this week is that Facebook and Google will continue to play an outsized role in shaping the online world. Facebook drives revenue at a faster pace than other tech company, and it’s doing that through its ad offerings—even as its rate of growth slows and the platform gets saturated with ads. Meanwhile, for Google, cost-per-click—the amount advertisers pay Google each time someone clicks on one of its ads—saw a bigger decline this quarter than analysts had predicted, because mobile ads cost less and Google’s mobile search traffic is up. But the pair remain the clear duopoly in online advertising, and will be for the foreseeable future. “These are two of the fastest-growing consumer tech companies, despite the fact that they are mature businesses,” says Jan Dawson, a principal analyst at Jackdaw Research. “And they are both almost entirely driven by advertising.”

It’s All About Growth

It's hard to overstate how big an impact advertising has on the tech products and the content you see online. It’s what drove the fake news crisis: automated ad placement on sketchy websites that prized the number of eyeballs on stories above all funded dubiously sourced political news. And those stories often went viral on Facebook news feeds, where ads are placed in between friends’ posts. It’s also at the root of so many publishers currently laying off their staff as they pivot to video: the mobile video ad is the product that has propelled Facebook sales for the past few quarters.

Whenever you search for anything on Google, meanwhile, you’ll likely see an ad come up as the very first search result—that’s the ad Google sells to marketers and advertisers at a premium. It also offers video ads through YouTube—which is still by far the internet’s biggest platform for video, in spite of the recent brand safety crisis it weathered. (YouTube had been inadvertently throwing up ads against hate-related content, causing legacy brands to ditch the platform.)

All of which underscores the value in understanding where Facebook and Google are putting their money. For Facebook, the News Feed and video ads are the primary products—and, the more targeted the ad is to a certain demographic, the more expensive it is. But as Facebook CFO David Wehner has been warning, including in its last earnings call this past week, ad revenue growth is expected to slow down in the second half of 2017, as Facebook runs out of spots to stuff new ads into.

To guard against that, Facebook has been investing in video content (reportedly even funding short-form original series itself), Instagram ads, and slowly flipping the switch to monetize its two messaging apps, which already rank number 1 and 2 in the most popular mobile messaging platforms worldwide. (Facebook Messenger has more than 1.2 billion monthly users, while WhatsApp has more than 1 billion users daily.)

Today, a Facebook ad costs 24 percent more than it did one year ago.

Facebook doesn’t expect these new efforts in advertising to fully offset Facebook’s slowing growth in ad revenue. But one thing is mitigating Facebook’s risks: today, a Facebook ad costs 24 percent more than it did one year ago. “As Facebook’s ad inventory becomes more constrained, the price of ad slots on Facebook is going up,” says Dawson, adding that the prices for different kinds of ads online aren’t set in a vacuum. The reason Facebook can charge this much is because Facebook has convinced marketers their ads actually work. Facebook takes pains to show marketers the “real-world impact of their ads,” says Dawson. “And not just how many people click and see your ads, but how many people bought your ad.”

No Other Choice

Google, meanwhile, derives most of its revenue from search advertising—the placing of ads against a certain term you search for online. It’s a powerful advertising spot, because if you search for “pizza,” you’re likely to be looking to buy a pizza, instead of, just browsing around, like you might do on Facebook or Pinterest. But because so much of online traffic has moved to mobile, where ads are cheaper, Google saw a drop of 23 percent in its “cost-per-click” metric—what advertisers pay Google when someone clicks on their ad.

Not that it affected Google in a big way this quarter. Ad revenue at Google leapt by more than 18 percent to $23 billion in the past three months, and indeed, the biggest blip on Google’s radar this earnings season came in the $2.7 billion fine imposed on the tech giant by the EU’s antitrust regulators. But for now, Google’s position in the advertising world is secure.

In the second quarter, as Tom Denford, chief strategy officer for the marketing consulting firm ID Comms points out, Google also suffered from the negative attention on YouTube. “Some large consumer packaged goods advertisers are still holding off investment on YouTube even now,” he says. But as the news cycle moves on and Google earns back marketers’ trust—slowly—YouTube could once again become a very attractive venue for ads, especially in the age of the mobile video craze.

The bottom line? Wherever Facebook and Google lead, the rest of the digital advertising world will follow. “Facebook and Google are the big platforms,” says Dawson. Meanwhile, platforms like Snapchat and Twitter may have a heavily engaged, but narrow audience, and they’re still struggling to prove their value to marketers, Dawson says. “If you want broad reach, and you want to reach big audiences using sophisticated targeting, you have go to Google and Facebook.” Whatever the snags of their current businesses, the lack of other feasible alternatives for advertising online at scale—at least right now—means that advertisers’ choice has already been made for them.


Source: Dave Alba, Wired