Four Days That Shoook the Digital Ad World

Google and Facebook delivered results that established - as if any further notice were needed - that their dominance of 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.