An Intense Digital War Is Being Fought, Will Facebook or Google Win?
Welcome to the second in a series of AtlasTrend articles where two listed companies will compete head to head to determine which company’s shares offer a better risk adjusted investment.
As you may recall, the rules are simple. Five rounds, with a winner for each round and then an overall winner. In this head to head contest – who will win the digital advertising war?
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Our two competitors
Our two competitors do not really need an introduction given their pervasiveness in our everyday lives and the fact that they have both grown to become two of the largest companies in the world.
First, we have Facebook. Famously founded in 2004 during the founders’ time at Harvard University, Facebook has grown into a social media giant with its 1.79 billion monthly active users and a market value of US$349 billion. Along the way, it has created or acquired other social media platforms such as Facebook. Messenger (over 1 billion users), WhatsApp (over 1 billion users) and Instagram (over 500 million users). It continues to be led by its enigmatic founder, Mark Zuckerberg who is investing heavily in new areas of growth such as virtual and augmented reality.
In the other corner is Google (owned by listed parent company, Alphabet). Founded in 1998 and named after the number googol (10 to the power of 100), Google has become the world’s dominant search engine and has a market value of US$537 billion. Although Google’s ubiquity has even created new verbs (such as to “google” or “googling”) in our vocabulary, it is perhaps its other assets that drive its growth and future value. Assets such as Chrome (its web browser), Google Maps, Gmail, Android (its mobile device operating system) and YouTube with its 1 billion viewers. Like Facebook, Alphabet is also developing a range of new technologies such as artificial intelligence and driverless cars.
Perhaps, we can also spend a short moment here to mention who are NOT the winners in this growing digital war. There are many casualties all bound by a common thread - traditional advertising. In the last 5 to 10 years, digital advertising has drastically taken away advertising revenue across all forms of traditional media – firstly, print and now radio, TV and cable.
Digital advertising revenues are expected to be more than TV advertising revenues for the first time ever in 2017 according to Publicis Group (digital advertising will have a 38% market share of the US$603 billion global advertising market, compared to TV’s 34% market share) and by 2020, digital advertising market share in the U.S. will reach almost 50% according to eMarketer. This has also clearly impacted the role of traditional advertising agencies, who have seen their roles diminished in the advertising food chain.
Why are we putting Facebook and Google in a head to head contest?
Whilst both companies use different strategies to generate advertising revenue, Google via its search engine and Facebook via its social network, it is becoming more and more apparent that these two companies are starting to dominate not only the digital advertising market but also the advertising market overall. The Interactive Advertising Bureau believes that both companies had a combined 64% market share of the US$59 billion U.S. digital advertising industry in 2015 while U.S. venture fund, Kleiner Perkins Caufield & Byers believes the market share is closer to 75%.
Therefore, the question is which is the ideal channel (Google’s search engine or Facebook’s social network) that will allow one of these internet titans to win the digital advertising war?
Round 1: Who is the current leader in digital advertising?
If we look at the most recent quarterly results for 2016, Google generated over US$22.3 billion in advertising revenue across its various businesses, with a growth rate of 20% over the same quarter in 2015. Facebook generated about US$6.8 billion of advertising revenue in the same quarter but its growth rate was 59%.
The reality is that both approaches to generating advertising revenue work for different reasons. Google is ideal for consumers who have more than likely made a purchase decision and are researching for the best price, brand or convenience. In contrast, Facebook’s social network is ideal for making purchase recommendations based on consumers’ interests and previous purchase habits.
Google recognised the power of a large social network and launched Google+ as a rival network to Facebook in 2011 but it has failed to usurp Facebook’s dominance. Google does not disclose the number of monthly active users for Google+ but some estimations put the number at about 300 million, well short of Facebook’s 1.79 billion.
Winner: Tie. Both approaches to digital advertising dominate how consumers are marketed to online. With Google’s larger size versus Facebook’s faster growth rates, it is too close to call a winner in this round.
Round 2: Who is winning in mobile and video?
Digital advertising has changed dramatically over the last few years with a move away from mere text and images to video as well as from desktop to mobile. Once again, both companies have been ahead of the game.
Where Google has largely failed with Google+, it has more than made up for with its acquisition of YouTube. Purchased in 2006 for US$1.65 billion, which was considered an expensive price at the time. Today, YouTube has half of the world’s internet users regularly watch its videos, and generates multiple times the viewing hours of Facebook’s video offering. Analyst estimates suggest that YouTube contributes just under 15% of Google’s advertising revenue but is growing at a 21% annual rate meaning it could generate over US$27 billion in revenue by 2020. YouTube already generates the same amount of revenue as Netflix, Spotify and Pandora combined.
YouTube’s pervasiveness has not only adversely impacted traditional TV and cable companies but it is also moving in on rivals with newer technologies. Its music video offering is a threat to music streaming companies such as Apple Music, Spotify and Pandora and its YouTube Red offering is presenting a new alternative to now established video streaming services of Netflix and Amazon Prime.
Facebook is significantly behind Google in video but has successfully pivoted to ensure it has stayed relevant as consumers embraced their smartphone as their primary internet device. Today, almost all of Facebook’s 1.79 billion users access the social network via their mobile with mobile generating 85% of Facebook’s revenue compared to about 50% for Google. Facebook’s acquisitions of Instagram and WhatsApp have been in part to ensure its users stay on their smartphone and Facebook’s apps for longer each day. What is amazing still is that Facebook has yet to attempt to generate advertising revenue from WhatsApp in a meaningful way.
Winner: Google. But only by an inch. We believe what gives them the edge is the massive potential for YouTube as not only a medium to generate advertising revenue but also create other media businesses. It is conceivable that YouTube will create and own some of the world’s most popular television stations broadcasting music concerts, movies, TV series, news and sports in our near future. And whilst it lags Facebook in mobile advertising revenue (as an overall proportion of total revenue), we believe consumers will progressively boost mobile revenue for Google as more and more search is conducted on smartphones.
To find out the winners for the remaining 3 rounds (who has the greater financial firepower, who has the better valued shares, who has the edge in their “other bets”) and the overall winner sign up for free here. You’ll gain access to the full report plus a curated library of investing ideas for where the world is heading.
Two of AtlasTrend’s managed funds own Facebook shares and Alphabet shares (Google’s parent company).
Kent Kwan is a co-founder of AtlasTrend, a global equities fund manager that makes it easy for anyone to invest in the world's most thriving trends.
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