U.S. Digital Advertising Landscape And Key Players (Part 2)

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In our previous note, we explored the online advertising industry in the U.S. To summarize, the digital advertising market in the U.S. is forecast to grow at a CAGR of 11.3% during 2015 and 2019 to reach $103.3 billion, according to Forrester Research. [1] Search marketing will continue to account for the highest share in the overall U.S. digital advertising budget. However, the future growth in the digital advertising market will be fueled by mobile ads, as the platform is still highly under-penetrated within brand marketing budgets, as compared to the amount of time spent on mobile devices. In this note, we explore the advertizing industry in detail, and look at the various participants in the industry.

See our complete analysis for Google

See our complete analysis for Facebook

Competitive Landscape In The Digital Advertising industry

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With the heightened Internet penetration in the U.S. and proliferation of content, especially user-generated content, the digital advertising market has taken center-stage in the advertising industry. Furthermore, users frequently consult the Internet before finalizing their purchase. As a result, the competition in the industry has increased tenfold. Companies currently operate a broad spectrum of services ranging from search engine advertising, which includes behemoth Google, to analytics. However, digital ad companies are focusing on grabbing the most eyeballs for their content partners.

However, the online advertising market is concentrated — the 10 leading ad-selling companies comprised 71% of total revenues in Q4 2014. This came in similar to the level seen in Q4 2013. ((IAB internet advertising revenue report, 2014 full year results, Interactive Advertising Bureau (IAB), April 2015)) While, Google, Microsoft (Bing), Yahoo, and AOL are the most dominant players in the search engine verticals, Facebook, Google, Twitter and Yahoo lead the display ads business. Google leads the U.S. search market with 64% share. [2]

Apr-15 Explicit Core Search (%) Explicit Core Search Queries (MM)
Google Sites 64.20% 11783
Microsoft Sites 20.20% 3702
Yahoo Sites 12.70% 2340
Ask network 1.80% 336
AOL 1.10% 192

In display ads, Facebook rules the roost with over 24% share in the U.S. display ads industry in 2014. [3] According to eMarketer, the projected market share for different display ads seller is as follows:

In $ Billion 2013 2014 2015 2016 2017
Facebook 3.28 5.29 6.82 8.5 10.03
% of Total 18.60% 23.80% 25.20% 26.20% 26.90%
Google 2.54 3.05 3.52 3.81 4.13
% of Total 14.40% 13.70% 13% 11.80% 11.10%
Twitter 0.43 0.83 1.34 1.92 2.54
% of Total 2.40% 3.70% 5% 5.90% 6.80%
Yahoo 1.27 1.23 1.24 1.27 1.29
% of Total 7.20% 5.50% 5% 3.90% 3.50%
AOL 0.76 0.83 0.94 1.07 1.19
% of Total 4.30% 3.70% 4% 3.30% 3.20%
Amazon 0.46 0.66 0.82 0.99 1.19
% of Total 2.60% 3.00% 3% 3.10% 3.20%
Microsoft 0.68 0.49 0.46 0.44 0.44
% of Total 3.90% 2.20% 2% 1.40% 1.20%
LinkedIn 0.21 0.27 0.31 0.37 0.43
% of Total 1.20% 1.20% 1% 1.10% 1.10%

The biggest challenge facing most of these companies is transitioning from desktop ads to mobile ads. According to eMarketer, mobile advertising in the U.S. accounted for $19.15 billion in 2014, with mobile display spending accounting for nearly half of that total, or $9.65 billion. While Forester estimates that mobile ad spending could reach $46 billion by 2019, eMarketer estimates mobile search spending will reach $65.87 billion, or 72% of the US digital search advertising market. [4] The different companies with their expected market share in mobile ads in the U.S. are as follows:

Mobile Market share

Clash Of The Giants: Google Vs Facebook

While Google continues to lead the search ads industry in the U.S., Facebook has emerged as the most dominant company in the display ads vertical. However, Google is trying to undercut Facebook’s dominance (especially increasing popularity of videos on Facebook) by increasing the reach of YouTube, which is one of the most dominant online video content providers on the Internet. Google is focusing on channelization of YouTube that will boost the unique user count as viewership for YouTube will rise. The number of unique visitors is vital for Google’s ad revenues as more people visiting the website generally translate into more pages viewed across Google’s websites.

A comparison of the two companies core financial metrics, shows that while Facebook’s EBIT grew 78% in 2014 year over year, that of Google’s rose at 18%. While Google is trying to explore different avenues such as the local ads vertical through Google Glass or increasing Internet reach to untapped regions in the world, Facebook is leveraging its growing popularity by introducing new ad formats such as in-stream ads. Google’s market share in PC and mobile search markets is over 60% and 85% respectively. Google’s strong share in digital advertising, and in particular the mobile search market, bodes well for the company, as this segment is expected to witness high growth. This is expected to translate into high cash flow growth for Google in the future.

With around 210 million monthly active users within the U.S. and Canada, Facebook is positioned as one of the leading companies in the region’s display ad market. The company’s revenues from the U.S. and Canada were seen at over $5 billion over the last year. With the social network currently prioritizing on videos, we expect Facebook’s market position to further improve in the coming years. Video views on FB recently surged to four billion per day as compared to just one billion in September 2014. Hence, we expect Facebook to take some market share away from YouTube as its online video business is fast gaining popularity. Since online video remains a fast growing segment within the overall digital ad market, we expect this to translate into high-revenue growth rate for the company.

Our $87.83 price estimate for FB’s stock and $547 price estimate for Google’s stock, are broadly in line with the current market price.

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  1. Digital to Overtake TV Ad Spending in Two Years, Says Forrester, Advertising Age, November 04, 2014 []
  2. comScore Releases April 2015 U.S. Desktop Search Engine Rankings, May 15 2015, www.comscore.com []
  3. Facebook and Twitter Will Take 33% Share of US Digital Display Market by 2017, March 26 2015, www.emaketer.com []
  4. Mobile Will Account for 72% of US Digital Ad Spend by 2019, March 24 2015, www.emarketer.com []