Considering marketing spending beyond the roughly $537B in global measured media, suggests a more than $1.5T market, where digital makes up less than 10%. Given the inherent advantages of digital – targeting, acquiring customers, tracking behavior, facilitating transactions, building loyalty, etc – we believe that spending can maintain a double digit CAGR for years, perhaps even accelerating as TV ad spending recedes. Against this, we believe that the winners will have to combine broad reach, sustainable user engagement, attractive demographics, precise user profiles, effective context, compelling native formats and powerful ad sales/campaign management tools. Against these criteria, GOOG, FB, and TWTR stand out, positioning that is corroborated by dominant market share, and, for FB and TWTR, torrid revenue growth. With our bullish view on future digital ad spending and an expectation that the benefits will be disproportionately concentrated to a few platforms, we see substantial upside for all three. AMZN, LNKD, NFLX, MSFT and AAPL are in the next tier, with clear advantage on some factors but serious weakness on others, requiring strategic change and focused investment to fully address ad opportunities. We are concerned for declining ad franchises – e.g. YHOO, AOL, IACI, etc. – and for subscale recent entrants – e.g. P, YELP, SnapChat, Pinterest, etc. – who could be casualties of the growing market concentration.
Digital ads have years of strong growth ahead. On-line ads have less than 10% of the ~$1.5T global market for advertising, marketing and promotion, addressing far more than the ~$537M in measured media spend often used as a benchmark. With its unique ability to identify likely customers, to deliver sharply targeted messages, to track the behavior of targeted consumers, to facilitate the completion of transactions, and to help to build loyalty, we believe that digital will continue to displace spending on other vehicles, including TV, and will sustain a better than 15% CAGR over the next decade.
Digital ad winners must deliver on 7 key factors. 1) Reach – connecting to very large numbers of users; 2) Engagement – attracting frequent and extensive use; 3) Demographics – penetrating into specific cohorts of attractive consumers; 4) Profiles – collecting detailed, accurate and actionable information on each user; 5) Context – delivering ad messages when consumers are most impressionable; 6) Format – incorporating ads as native content with a rich palette of media; and 7) Tools – offering a powerful and flexible technology platform to target and track customers. The few companies able to combine strength in all 7 factors are consolidating their share – GOOG, FB and TWTR capture 40%+ of all digital ad spending and 75%+ of mobile ad spending.
GOOG is ready to get aggressive. With 1.5B users for Android, 1.2B for search, 1B for YouTube, 800M for Chrome and 400M for Gmail, GOOG’s reach is enormous, with comprehensive demographic penetration. Engagement is also excellent, particularly for YouTube. User profiles offer extraordinary insights, but data is not yet shared across products or the 3rd party network. Context is excellent, hitting users while they search or ahead of viewing video. GOOG ads are native, but it has been conservative in format innovation. Finally, it has excellent analytics and placement tools, but these are not integrated well across products. This excellence built a dominant position, but a relatively passive approach has seen a recent slow leak of share. We expect a substantial new advertising initiative in 2015 will help.
FB is moving fast and taking share. FB’s 1.4B MAUs reflect massive reach, even before considering how many of the 600M WhatsApp and 400M Instagram users are additive to the total, usage is nearly ubiquitous amongst the younger and richer cohorts coveted by advertisers. Engagement leads on all measures – time, visits and traffic. This generates a ton of data, which FB is liberal about exploiting, but the signal-to-noise level for advertising is a bit lower than some rivals. Similarly, FB’s chaotic newsfeed has hurt the context for ads, but the ongoing shift to more purpose-specific apps – e.g. Instagram, Messenger, or an anticipated YouTube-like video sharing service – will improve this. FB has been aggressive with native ad formats, pioneering app install ads and auto-roll video, and has invested heavily in building its sophisticated ad tech platform. FB is the #2 digital ad player, is still growing sales at nearly 50%, and is exceptionally well positioned for the ongoing shift to mobile and video.
TWTR is better than you think. TWTR has but 288M registered users, but may have reach to nearly a billion via unlogged visitors and syndicated content. Demographics and engagement seem good, but the inability to accurately define the unregistered reach devalues much of TWTR’s audience. Still, profiles on the known users offer valuable insights into true interests, and the ads are delivered to a consistent context of discovery and can be coordinated with other media. The native formats are best in class. TWTR is beefing up its platform tools, emulating FB in many respects and extracting additional value from its user data via 3rd party sales. We believe TWTR has established itself as a differentiated and scale player in the digital ad game, success that is apparent in its near 100% sales growth rate.
AMZN, LNKD, NFLX, MSFT and AAPL could contend. These companies have important spikes on dimensions in our framework but also serious deficits. AMZN has good reach and demographics, and has peerless data on user buying habits and intentions, but its context is seriously muddied by conflicts of interest and a lack of experience in serving ads. LNKD has very attractive demographics it its 300M user base, but engagement is modest and the advertising context is weak. NFLX could be a powerhouse based on demographics, engagement, user profiles, context and native formats, but it has chosen not to participate. MSFT has generated traction on the desktop, but has a much weaker position in mobile. AAPL, seemingly a natural based on its closed-garden platform with a large, loyal and demographically attractive base of mobile users, has stumbled repeatedly in building an ad platform.
The old guard is bleeding, the new guard has an uphill battle. Yesterday’s internet leaders, YHOO, AOL, and IACI have been losing share in ad sales for years, with little evidence of strength in enough of the 7 factors to turn it around. Relative newbies, like P, YELP, Pinterest, and Snapchat, are growing, but lack critical mass and are vulnerable to copycat functionality integrated into future apps offered by the platform scale players – e.g. GOOG, FB, TWTR, AMZN, AAPL, etc. Regional players, in idiosyncratic national markets and often, with government protection – e.g. BIDU, BABA, Tencent, etc. – have sustainable advantage along the seven factors within their target geographies but face obstacles in exporting their ad platforms into global markets.
For our full research notes, please visit our published research site.