Facebook vs Google vs Amazon: where next for online advertising?
Facebook’s competition with rivals like Amazon, Apple and Google will intensify as the social media giant moves into new markets. But does it have what it takes to succeed?
Facebook has grown into one of the world’s most valuable publicly-listed businesses by providing its social media platform to billions of people around the world for free, leveraging user’s data and time to attract marketing dollars from businesses seeking an audience.
But the company has past peak penetration in most markets and growth in user numbers and engagement has slowed dramatically over recent years. Plus, Facebook’s role in society is being questioned more than ever as it struggles to get a grip on issues such as the distribution of fake news or protecting our data. The Cambridge Analytica scandal and the use of Facebook for foreign interference in elections has dented Facebook’s armour, exposing its reliance on advertising and a vulnerability from its inability to control the staggering amount of content uploaded to its site every minute.
This has prompted the social media kingpin to stretch its legs and diversify from its dependence on advertising income by monetising other arms of the business such as video and its messaging services on Instagram, WhatsApp and Messenger. Although advertising will remain the backbone of Facebook’s financials, the decision to move into new arenas brings new foes – some it has more experience battling than others.
Facebook finds new foes: Amazon, Apple and Tencent
Facebook outlined several new competitors for the first time in its latest annual filing with the Securities & Exchange Commission, stating it competes with Apple in messaging, Amazon in advertising, Google and Youtube (both part of Alphabet) in advertising and video, and Tencent in social media and messaging. Google, its main competitor for digital ad spending, has been cited as an example for years but the others are new threats that Facebook has openly identified. The list is far from surprising, but it shows Facebook is serious about its attempts to monetise new areas of business and the formidable opposition it will have to take on in order to succeed.
Facebook has said its plans to break into messaging and video 'may not have clear paths to monetization' and, amid slower growth and fierce competition, investors are becoming wary over the future of the business once the social media platform pasts its peak.
Facebook is not the only Big Tech firm looking to transform itself to address a slowdown in its core business and diversify revenue streams. For example, Apple is searching for its future beyond hardware as iPhone sales slow and Amazon continues to leap into any new markets it fancies. While Big Tech has largely managed to carve out their own niches, the race to break into new markets is causing these titans of industry to clash more often and compete on new frontiers.
Online advertising market: how much are digital ads worth?
Companies are still spending the majority of their budgets on advertising through traditional means like broadcast television, radio and billboards, but this is gradually being trimmed as they divert more funds to digital ad campaigns to capitalise on the increasing amount of time we spend browsing, shopping and being entertained online. Advertisers from around the world spent around 40.2% of their budgets on online advertising last year compared to 37.6% in 2017, according to Zenith Media. That is expected to jump to 44.6% of global ad spend by 2020, demonstrating that this irreversible trend will see online advertising become the main channel for advertisers within a few years.
Advertisers are primarily funnelling their online marketing dollars into two areas. The most popular is search advertising, which is forecast by Statista to be worth $104 billion in 2019. Alphabet, which earns over 80% of its revenue from advertising (with the balance made up of things like its App Store and hardware sales), is the dominate force through Google.com and the Google Search app. Alphabet’s latest results showed advertising revenue rose 22% in 2018.
The second most popular destination for online marketing dollars is on social media, with Facebook by far the top destination. Facebook generates all its revenue and earnings, virtually, from selling online advertising that can target users on its core platform and Instagram. This model ultimately relies on the amount of time users spend on its platform and their level of engagement, which dictates how attractive the business is to advertisers.
Facebook is still managing to grow its overall user base and engage its audiences for longer periods of time but the rates of growth have been in firm decline for several years. The total number of people using Facebook was growing at a quarterly rate of 4% at the start of 2016 but that slowed significantly to just 2.2% in the final three months of 2018, while growth in engagement [measured by Daily Active Users (DAU)] has slowed from 5% to 1.9% over the same period:
Facebook growth has slowed over the last three years
Daily Active Users (DAU)
Monthly Active Users (MAU)
Although 2018 was a tough year for Facebook’s public relations department, and some big-name clients, such as Unilever, did follow through with threats to boycott the platform for placing ads for its goods next to inappropriate content, the problems that began to mount last year has not sparked a mass exodus of advertisers as predicted by some. Facebook’s annual revenue in 2018 rose to $55.8 billion from $40.65 billion, up 37% year-on-year (YoY), thanks to higher prices and volumes. However, revenue growth has still slowed from 47% over 2016-2017.
Digital duopoly: Facebook vs Google
The supremacy of Facebook and Google in their respective fields has created a digital duopoly within the online advertising market, raking-in nearly two-thirds of online marketing dollars invested around the world. According to eMarketer, Facebook and Google have seen their combined share of the market rise from 54.7% in 2015 to 65.8% in 2018, with expectations for the pair to cement their dominance further to 67.6% this year.
Online ad spending: social media to overtake search
Google is the bigger element of the digital duopoly because marketers currently plough more sums into search advertising than they do on social media. Plus, Google holds greater control over its market than Facebook, which has more prominent rivals like Microsoft’s LinkedIn, Twitter and SNAP to compete with.
However, this too is gradually changing as the amount being channeled into social media campaigns is growing considerably faster than search. Figures from Statista show just over 25% of online ad spend was on social media campaigns in 2018, far behind the 36% taken by search, but estimates suggest social media will become the primary destination for online ads by 2020 when it will hold 34% of global ad spend compared to 31% spent on search. By 2023, over 42% of digital ad budgets will be spent on social media with only 26% earmarked for search ads:
Share of global online ad spend
|Social media advertising||21%||25.5%||29.8%||33.7%||37%||39.8%||42.1%|
Will Amazon break-up the digital duopoly of Facebook and Google?
It has long been known that its huge customer base and unique insight into our purchasing habits makes Amazon a sleeping giant when it comes to online advertising and it appears 2018 was the year it started to stir. Although Amazon is an obvious destination for advertisers looking to promote their products or push their offers to the top of the table the company has only just started to monetise these parts of the business.
Just as Google and Facebook have carved out their own segments of the online ad market by offering distinctively different destinations, Amazon’s strength in e-commerce gives the company its own unique edge. This has already proven detrimental to Google, which has historically been the destination of choice for anyone looking to purchase something online or pose a general enquiry for the Internet to solve. More than half of all online product searches now start on Amazon rather than Google. Ultimately, Amazon is closer to customers when they are purchasing goods and the fact over half of all goods sold through the site comes from third-party sellers means it has a large community eager to compete to get their goods to the top of Amazon’s search results.
Amazon finally started to wield its potential in advertising last year, generating over $10 billion of revenue compared to just $3 billion in 2016. That may only represent a fraction of what Google and Facebook earn from online ads each year (it matches the amount Google raised revenue last year) It is a significant jump that should be taken as a sign of things to come.
Read about how Amazon Q4 results beat revenue and earnings estimates
There is another reason why the entry of Amazon has got the current incumbents worried. While Facebook and Google both rely on advertising for virtually all of their income, it represents only one of Amazon’s many tentacles: online advertising accounted for less than 5% of sales in 2018, with the vast majority of income still coming from e-commerce and cloud computing. This means Amazon has the most to gain and the least to lose as it looks to unseat Facebook and Google from their thrones.
Facebook and Google locked-out of opportunities in China
Another problem for most of the US tech firms is their lack of access to the fastest-growing markets, with both Facebook and Google banned in China - the second largest and fastest growing market for digital ad spending. While North America is the biggest digital ad market at present figures suggest Asia Pacific will overtake as the biggest destination for marketing dollars in 2018 after online ad spending broke past the $100 billion mark, driven predominantly by the China.
In their absence, players such as Tencent and Alibaba have been able to thrive in the knowledge they only have to compete with domestic rivals. The size and scale of both means they are able to collect an array of data that advertisers can leverage to target their audiences, although they have been less aggressive than their western counterparts so far.
For example, Tencent has not pursued online ads in the way Facebook and Google have but it has demonstrated its ability to tap-into the 1 billion people who use its social media and messaging apps like WeChat and QQ. A temporary ban on licensing new games has severely hit its main source of revenue (accounting for up to 40%) and forced it to look for new income streams to offset the decline, including its online ad capabilities. Tencent’s advertising revenue in the third quarter of 2018 jumped 47% YoY and 15% quarter-on-quarter (QoQ), taking its share of the firm’s overall revenue up to 20% from 17% the year before.
Facebook tries to monetise messaging
Having built Facebook Messenger and acquired Instagram and WhatsApp in 2012 and 2014, respectively, the company has three of the most popular messaging services under its belt and is keen to see a return on its investment. Messaging is the 'fastest growing area' of the business, according to chief executive Mark Zuckerberg.
All three services currently operate independently of one another and attract different customers: Instagram is all about sharing photos and ideas, Messenger is an extension to its core platform that allows family and friends to communicate, and WhatsApp is built on encryption to appeal to those with privacy concerns and become known for its group chat function.
Facebook is now, however, bringing the three services closer together in its first radical move toward monetisation after announcing plans to bring the behind-the-scenes functions of all three under one encrypted system by 2020, while keeping the apps as separate products. This has raised eyebrows and posed further questions about the independence of each service and how Facebook plans to use and transfer our private data, but it is a natural if not inevitable move from a business perspective: it will bring the costs down of running three separate services and improve its data offering to advertisers by gathering the information collected by each one and bundling it into a package. It will also make it easier for advertisers to get their message out across multiple platforms.
Not many have successfully monetised messaging services yet and Facebook has conceded that it has 'historically monetized messaging in only a very limited fashion' and warned it 'may not be successful in our efforts to generate meaningful revenue from messaging over the long term'. One example of success has been Tencent, which has over 1 billion people signed up to its WeChat messaging service. However, the rewards are being found in enterprise as the platform is fast-becoming a key communication tool for businesses, something that western rivals have struggled to do so far. Burberry, as one example, adopted WeChat after it found its Chinese employees were communicating with customers using their personal accounts and taking valuable customers with them when they left. Tencent has previously claimed four out of five of China’s top 500 businesses use WeChat to communicate internally and with customers, as well as to analyse data.
Tencent’s enterprise offering is bolstered by its cloud computing business which, amid the limitations imposed on its gaming arm, is playing a bigger role within the business. But, unlike most of its other services, Tencent has to compete with foreign rivals like Amazon Web Services, which has two cloud computing centres in the Beijing and Ningxia regions.
Facebook to add payments system to WhatsApp
One way Facebook is looking to monetise its messaging services is by adding capabilities that would allow people to make payments through its apps, with Zuckerberg confirming that adding payments to WhatsApp is under consideration. WhatsApp is the obvious choice for such a service as it is the only one with the end-to-end encryption needed to facilitate transactions and the transfer of sensitive data.
This is another area where Tencent has made ground. The firm said the 10.5% YoY lift in WeChat MAUs last year was partly down to increased uptake of the apps built-in payment service WeChat Pay. Payments is big business for Tencent and growing, accounting for 25% of total revenue compared to just 18% a year ago.
Closer to home, any push into payments would put Facebook on a collision course with the likes of Microsoft, Google, Samsung and Apple – all of which offer mobile payments and middleman services competing for a slice of people’s transactions.
Facebook vs Apple: a new rivalry
Mobile is key for the digital duopoly of Facebook and Google and the key device targeted by online advertisers. Facebook said the 'most important factor driving advertising revenue growth was an increase in revenue from ads on mobile devices' in 2018, which is unsurprising considering mobile ads accounted for a staggering 92% of Facebook’s revenue last year, up from 88% in 2017 and 83% in 2016. Similarly, Google said the jump in revenue last year was primarily driven by increases in mobile search.
With this in mind, a rather astonishing spat with Apple has exposed what could be argued is Facebook’s biggest weakness. The social media platform has historically formed a core part of the apps that Apple made available on its iPhones and Facebook was even integrated into its models in 2012, but the two are now butting heads over privacy issues. Having discovered Facebook had paid some people to track what they did through an app on their iPhones, Apple said Facebook had broken its rules and took drastic action that demonstrated who holds the upper hand between the two. Apple cut-off all of Facebook’s apps that were built into its iOS operating system for over 24 hours, disrupting the social media giant’s workforce. Apple’s chief executive Tim Cook has been prioritising privacy and security and openly criticised Facebook’s handling of the fallout from the Cambridge Analytica scandal that erupted last year.
Facebook’s success has been built on ensuring it can operate with every device and service but the dispute suggests Apple’s decision to shut-out any service that isn’t benefiting the business is a far stronger strategy. Facebook has admitted competitors have the ability to cause severe disruption for the business by 'making access to our products more difficult or impossible' and warned both Google and Apple have introduced competing products on their Android and iOS operating systems.
Apple and Facebook have largely kept out of each other’s way and complimented one another but the fierce rivalry between the two will only intensify going forward. Like Facebook, Apple is looking for the next era of growth as sales of iPhones and hardware begins to slow. And, like Facebook, Apple sees immediate opportunity in messaging.
Apple’s iMessage system forms a key component of an iPhone’s functionality but the firm is having to increasingly compete with the likes of WhatsApp. The action taken against Facebook suggests Apple, with 1.4 billion devices in use around the world, has ammunition to use if it needs to give its messaging system an advantage.
The iPhone maker is pinning its hopes on digital services going forward and believes loyal owners of its hardware will become the foundation of a new business built around providing services like Apple Music, Apple Pay, iMessage and a new video-streaming service that is expected to be launched in the coming years. It already has 360 million subscriptions worldwide, including external subscriptions to services like LinkedIn or dating service Tinder that users pay for through the App Store’s payment system. Notably, some firms, including Netflix and Spotify, have stopped customers from paying through Apple and giving it a slice of the action. Apple is certainly making headway in this area, adding 120 million new subscriptions last year with ambitions to hit 500 million this year, but its overall customer base is still smaller than the 2 billion people that use at least one of Facebook’s services.
Facebook faces fierce competition in online video ads
Another key area for Facebook’s advertising business is video. The digital duopoly in online advertising is also true for video with the pair accounting for 66% of global video ad revenue, according to eMarketer. Facebook is estimated to hold 39% market share while YouTube – Google’s primary video arm – holds just shy of 25%.
Google said the increase in the volume of paid clicks seen last year was primarily down to more YouTube ads, which it admits offers a cheaper cost-per-click to advertisers than other platforms. Tencent also attributed user growth on QQ to 'enriched video content' and higher levels of engagement with videos by users under the age of 21, and said people spent more time on WeChat to watch uploaded content. The Chinese firm said over 7 billion short and mini content videos were being viewed across its platforms daily in 2018.
Facebook’s competitors do have the advantage once again because of their involvement in hardware that gives them greater control over video content, such as the Amazon Fire TV stick, Google Chromecast or Apple TV.
It is also worth mentioning the advertising potential of audio services. A total of $1.6 billion was spent advertising on audio services last year, up 29%, but this still only represents a meagre 2% of the entire market. Companies like Amazon and Apple have the edge in this field through services such as Audible and Apple Music.
A bet on Facebook is a bet against everyone else
Facebook is right to explore new avenues for growth, but each one seems to have either already been shut off by the competition or quickly filling with new rivals. Moving into messaging will put it up against the likes of Apple, monetising Instagram will put it head-to-head for commerce marketing dollars with Amazon and its longer-term ambitions in areas like Virtual Reality will heighten its rivalry with its Big Tech peers in the years to come.
The likes of Facebook, Apple, Amazon and Google have all managed to carve-out their own slice of the pie as they stood at the forefront of the digital revolution but they are now simply too big to avoid one another. Clashes between these titans will become more common as they race to dominate new markets, but it is unclear who will be the champions and who will be the causalities.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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