Facebook Is the Biggest Threat to Google's Ad Revenue Throne

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After Google’s founding in 1998, it quickly ascended to the top ranking among search engines. During the intervening years, many search engines have hoped to supplant Google or, at the very least, offer the behemoth some competition.

Key Takeaways

  • Despite all of its failed competitors in the search engine realm, Google faces a legitimate threat from Facebook because the two companies compete for market share in the Internet advertising space.
  • Both Facebook and Google use sophisticated tools and consumers’ demographic information and location in order to serve users targeted advertisements.
  • Despite Facebook’s competition, Google is still considered the dominant player in digital advertising, with a 37% share of the $130 billion U.S. digital advertising market.
  • In 2019, the U.S. Justice Department began laying the groundwork for an investigation into Google on the basis of its having monopolistic pricing power.

When Google first launched, most web users used search engines such as Lycos and AltaVista to conduct searches. However, these companies were quickly rendered obsolete as users gravitated to Google’s simple design and user-friendly interface. Other competitors, such as Yahoo (YHOO) and MSN, clung to small market shares. Later challengers like Bing have unsuccessfully tried to position themselves as the go-to search engine for the majority of web users.

Despite all of its failed competitors, Google does have one threat to its dominance: Facebook. While Facebook is not a search engine, it’s a company that everyone has heard of and most internet users visit on a regular basis. And that is why advertisers like it.

Facebook and Google Compete For Advertisers

Facebook and Google fulfill very different purposes for their users: one is a search engine, while the other is a social network. Internet users navigate to Google to seek specific information and to Facebook to connect with friends, family, and professional acquaintances. However, because of their revenue models, the two companies compete for advertisers.

For the vast majority of users, Google and Facebook offer their services for free. Google doesn’t make any money when a person uses its service to look up the capital of New Hampshire. Similarly, Facebook doesn’t make any money when a user posts a photograph of what they ate for breakfast. But Google and Facebook both report billions of dollars in revenue every year because they charge advertisers exorbitant fees to put their products or services in front of their users. Google and Facebook users generate revenue for the company indirectly; the more visitors the sites receive, the more that advertisers seek to use their platforms, which translates to the ability to charge a higher fee for advertising inventory.

Google Ads (formerly known as Google AdWords), an online advertising platform developed by Google, has dominated the online advertising market for the past two decades. Google Ads allows advertisers to harness Google’s tremendous reach among Internet searchers by paying the company to drive traffic to their websites. The traditional Google Ads model is pay-per-click; Google displays an advertiser’s message among a list of sponsored results based on keyword phrases that users have typed into the Google search bar, and the advertiser pays for every user who clicks on the ad. The more competitive and lucrative the keywords are, the more Google charges per advertisement. Google Ads also provides a service called Analytics 360 that advertisers can use to measure how well a campaign is performing.

Facebook’s Targeted Advertising

In the late 2000s, Facebook realized it also could leverage the millions of daily visitors to the site for advertising revenue. The social network launched its Facebook Ads program in 2007. With Facebook Ads, advertisers can pay for their messages to appear in users’ news feed based on specific information in their profiles. This kind of targeted advertising enables a company that sells sports-related apparel to purchase inventory that appears in the feeds of Facebook users who post a lot about sports, for example.

In the Internet advertising space, Google and Facebook now compete for market share. According to eMarketer, in 2018, Facebook and Google together accounted for 58% of digital advertising spend in the U.S. Both websites currently use sophisticated tools and consumers’ demographic information and location in order to serve users advertisements.

Google’s Advertising Monopoly

Despite Facebook’s competition, Google is still considered the dominant player in digital marketing. According to eMarketer, the company has a 37% share of the $130 billion U.S. digital advertising market. The company has close to 80% of the U.S. market for search advertisements, accounting for the majority of its $116.3 billion in total advertising revenue in 2018.

Google advertisements can appear nearly everywhere online, from news sites to cooking sites to mobile applications, and their advertisements can appear in many different forms, from display advertisements to banner images in boxes within or next to articles to advertisements that appear within videos.

Currently, Google owns the leading tool to purchase advertising space, called Display & Video 360, or DV 360. Through DV 360, advertisers can place bids to reach Internet users based on their location, demographics, or their consumer spending habits. Advertisers’ bids are fed into an automated system that auctions off advertising inventory across thousands of websites. Google’s exchange is called AdX, but bids placed in DV 360 can go to marketplaces not owned by Google.

Google’s sophisticated system for purchasing and selling advertisements–combined with the fact that it is both a buyer and seller of advertisements and controls the most popular services that connect advertisers and publishers–led to calls for the U.S. Justice Department to take antitrust action against the company on the basis of its having monopolistic pricing power.

Previously, the Federal Trade Commission conducted an investigation into the company. However, the case was closed in 2013; the only result of the investigation was that Google made some voluntary changes to their business practices.

The current action being taken against Google is being led by the U.S. Justice Department. In January 2020, the investigation appeared to be escalating as officials at the state and federal level began cooperating. Seven state attorney generals who have also been investigating the company were invited to share their findings at a meeting with U.S. Justice Department attorneys.

Source: Investopedia

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