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In 2016, Facebook bypassed Google in ads. Here’s why.

Introduction

The gone 2016 was the first year I thought Facebook ends up beating Google in the ad race, despite the fact Google still dominates in revenue ($67Bn vs. $17Bn in 2015). I’ll explain why.

First, consider that Google’s growth is restricted by three things:

  1. natural demand
  2. keyword volumes, and
  3. approach of perfect market.

More demand than supply

First, at any given time there is a limited number of people interested in a product/service. The interest can be of purchase intent or just general interest, but either way it translates into searches. Each search is an impression that Google can sell to advertisers through its AdWords bidding. The major problem is this: even when I’d like to spend more money on AdWords, I cannot. There is simply not enough search volume to satisfy my budget (in many cases there is, but in highly targeted and profitable campaigns many times there isn’t). So, the excess budget I will spend elsewhere where the profitable ad inventory is not limited (that is, Facebook at the moment).

Limited growth

According to estimates, search volume is growing by 10-15% annually [1]. Yet, Google’s revenue is expected to grow even by 26% [2]. Over the year, Google’s growth rate in terms of search volume has substantially decreased, although this is perceived as a natural phenomenon (after trillion searches it’s hard to keep growing double digits). In any case, the aforementioned dynamics reflect to search volumes – when the volumes don’t grow much and new advertisers keep entering the ad auction, there is more competition over the same searches. In other words, supply stays stable but demand increases, resulting in more intense bid wars.

Approaching perfect market

For a long time now, I’ve added +15% increase in internal budgeting for AdWords, and last year that was hard to maintain. Google is still a profitable channel, but the advertisers’ surplus is decreasing year by year, incentivizing them to look for alternative channels. While Google is restrained by its natural search volumes, Facebook’s ad inventory (=impressions) are practically limitless. The closer AdWords gets to a perfect market (=no economic rents), the less attractive it is for savvy marketers. Facebook is less exploited, and allows rents.

What will Google do?

Finally, I don’t like the Alphabet business. Already in the beginning it signals to investors that Google is in “whatever comes to mind” business instead of strategic focus on search. Most likely Alphabet ends up draining resources from the mother company, producing loss and taking human capital off from succeeding in online ads business (which is where their money comes from). In contrast, Facebook is very focused on social; it buys off competitors and improves fast. That said, I do have to recognize that Google’s advertising system is still much better than that of Facebook, and in fact still the best in the world. But momentum seems to be shifting to Facebook’s side.

Conclusion

The maximum number of impressions (=ad inventory) of Facebook is much higher than that of Google, because Google is limited by natural demand and Facebook is not. In the marketplace, there is always more supply than demand which is why advertisers want to spend more than what Google enables. These factors combined with Facebook’s continously increasing ability to match interested people with the right type of ads, makes Facebook’s revenue potential much bigger than Google’s.

From advertiser’s perspective, Facebook and Google both are and are not competitors. They are competitors for ad revenue, but they are not competitors in the online channel mix. Because Google is for demand capture and Facebook for demand creation, most marketers want to include both in their channel mix. This means Google’s share of online ad revenue might decrease, but a rational online advertisers will not drop its use so it will remain as a (less important) channel into foreseeable future.

References

[1] http://www.internetlivestats.com/google-search-statistics/

[2] http://venturebeat.com/2016/09/27/4-graphs-show-the-state-of-facebook-and-googles-revenue-dominance/

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