Facebook Inc. Dominates Alphabet Inc. in This Key Metric

By Markets Fool.com

Today, Alphabet stands head-and-shoulders ahead of its nearest competitor, Facebook , in the race for digital advertising spend. Just how big of a mountain does Facebook have to climb to make a dent in Alphabet's leadership position? In the fourth quarter of 2015, Alphabet reported $21.33 billion revenue -- over 90% of which was ad-related. That was more than Facebook's revenue of $17.93 billion for all of last year.

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Such a disparity in size would seem to make comparisons between Alphabet and Facebook a stretch. But before investors discount Facebook as a legitimate competitor to Alphabet, the social-media king already owns a commanding lead in one critical segment of the online advertising market. And if forecasts are to be believed, that leadership position could prove to be just what Facebook needs to gain on Alphabet.

Surprise, surprise
According to data from eMarketer, Alphabet, as expected, blew away its search advertising brethren again last year, and more of the same is expected in 2016. Of the global search market's net $74.72 billion in ad spend -- that is, what was left after traffic acquisition costs (TACs) and other expenses -- nearly 59% went to Alphabet in 2015, and though its share is expected to decline to "just" 55.2%, revenue will climb to $47.57 billion this year.

Naturally, Facebook is nowhere to be found on a list of the world's search leaders. But search isn't the only online marketing platform. It may not come as a surprise to learn that Facebook is the global leader in display ads, as measured by revenue. Display ads are incorporated into websites and include video and images, among other formats.

What may raise an eyebrow or two is just how dominant Facebook's display leadership position is -- and the future looks even better. Facebook finished 2015 with $17.08 billion in net display advertising sales, a 48.6% jump from the prior year and good for 25% of the global marketplace. By comparison, Alphabet's Google was a distant second, with $9.07 billion in display ad revenue.

Source: eMarketer.

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Unlike Alphabet, however, Facebook's share of the booming display-ad pie is expected to grow to over $22 billion in 2016, good for 26.9% of the market. Just as impressively, Facebook is expected to generate more than twice the display-ad revenue than Alphabet. As Facebook gains a larger portion of display-advertising dollars this year, Alphabet's will decline to 12.3%, a percentage point less than 2015.

The two digital leaders are moving in opposite directions as it relates to display spots, and if industry pundits prove correct, that could be the impetus Facebook needs to close the gap with Alphabet.

Why it matters
By virtually all accounts, digital advertising -- both search and display -- will continue to earn an ever-increasing portion of marketers' budgets. In fact, at the end of 2017, digital ads are forecasted to outpace TV as the world's No. 1 advertising alternative. Growth of the entire online ad market bodes well for both Alphabet and Facebook, but a separate report indicates that display ads will get a big boost this year.

Display-ad revenue will surpass search in the U.S. for the first time ever in 2016, according to eMarketer. That's notable, because as the largest digital ad market on the planet, the U.S. is a bellwether of sorts for online trends. Better still for Facebook, the disparity between U.S. search and display-ad spend is expected to widen further in each of the next three years.

With its host of revenue opportunities waiting in the wings -- WhatsApp, Messenger, and Oculus Rift, to name a few -- and video spots and the monetization of Instagram in full swing, Facebook is already inching its way up the digital-advertising ladder. Considering its surprisingly large display-ad market leadership, and expectations for that to lead the way in terms of online spend, the hill Facebook needs to climb to catch Alphabet may be a bit smaller than some investors had thought.

The article Facebook Inc. Dominates Alphabet Inc. in This Key Metric originally appeared on Fool.com.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.