If This Number Is Right, Alphabet and Facebook Are Unstoppable

By Markets Fool.com

Image source: FacebookBrand.com.

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A recent New York Times piece about the struggles of media companies contained a startling statistic: Facebook and Alphabet are now capturing 85% of all new ad dollars being spent in digital.

Think about that for a moment. Just two companies are vacuuming up $0.85 of every new dollar that enters the digital ad space -- at least according to the Morgan Stanley analyst who shared the statistic with theTimes.

Since the piece ran, the number has been both parroted and contested. If it's right, it points to a new level of digital ad dominance for the two biggest players in the game. It's King Kong vs. Godzilla, and everyone else is just hoping to avoid getting stepped on.

But even if it's not accurate, the episode can still tell us a lot about the state of the advertising industry and how dominant these two companies have become.

First, a bit more about that number...

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Adweek was quick to call the 85% figure into question. The advertising trade publication said the number "appeared to be high," and ran it by David Silverman, a partner at PricewaterhouseCoopers U.S.His estimate was much lower -- the top 10 digital ad companies had been bringing in 75% of all digital ad revenue, and he didn't see how that would change so dramatically so quickly.

Indeed, the 85% figure would leave just a small sliver of the digital ad pie for everyone else operating in the space -- from large digital players struggling to gain share, like Twitter and Verizon's AOL, to fast-growing upstarts like Pinterest and Snapchat, to the countless web publications that display digital ads.

Meanwhile, Technology Business Research reportedly estimated the combined share of new ad dollars controlled by Facebook and Alphabet at 57%, a number that would jibe more closely with Silverman's.

These latter estimates are also more in line with what we've seen in previous research. For example, eMarketer gauged the two companies' combined digital ad market share in the U.S. last year at just about 53%. More importantly, the firm did not see that growing substantially in coming years.

Source: eMarketer.com.

But don't let that obscure the bigger picture

The jury may still be out on the accuracy of the reported Morgan Stanley estimate, and it may well be high, but this much is clear: The fact that many well-researched ad industry followers did not sound an alarm over it being way off is a testament to the dominant positions these two companies have built for themselves.

Indeed, there are similarly impressive numbers being reported. As the election season heats up, Recode estimates that Facebook and Alphabet are bringing in 85% of digital political advertising.

Here's what we know for sure: Alphabet and Facebook generate more than a combined $25 billion a quarter in revenue, most coming from ads.

Alphabet posted revenue growth of 17% in the first quarter when measured against the year-ago period. Facebook grew revenue by 52%.

Both companies count their users in the billions, which means they can deliver substantial audiences to advertisers. Because of the depth of user data each acquires, they can also target advertising with great precision. Advertisers continue to say they are most satisfied with the return on investment from their Facebook and Google ads.

The two companies are also positioning themselves well in the mobile ad space. While Facebook builds out Instagram and evolves News Feed to capitalize on the trend toward mobile video consumption, Google is reaching beyond mobile keyword search, ramping up efforts to monetize its popular mobile products like Google Maps and image search. That's required investment, and has no doubt tempered earnings, but it should pay off in the long term.

Momentum is building

Future market research should tell us whether the Times-reported estimate proves accurate or inflated. But investors shouldn't lose sight of the fact that these two companies have carved out commanding leads in digital advertising and are positioning themselves to further strengthen their holds on the market.

The game may not yet be over for smaller players like Twitter and AOL, and the countless other Web publications fighting for advertisers. And the digital ad market is always prone to disruption. But right now, Facebook and Alphabet look hard to stop.

The article If This Number Is Right, Alphabet and Facebook Are Unstoppable originally appeared on Fool.com.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John-Erik Koslosky owns shares of Alphabet (A shares), Facebook, and Twitter. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, Twitter, and Verizon Communications. 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.