Digital Advertising Is Growing Faster Than Ever -- and Here's Who's Winning the Race

By Markets Fool.com

Image source: Facebook.

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Online advertising is growing faster than it has in at least four years in the U.S., and two clear winners have emerged among the field: Facebook and Alphabet .

The Internet Advertising Bureau, or IAB, recently released a report showing U.S. digital advertising revenue up some 21% over the prior year, the fastest rate of growth the bureau has seen since at least 2012.

What makes that even more notable is the fact that online ad revenue had just about flatlined in the period between 2007 and 2011, according to IAB figures. That was no doubt in part due to the economic downturn, but also in part to the fact that the desktop ad market had become stagnant and the mobile market was yet to heat up.

The recent surge shows how things have changed on the latter front, and perhaps no company has been a bigger beneficiary of the mobile transition than Facebook.

Finding big growth on the small screen

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The single biggest area driving this new surge in online advertising is mobile, and we can expect that to continue for the next handful of years. Industry research firm eMarketer expects the market to more than double off its 2015 numbers in just three years.

Facebook made mobile a priority as others were doubting whether mobile ads could generate the type of revenue desktop was capable of. It's reaping the benefits of that today: Mobile ad revenue came in at $4.3 billion last quarter, up 73% over the prior year. Mobile now makes up 82% of the company's overall ad revenue.

Facebook is becoming the dominant platform for mobile users. It now boasts a billion daily mobile users, and the average Facebook user spends some 50 minutes a day in its three main apps, Facebook, Instagram, and Messenger. That's a number that's up by a quarter in just two years.

Just how large an opportunity is mobile for Facebook?

Mobile advertising -- a $19 billion business in the U.S. two years ago -- is on pace to become a $77 billion business here by 2020, according to eMarketer. If that proves accurate, mobile should rival TV as the single largest ad market in the world.

And by that time, Facebook may be raking in some $51 billion in mobile advertising alone, according to some estimates. For comparison, mobile accounted for somewhere in the neighborhood of $15 billion for the company in 2015.

Facebook has big plans to transform mobile in the years to come. And a key part of that transformation is video. The social network is making video a bigger part of your News Feed every day, and executives have said the can see a day as soon as five years from now when your News Feed may be all video.

There's a good reason for the company to move in that direction: Advertisers love video ads, and it's a format that works on the smartphone screen.

What's more, Facebook is giving advertisers large and small the tools they need to create effective mobile video ads as well as interactive ads that use video, text, and other components.

Making the transition from desktop to mobile

All that said, Facebook is still not the biggest player in mobile advertising. That distinction belongs to Alphabet, which controls about a third of the mobile ad market.

Alphabet's overall revenue growth, at about 17%, came in below the industrywide number recorded by IAB -- as well as the number analysts were expecting. That's cause for some concern.

But executives painted a more promising picture regarding the mobile business. Alphabet does not break out its mobile ad numbers separately, but execs said mobile search has become the primary driver of revenue growth, and they assured investors that it will be able to have the same level of success with mobile as it has with desktop.

Although investors should look to the quarterly results to monitor progress, Alphabet's track record warrants giving the company the benefit of the doubt.

Investors should keep in mind that these two companies will need to fend off smaller rivals looking to disrupt an ad market that's in a constant state of flux. We don't need to look any further than Snapchat and Pinterest to see how fast new threats can develop.But Facebook and Alphabet have staked out commanding positions in the ad market moving ahead. With growth heating up, they're poised to be the biggest beneficiaries.

The article Digital Advertising Is Growing Faster Than Ever -- and Here's Who's Winning the Race 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) and Facebook. 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.