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Battling For Quality Screen Time

A winning Internet content strategy once meant providing consumers with the best or fastest access to news, social media messages, video entertainment and other content online.

Not anymore.

Now the battle has expanded from a campaign to lure consumer "eyeballs" into a contest to see just how many screens a company can control. Google (GOOG), Twitter, Yahoo (YHOO) and others are all looking for ways to get the most screen time with consumers. And no screen is off limits. Think PCs, laptops, mobile phones, tablets, TVs and even wearable devices such as Google Glass.

Screens were a key issue when Larry Page, Google's chief executive, met with analysts Oct. 17 to discuss the company's third-quarter results.

"For years everyone talked about the multi-screen world. Now it's arrived, but on a scale few imagined; people increasingly have more than one device, and screens are proliferating in the home as well as wearable screens like watches and Google Glass," he said.

1. Business

Internet content providers offer consumers access to information, news, videos, social networking and other online data. Most content is supported by online ads including text-based ads near search results and full-color display ads.

Google, the Web's top search company, Facebook (FB), the Internet's leading social media site, and Baidu (BIDU), China's top search service, are dominant players.

Google, the Web's leading search provider, reported a 12% year-over-year revenue gain in its third quarter, after growth slowed to 1% in Q2. The stock spiked 18% in October, to a new high above 1,000 a share.

Facebook, Baidu and SouFun Holdings (SFUN), a China-based online real estate portal, have all reported recent quarters with year-over-year revenue growth north of 40%. But not everyone has joined the party. Revenue growth for Yahoo, the Web's leading portal, remains flat as the company works through a makeover. Investors don't seem to mind. Despite its challenged earnings and sales, Yahoo shares are up 66% this year through Friday.

LinkedIn (LNKD) is a fast mover with quarterly revenue growth over its past five quarters pacing far north of 50%. Unlike its peers, only about 40% of its revenue comes from ads. The majority is derived from companies that pay directly for its online recruiting services. Many are willing to spend up to $8,000 a year for quick access to a growing talent pool, says Martin Pyykkonen, an analyst for Wedge Partners.

"It's a productivity tool; it's a no-brainer for an employer," he said.

2. Market

Big and getting bigger.

In the first half of the year, Internet ad sales in the U.S. jumped 18% to $20.1 billion vs. the same period last year. That included a 145% surge in mobile ad sales and a 24% increase in digital video ads, says the Interactive Advertising Bureau.

Spending is expected to keep expanding. By 2017, sales of online ads in the U.S. will reach $61.4 billion, up 91% from 2011, says eMarketer.

Global Internet ad sales are estimated to soar 100%, to $173.1 billion, by 2017 vs. 2011, boosted by a growing number of Internet users. By 2017, the number of global Internet consumers is expected to top 3.2 billion, 54% more than in 2011.

Mobile users are another driver. The population of global smartphone users is expected to reach 2.51 billion in 2017, up from 667 million in 2011. In the U.S., smartphone users are expected to more than double — from 101 million in 2011 to more than 225 million in 2017.

By 2017, sales of mobile ads in the U.S. will reach $31.1 billion, eMarketer says, vs. $1.56 billion in 2011.

Advertisers are working to migrate alongside consumers, says Clark Fredricksen, an analyst for eMarketer.

"That is the result of consumers spending more time on mobile devices including tablets than ever before and advertisers following them there," he said.

3. Climate

Revenue growth and profits for many Internet content companies are increasingly determined by their ability to specifically tailor ads to each individual consumer's searches or overall interests. Those that do the best job tend to make the most money.

Companies including Google and Facebook have walked a fine line: digging for information to match ads to a consumer's habits and tastes without invading the person's privacy. Some techniques have raised the hackles of consumer groups. Analysts are split on whether the government will or will not intervene.

Again, the challenges have not deterred investors. Venture capital Internet content start-up investments topped $1.32 billion for the first nine months of the year vs. $1.54 billion for all of 2012, says PricewaterhouseCoopers and the National Venture Capital Association.

Social media sites, including some connected to colleges and universities, are among the top funding recipients. Total funding will likely exceed last year's total due to growth of the online ad market and Internet content stocks, says Sean DeWinter, a partner at PWC.

"There is nothing to indicate that there would be a downtick in this area," he said.

One possible bellwether is Twitter. The social media service is expected to launch an IPO in November. Its Q3 revenues climbed 105% while losses soared 199% vs. the year-earlier quarter. Monthly active users increased 39% in Q3. But the rate of growth has been declining for the last six quarters. Even so, Twitter's tighter ad targeting to information in its messages might offer better upside to advertisers than Facebook, says Pyykkonen.

4. Technology

Google is testing placing display ads on its search pages to boost revenue. Back in 2005, the company said its search pages were off-limits to graphic ads.

The company is also working on enhanced campaigns, bundled ad programs that include display ads for PCs and mobile devices. In addition, Google is continually tweaking its search algorithm to better match its results with consumer searches. Facebook is making a similar effort on its own site.

In October, Facebook said it would introduce ads on Instagram, a photo-streaming service it purchased last year for $715 million.

Baidu has stepped up its mobile strategy to increase search revenue from mobile phones. In July, it agreed to acquire 91 Wireless, China's largest third-party app store, for $1.9 billion Recognition of mobile is one reason why investors are buying Baidu, says Tian Hou, analyst for T.H. Capital Research.

"That is significant upside; the mobile business actually gives newer growth outlook to Baidu for the future," she said.

Google and others use a retargeting feature to send ads to consumers based on prior product searches. Retargeting has so far been limited to one device such as a PC. Allowing ads to follow consumers regardless of what device they are using is a likely next step, says PWC's DeWinter.

"Retargeting exists only on one device now and we could see it on multiple devices later," he said.

5. Outlook

Consumer demand for news, info and social media connections will continue to drive Internet content. Advertisers are likely to continue to follow. But there will always be hits and misses. In late October, Baidu and Facebook both reported Q3 results above views, although Facebook reported some loss of interest among younger teenagers.

Yelp (YELP) and InterActiveCorp. (IACI) had some growing pains. LinkedIn's Q3 results beat views, but investors balked at a Q4 guidance that missed.

Upside:The Internet's share of the ad world is growing, says Fredericksen.

"As of this year, digital accounts for a quarter of all ad spending in the U.S; TV accounts for 38%, print 19% — that's huge," he said.

Overall ad growth appears healthy, and advertisers are moving more of their dollars to the cyberworld, says Pyykkonen.

"The advertising market looks to be healthy going into next year and its no secret that more money is moving from (traditional) advertising to online campaigns of all sorts," he said.

Risks:In October LinkedIn said it expects 50% of its members to access the service from mobile devices next year, up from 38% this year.

Mobile is fast becoming an industry barometer, Fredericksen says.

"The companies that may have the most trouble going forward are the companies that don't have a strong mobile offering," he said.

Market tracker IDC says that by 2017, 87% of the global smart device market will be controlled by smartphones and tablets, with PCs and laptops relegated to 13%.

Given the direction, Internet content could shift heavily to mobile, says PWC's DeWinter.

"An interesting question is when developers will potentially only develop their content for the mobile user," he said.

But there is a price for shifting display ads to mobile devices. Prices for display ads on mobile devices are a fraction of those that appear on PCs. The disparity contributed to Google's 8% cost-per-click decline in Q3.

"(Mobile) pricing is lower," said Pyykkonen, "so the more (mobile) traffic volume you are getting, the mix is naturally going to come down."