Google and Facebook were responsible for all the growth in the US digital advertising market in the first half of the year, while the rest of the industry collectively shrunk, according to some estimates.
When Jason Kint, CEO of trade group Digital Content Next, compared IAB numbers showing US ad revenue growth in the first half, with Google and Facebook's publicly reported numbers, he found that the two tech giants accounted for 103% of the growth in the digital ad industry — while everyone else shrunk 3%.
If you're a company that makes its money by selling online ads, that's clearly a worrying stat. And the threat of disintermediation by the Google and Facebook duopoly is a going concern for advertising agencies too.
Sir Martin Sorrell, CEO of the world's largest advertising agency holding company WPP, has long described Google as a "frenemy". WPP will spend at least $5 billion of its clients' money with Google this year — making it the advertising company's biggest media partner — yet Google is one of its biggest rivals, through its DoubleClick ad platform and by forming direct relationships with its clients.
However, a note from analysts at Credit Suisse claims the Google and Facebook threat to ad agencies has been "over-stated."
Credit Suisse spoke to experts across the industry including marketers, auditors, consultants, agency staff, and other people familiar of working with Google and Facebook. The conclusion of that analysis was that agencies' independence should mitigate any threat of being toppled by the two digital advertising titans.
Google and Facebook have built huge ad tech 'stacks'
The note credits Google with being one of the first companies to build out an ad tech "stack," with its acquisition of DoubleClick in 2007, allowing advertisers to buy ads "programmatically" online using real-time auction systems. That was followed by the launch of the DoubleClick ad exchange in 2009; the acquisition of the AdMob mobile ad exchange in 2010; the acquisition of demand-side platform (DSP) Invite Media in the same year; and the acquisition of the AdMeld supply-side platform (SSP).
Facebook, meanwhile, has grown a huge ad business on its own platforms, generating $17 billion in ad revenue last year. It too often works direct with advertisers, such as with retailers on its Dynamic Product Ads format. And outside of Facebook's own platforms, the company has built a huge $1 billion+ business in its Facebook Audience Network, which serves Facebook ads on third-party sites and apps.
Google and Facebook are big, but the entire ad market is huge
Credit Suisse said it received a "consistent" message from industry experts as to why Google and Facebook are not yet presenting an existential threat to agencies.
While Google and Facebook represent huge forces in the digital advertising market, they still represent just 15% of spending on advertising in total, according to Credit Suisse's estimates. Online, Google and Facebook accounts for 50% of digital ad spending, which Credit Suisse says is down from 60% in 2012.
New platforms are emerging all the time, fragmenting the media landscape. Snapchat only started selling ads in the back end of 2014 and Amazon is only just getting started when it comes to turning its huge treasure trove of consumer shopping data into a major advertising business.
The network effect of agencies is hard to compete with
Agencies are still an important source of revenue for Google and Facebook. Marketers may have regular meetings with both of the companies, but media plans are still executed by media agencies, according to Credit Suisse. And it's the agencies that usually help advertisers with Facebook and Google's self-service platforms.
"Clients still rely on the agencies to make sure that spending is allocated in the best and most efficient manner possible across all media properties," the Credit Suisse note says.
The advantage of working with big agency networks is that they pool all of their client ad spend together in order to get the best prices and access to new products and data. That's the network effect. And even when advertisers sign a direct deal with Facebook or Google, the money still comes out of the pool the client has given to the agency, according to Credit Suisse.
And, Credit Suisse points out that a number of those direct deals haven't been fruitful because advertisers simply don't have the time to make them work effectively: "In many cases, direct deals with Google and Facebook that involve additional services or projects have not worked out well due to limited bandwidth on the client side."
The importance of third-party measurement
The ad industry often accuses Facebook and Google of being "walled gardens" when it comes to their data. Yes, they work with third-party measurement firms, but there is still no standard metric that works across Facebook and Google when it comes to video, for example.
Credit Suisse points out that while Facebook partners with measurement firms like Moat, Integral Ad Science, and Nielsen, "the metric Facebook uses to sell advertising comes only from Facebook itself." The Wall Street Journal reported earlier this month that ad buyers also want more transparency into how third-party data is collected on Google's YouTube.
Measurement has become a hot topic in recent months, exacerbated by Facebook's confession earlier this month that it had been exaggerating — and in some cases understating — several metrics across video, Instant Articles, and Pages. Facebook is working to fix the issues and announced big changes including the launch of a measurement council, additional third-party verification measures, and the launch of a blog to highlight bugs and errors as it seeks to reassure its clients they can be confident in the data it provides.
Such issues highlight the need for advertisers to have trusted, independent advisers to explain where they should be placing their budgets, rather than blindly trusting media platforms alone. It's no coincidence that WPP has invested in Kantar and comScore — with the growth in online media, measurement is becoming an increasingly important commodity.
And while it's true that agencies face emerging competition from consultants — such as IBM, Deloitte, and Accenture, which have all invested heavily in building out digital marketing capabilities — Credit Suisse doesn't believe Google and Facebook present an existential threat just yet.
Credit Suisse's analysts concluded: "We do not think at the moment that Google and Facebook are seeking to or will be successful in replacing agencies. However their scale, their control of data and their place in parts of the value chain such as ad networks, DSP and SSP mean that investors are still likely to worry about this and agency multiples could continue to price in a discount for such a structural threat."
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