In March this year, eMarketer published some very interesting numbers reflecting how the growth in digital ad spending is seriously slowing down. The consequences are already quite evident, with Google suffering most of the growth slowdown across the Internet giants.
However, all three are about to crash against the hard wall of growth reality. Generally speaking, the cost per click -CPC- has become increasingly cheaper lately, but growth in sheer volume has overcompensated this, securing top line growth for all three players. When volumes won’t be able to compensate enough for ever cheaper CPC, the game will be up. The need for justifying a growth story before the shareholders will probably launch an even more furious battle for volumes and thus a full fledge price war on CPC between the three internet giants.
Once in this scenario, all three companies will need either to change their business model, penetrate other non-core segments or both. As a result, they may follow two different strategies.
On one hand, they may charge for their services or increase the prices they already have attached to their additional products and services delivered through their core platforms. All of them have a convenience advantage for users as mega-aggregators, and may somehow get away with it. Facebook may charge for some services like Instagram TV or charge more for FB Watch. Google may increase prices for Youtube existing premium services or Youtube music. All three may increase the «cut» they demand from third parties for distributing content, services and product through their platforms.
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This strategy may seem simple, but it is not. All additional content, service and products delivered through these platforms shaping their ecosystems face a high level of competition outside of them. For example, Amazon Prime Video competes directly against Netflix, Youtube, HBO and soon Disney+. There are rumors about FB launching its own crypto currency. This too could inject a higher convenience layer to the interaction with the user and isolate the company from eroding prices up to a point. However, the strategy of increasing prices through more or less transparent manners has a logic upper limit and does little to sustain a competitive advantage in the long run.
Google, Facebook and Amazon have another alternative much more close to their core business: To cross the digital Rubicon and eat into the non-digital advertising market.
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From a strategic point of view this makes sense. It allows all three companies to cater into the skills they already have, to serve the brands they already serve and reach the users they already know. In addition, even the traditional advertising industry is becoming increasingly digital. For example, outdoors advertising players Clear Channel and JCDecaux transform more and more of their traditionally paper-based boards into digitally connected and updated screens. Throw into the mix our ubiquitous and always connected smartphones with location capabilities and you may imagine many different ways of enhancing the combined effect of digital and traditional advertising.
It is therefore entirely possible that digital ad giants may start taking positions in traditional advertising companies and even media agencies quite soon. The precedent is Amazon when it bought the physical retailer Whole Foods Some investors may have seen the writing on the wall already. For example, the P/E ratio of JCDecaux is 25, higher than the one of Apple and similar to the ones of Facebook and Alphabet. This may indicate that some investors believe in much higher returns in the near future or in an acquisition.
The borders between digital and traditional advertising are becoming increasingly blurry. If regulators allow it, or are as usually too slow to react, the giants from the former may be about to engulf the players from the latter.
Investors may want to take positions accordingly.
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