Seismic shift led by Google and Facebook

Last week marked an important moment for rankings of the top 5 largest U.S. companies by market capitalization. For the first time ever, the list now belongs exclusively to technology companies. At the summit is Apple with $561 billion in market capital. Completing the list is Alphabet (Google’s parent company), Microsoft, Amazon and Facebook.

What is the underlying importance of this news? For one, research reveals shifts occurring in the advertising market. Secondly, it signifies the value of targeted digital advertising. Furthermore, given companies of all sizes are allocating more of their advertising budgets to this segment, it highlights that digital advertising is now taken seriously.

“The seismic upheavals that transform entire industries usually take many years to play out. But sometimes, their effects burst through in a single, earth-shaking week.” – Richard Waters, Financial Times

Last week began with the $4.8bn sale of Yahoo to Verizon. Verizon, a $218bn U.S. telecoms provider, is trying to transform itself into a serious player in the realm of digital advertising. Purchasing Yahoo may give Verizon the boost it is after. On 26 July 2016 Lowell McAdam, Verizon CEO, said the company had “made an exponential leap in capabilities” by acquiring the pioneering Internet brand.

“Are we going to challenge Google and Facebook? I just say, look, we’re planning on being a significant player here. The market is going to grow exponentially.” – Lowell McAdam, Verizon CEO

Whilst Verizon is by no means a dominant force in digital advertising at this stage, the company’s ambitions are very clear. Yahoo, worth $125bn at its peak in 2000, remains a key web portal with over 600 million monthly active mobile users. It also runs one of the most popular email services globally with approximately 225 million monthly active users. The Yahoo deal sends out a message that Verizon is ready to compete with the market leaders. Further underlining this is the fact that it bought AOL, another fallen star from the dotcom era, for $4.4bn in 2015.

Evidence suggests that establishing a presence in digital advertising will be no mean feat. According to eMarketer, Google and Facebook together control almost 43% of the entire digital advertising market. Yahoo and AOL however pale in comparison with a combined 6% of the U.S. digital advertising market.

Diving deeper into Google and Facebook’s financial reports highlights just how lucrative online advertising market is. The two companies reported unrivalled second quarter financial results in the latter half of last week, largely due to strong advertising revenue growth.

Google, which owns YouTube, saw its fastest growth in two years on the back of an accelerating shift to mobile advertising. Sundar Pichai, Google CEO, pointed out that the company was “extraordinarily well positioned to take advantage of the mobile shift”. eMarketer expects Google will generate an incredible $57.80 billion in total digital ad revenue worldwide, an increase of 9.0% over last year.

Facebook, which owns Instagram and WhatsApp, also reported a spectacular quarter with revenues from advertising jumping 63% from a year ago, smashing analyst estimates. Mark Zuckerburg, Facebook CEO, stated, “we’re particularly pleased with our progress in video as we move towards a world where video is at the heart of all our services”.

Company Market Capitalization*
Alphabet (Google’s Parent) $538bn
Facebook $348bn
Twitter $12bn
Verizon Communications $218bn

* as of market close on 3 August 2016

Video marketing has become a hotly contested area. Video allows marketers to build strong visual connections with its target audience, a fact demonstrated by the very existence of YouTube, Facebook Live, SnapChat and Vine. Twitter, who announced disappointing overall earnings, reported that around 50% of its advertising revenue last quarter came from video. This is particularly significant given that video did not even exist as an advertising format last year on Twitter.

Overall, what is clear is that digital advertising remains a very lucrative space for the top technology companies. Facebook and Google have built up unassailable leads and are currently well ahead of the pack. However, this may change as the industry continues evolving and other companies including Verizon aggressively acquire market share.

Disclosure: In the interest of being fully transparent, the author is an Alphabet shareholder at the time of publishing this article.