The advertising industry is going through a huge transformation process as consumers around the world spend more and more time on digital mediums. The growth of the internet and smartphones around the world has completely changed the way we spend our time. The amount of time we spend in a living room in front of our television sets is on the wane while the time we spend browsing on various devices is on the rise.
Advertisers, naturally, have to follow the crowds, and that’s the reason why they are steadily increasing the share of marketing spend on digital advertising.
In 2010, according to data from eMarketer.com, users spent 40% of their time on TV and video while spending 23.5% of their time on the internet.
Fast forward six years, and by 2016 an average user in the U.S. was spending 5.53 hours per day on digital mediums compared to 4.05 hours on TV. The gap is expected to widen over the next few years with time spent on digital mediums going up to 6.01 hours and TV time dropping to 3.55 hours by 2018. This trend has been going on for some time, and there is a good likelihood that it might accelerate in the future.
Five or 10 years ago, TV was the only option, or at least the best option, for us to watch videos. But today the scenario has completely changed. There are nearly 100 million subscribers on Netflix (NFLX, Financial), a video streaming service, and every day billions of hours worth of video are being uploaded to YouTube, which is devoured by users all over the world.
There are also any number of streaming devices from companies like Apple (AAPL, Financial) and Amazon (AMZN, Financial), not to mention off-market products like the Kodi box, all of which have users in the tens of millions and growing strong.
The last bastion – live telecast – has always been traditional TV’s forte, but even that is now being challenged with social media portals such as Facebook (FB, Financial), Twitter (TWTR, Financial) and YouTube diving deep into live streaming.
Unlike the landscape that existed a decade ago, we now have credible challengers to mainstream television. The moat that TV enjoyed at one point has already vanished. Thankfully, TVs haven’t vanished yet and may remain in our living rooms for many more years, but the time we spend with them will keep moving lower and lower, and it might easily become a device that we can all live without – unless we want to stream internet content on a large screen.
Inevitably with that shift comes the transition from traditional advertising media to digital advertising channels.
There are two companies that have already positioned themselves to take advantage of this shift: Google and Facebook. Though there are many companies operating in the digital advertising space, Google and Facebook will dominate the digital advertising world for many more years to come.
Smartphones are everywhere, and this is the primary medium on which we access the internet. Google’s Android is the No. 1 operating system in the mobile world with a market share that is fast approaching 90%. There is still plenty of room for smartphone sales to grow in the developing world and, once again, Android phones, which are are much cheaper than Apple’s iPhone, will capture the lion's share of the growing smartphone market.
Android is a strong conduit for Google’s ad channels because of the plethora of apps that all lead back to monetization for the company, the foremost of these being Google Search. With no credible mass market challenger for Android, Google will remain the largest digital advertiser in the world, enjoying steady growth for several years to come.
Facebook already has the scale and reach. The main platform is a stone’s throw away from reaching 2 billion monthly active users around the world. Instagram is growing as fast as Facebook did in its time and already has more than 600 million monthly active users; and WhatsApp has more than 1 billion users in its fold. These three applications are widely used by users all over the world, obviously, and the sheer amount of time people spend on these applications makes them appealing to digital advertisers.
There is no strong challenger to Facebook in the social media or messaging app space, and this will allow Facebook to keep moving its share of digital advertising higher and higher over the years. The current near-50% revenue growth rate will come down sooner or later, but Facebook will be able to keep growing along with the digital advertising industry for many more years.
It’s important for investors in these companies to understand the moats their advertising divisions have around themselves and how resilient they are to disruption by new players or even existing ones. Massive user bases don’t get built overnight, and neither do they vanish overnight.
These are strong revenue streams that are growing at very healthy rates and will continue to do so until that transition from traditional advertising to online advertising is complete, and we are still years away from that.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
Start a free seven-day trial of Premium Membership to GuruFocus.
