Does The Digital Future Belong To Social Networks; Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR)?

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Online advertisement is the bread and butter for technology companies like Facebook Inc (NASDAQ:FB), Twitter Inc (NYSE:TWTR), Google Inc (NASDAQ:GOOGL) and Yahoo! Inc. (NASDAQ:YHOO). As Internet users shift away from desktop platforms to mobile, the battle for ad revenue has shifted to mobile dominance.

For everything mobile advertising, Google currently dominates the scene, but Facebook beats it when it narrows down specifically to display mobile ads. Spending on mobile advertising, especially display ads, is on the rise, but things appear tilted in favor of social networks – especially Facebook and Twitter.

Growth in digital ad spending

According to eMarketer, the U.S. digital display ad spending is expected to reach $27.05 billion this year. Further growth is expected in the segment such that by 2017 U.S. digital display ad market will be worth no less than $37.36 billion. Meanwhile, Facebook Inc (NASDAQ:FB) and Twitter Inc (NYSE:TWTR)’s display ad market share is expected to edge up this year to a combined 33.7% compared to slightly over 30% last year.

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Market share

By the end of 2015, Facebook Inc (NASDAQ:FB)’s U.S. digital display ad market share is expected to reach above 25% of the total market, bringing in about $6.82 billion in revenue from the segment. Facebook’s market portion is expected to continue rising so that the company will be able to control 26.9% of the U.S. display ad market by 2017. Similarly, Twitter Inc (NYSE:TWTR)’s portion will reach 5% this year and rise to 6.8% in 2017.

As Facebook and Twitter extend their share of the U.S. digital display ad market, Google Inc (NASDAQ:GOOGL) and Yahoo! Inc. (NASDAQ:YHOO) are expected to be on the receiving end, facing a decline in their respective market shares.

Google is expected to maintain its position as the second-placed display ad market holder behind Facebook for the foreseeable future. However, the search engine company will notice gradual decline in its market share as time goes, its market share is expected to down to 11.1% in 2017 from 13% this year. The company controlled 13.7% of the U.S. digital display ad in 2014.

Things are not expected to be any better for Yahoo, which is expected to fall behind Twitter in the U.S. digital display ad category this year. Yahoo is expected to hold onto just about 4.6% of the market share by the end of 2015 compared to Twitter’s 5%.

Fortunes in the display ad are clearly skewed in favor of the leading social media networks, but they are still making efforts to deepen their dominance further through strategic acquisitions.

Mobile display ad spending

Predictions show that spending on mobile display advertising in the U.S. will for the first time this year outpace desktop display advertising. Mobile display ad spend is expected to touch $14.67 billion in 2015 compared to just about $9.65 billion in 2014. Facebook Inc (NASDAQ:FB) alone is expected to take home $5 billion of all the U.S. mobile display ads this year, and rising to $7.53 billion or more than 50% of the total market in 2017.

Similar gains are expected to come in the way of Twitter Inc (NYSE:TWTR), which will generate 90% of its U.S. ad sales from mobile to total more than $1.19 billion, and more than double over the figure in the next two years to $2.29 billion.

The surge in mobile display ad spending is expected to cause further decline in desktop display, falling to $12.38 billion in 2015 compared to $12.56 billion in 2014.

Boosting mobile presence

Although Facebook Inc (NASDAQ:FB) and Twitter appear to have a leg up in mobile display ad market in the long run, the companies are not just sitting there waiting for things to unfold organically. They are actively influencing their mobile growth through strategic acquisitions, which should enable them to penetrate the market even deeper.

Facebook has made a number of potentially transformative acquisitions in the mobile category. The company tapped LiveRail, a company that connects digital marketers to publishers on mobile and Web platforms. Facebook did not disclose what it paid for LiveRail but sources hinted that it paid more than $400 million. Nevertheless, the acquisition brought to Facebook a platform and a tool that enables publishers to better determine pricing for targeted ad units.

Facebook Inc (NASDAQ:FB)’s appetite for larger mobile presence also led the company to pay nearly $22 billion to add popular mobile messaging app WhatsApp to its portfolio. WhatsApp boasts more than 700 million active users and the numbers are growing fast. The app just launched a voice call feature that is expected to entice even more users to join its network.

The other strategy that Facebook is using to bolster its mobile presence is wooing publishers to post directly through its platform. The company is negotiating with some of the largest news organizations in the world to use its platform of nearly 1.4 billion monthly active users to reach a wider audience. Such an arrangement would enable Facebook to get more mobile traffic to its site thereby boosting its banner ad revenue.

Facebook has also made a number of mobile acquisitions in the recent times, especially for tools that could increase its user numbers or make it easy for marketers to target ads on the platform.

Twitter Inc (NYSE:TWTR) has not been left out either. The company, which generated 88% of its total revenue of $432 million in 4Q2014 from mobile platforms, has also inked a number of key deals to bolsters its mobile revenue. The company tapped India’s ZipDial or Missed Call, a service that enables mobile users to access online content even without data plans. The app boasts over 60 million users in developing markets of India, Sri Lanka, Bangladesh, Philippines and South Africa.

Twitter has also entered into content syndication deals with other digital platforms so that it can serve digital ads outside its own network. Such deals could also help Twitter to woo more users to its own site. Additionally, the company inked a content sharing deal with Google Inc (NASDAQ:GOOGL), a step that is expected to enable it service ads even to unregistered users regardless the platform they are using to access the site.

Mobile growth drivers

Audience shift: Marketers are shifting to mobile platforms because that is where the audience is moving. An increasing number of digital content consumers today are using smartphones and tablets to access the Internet during their free time, thereby accelerating the growth of m-commerce. Mobile devices have also become handy for researching products and comparing product prices online. For marketers, a larger mobile presence is synonymous with large online sales, which is why spending on mobile advertising is growing rapidly and providers of mobile ads services such as Facebook are also moving fast to expand in the segment.

Mobile shopping app: Rise of m-commerce is also being fuelled by optimized apps that support in-app browsing and shopping experiences. Dedicated mobile shopping apps have enabled leading e-commerce providers such as eBay Inc (NASDAQ:EBAY) and Amazon.com, Inc. (NASDAQ:AMZN) to increase mobile traffic to their sites, encouraging other marketers to push for wider mobile presence.

Targeted ads: The rise in geo-targeted ads is also accelerating growth of mobile commerce. Marketers are looking for ways to reach potential shoppers wherever they are and geo-targeted mobile ad is a great way to do that. Mobile users are able to get tips about the nearest restaurants, movie theatres and more as they move around through geo-targeted ads.

Mobile payment: In-app payment features for mobile are also fuelling mobile ad spending. The amount of time that people spend on their mobile devices has increased as the devices are used for more functions such as making in-store and in-app payments.

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Conclusion

Mobile is the future. The growth in mobile user base and improvement in mobile ad targeting have combined to enhance participation of marketers and publishers on mobile platforms. Nevertheless, the future belongs to players that are able to grow their mobile foothold deeper, which explains why, from Facebook Inc (NASDAQ:FB) to Yahoo! Inc. (NASDAQ:YHOO), all are actively investing in mobile expansion. However, fortunes in mobile display advertising are tilted in favor of social networks.


Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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