Is Google Up for Facebook’s Challenge?

Umang is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Google (NASDAQ: GOOG) has ruled online advertising for the last few years. They have provided the required database in order to lure the advertisers towards them. Not only that, they have also provided the best possible tracking system in order to pin down the number of clicks per ad displayed. This is quite visible with its performance in the last few years:

<table> <tbody> <tr> <td colspan="7">Net US Digital Ad Revenue Share at Major Digital Ad-selling Companies</td> </tr> <tr> <td colspan="2">(% of Total digital ad revenues)</td> <td>2010</td> <td>2011</td> <td>2012</td> <td>2013</td> <td>2014</td> </tr> <tr> <td>Google</td> <td> </td> <td>38.10%</td> <td>40.10%</td> <td>41.30%</td> <td>42.60%</td> <td>43.80%</td> </tr> <tr> <td>Yahoo!</td> <td> </td> <td>12.80%</td> <td>9.60%</td> <td>8.40%</td> <td>7.50%</td> <td>6.90%</td> </tr> <tr> <td>Microsoft</td> <td> </td> <td>5.70%</td> <td>5.70%</td> <td>6.00%</td> <td>6.60%</td> <td>7.20%</td> </tr> <tr> <td>Facebook</td> <td> </td> <td>4.40%</td> <td>5.40%</td> <td>5.80%</td> <td>6.30%</td> <td>6.70%</td> </tr> <tr> <td>Aol</td> <td> </td> <td>3.30%</td> <td>2.80%</td> <td>2.50%</td> <td>2.30%</td> <td>2.20%</td> </tr> <tr> <td colspan="2">Total Digital (billions) </td> <td>$26.29</td> <td>$31.99</td> <td>$37.31</td> <td>$42.50</td> <td>$47.77</td> </tr> </tbody> </table>


In the year 2012, Google managed to account for as much as 41.3% of the total online ad revenue of $37.31 billion. This is quite an impressive figure, considering how tough the competition is these days.

The other company which we see in the list is Facebook (NASDAQ: FB), which has disappointed many since it got listed on the Nasdaq last year. The big question raised regarding Facebook was its ability to continue generating revenue in the coming few years. This increased the vulnerability of its stock price, causing shares to fall as low as $17.55.

But Mark Zuckerberg was in a different school of thought altogether. And now he's come up with a new weapon which will surely challenge Google.

As mentioned earlier, Google provides a tool to its advertisers to track down the number of clicks on each ad displayed. This helps the advertisers in analyzing and accordingly interpreting each of its ads. But now the big question raised by all the advertisers is, how many of these clicks actually convert into sales? Well, the answer comes from Facebook with its latest technology called conversion tracking.  

Conversion tracking allows advertisers to track down each sale to its original source of click. This is quite a useful tool, since it allows advertisers to track down each users shopping habits and accordingly customize their ads. This is possible because in Facebook the sales happen through individual login account. This allows Facebook to track down each sale to its original source of click. Now with a user database over 1 billion, this should really boost Facebook's online ad revenue in the coming few years till the time Google comes up with something similar.

Google has been working on a similar line with the integration of Google+. But this has not yet reached its optimum level because of lack in popularity of Google+ and its usage. This is where Facebook holds an upper edge in attracting more advertisers towards itself as compared to Google.

In the testing phase of conversion tracking, they have combined conversion tracking with Optimized CPM. Optimized CPM allows an advertiser to prioritize their marketing goals, and then automatically delivers ads against those goals in the most effective way possible. This allows advertisers to maximize the value they get from their budgets. Advertisers can optimize their campaigns based on their goals like Actions, Reach, Clicks or Social Impressions.

With the competition getting tougher day by day, it is time that Yahoo! (NASDAQ: YHOO) and Microsoft (NASDAQ: MSFT) pull up their socks before it’s too late. Managerial changes, new company focus and adequate results in the first two quarters of 2012 have led eMarketer to raise the forecast for Yahoo! from a 4.7% decline to 1.7% growth for 2012. Despite all this the picture isn’t looking so good as Yahoo continues to lose its share in the digital ad market.

On the other hand, Microsoft’s Online Services Division, which manages digital advertising (including Bing and MSN), has reported an operating loss for 17 quarters in a row. Microsoft has launched various campaigns to gain visibility for its search engine, Bing, including one that attempted to argue that Bing provided better search results than Google.  But this was all in vain: Google's search engine outperformed Bing in many tests conducted.

This new conversion tracking tool in Facebook's arsenal should really boost its digital ad revenue in the year 2013. The huge database, combined with the proper technology tools to analyze this data, should help in generating consistent revenue from digital world in the coming years. Now, we need to see how Google might respond to it. With Google+ not being able to generate the required numbers, can it invent something more attractive and effective to continue its dominance in the digital world?

Umang27 has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Google and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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