If you thought the online advertising industry was a big business, you'd be mistaken if you compared it to the offline advertising industry. Combined, these industries rake in $800 billion a year worldwide, yet online advertising only makes up less than $100 billion of the total. According to Google (NASDAQ:GOOGL) Chief Business Officer Nikesh Arora, offline advertisers will become increasingly more comfortable with online advertising, resulting in hundreds of billions of dollars of ad money shifting online. Five years from now, Arora believes there's a "reasonable probability" that over 50% of total advertising spending goes online. To say that Google is in great position to benefit would be an understatement.
A big catalyst
In order to convince the marketing world that online advertising will one day make up the lion's share of advertising budgets, something powerful needs to come along for advertisers to take notice. Arora believes that something is Internet-connected televisions, or smart TVs, an area in which Google has not been wildly successful to date. However, he argues that in the coming years, smart TVs will go from "nice-to-have" to "must-have" in the minds of consumers, forcing marketers to allocate more ad dollars online.
YouTube is shaping up to be a huge winner here as Google continues to transform the site into becoming more desirable for users and advertisers alike. Through the use of channels, Google is hoping it will improve the experience by connecting users directly with content, aligning more closely with the traditional TV experience. YouTube channels should be thought of as Google's response to a DVR, but instead of recording content of interest, users subscribe to content. Both approaches accomplish the same exact thing, which is to bring relevant content directly to the user so they don't have to actively seek it out.
Not only are YouTube channels more convenient for users to connect with relevant content, the value preposition for Google is tremendous. According to YouTube head Salar Kamangar, packaging a video within a niche-specific channel has the potential to bring 10 times more in advertising spending per 1,000 users than if it were stand-alone. The justification here is that marketers have better odds of targeting their intended audience.
The third wave
The Internet is a compelling replacement to the traditional broadcast television model because it invites the possibility of a two-way interactive user experience. Not to mention the Internet successfully caters to niche interests on a truly global scale at a substantially lower cost than the traditional broadcast model. In the future, Kamangar envisions a world where you will be able to watch a live sporting event with people you know a la Google Hangouts, while being able to choose the camera perspective of your liking. As we approach the third wave of media where the Internet becomes the medium, YouTube is setting itself up to become the platform. Over the past few years, Google has handed out over $100 million dollars to create new channels, in hopes not only to drive increased advertising spending for "professional" content, but for users to increase their stickiness to the platform.
That other platform
Granted, Facebook (NASDAQ:FB) is still in the early stages of monetizing its platform, but in the coming years, I fully expect marketers to better understand the value the Facebook platform offers. Facebook has already determined that clicks are a worthless measurement for gauging advertising effectiveness on its platform, which why it's in the process of developing alternative measurements. As long as Facebook can successfully prove that its ads are working and marketers can embrace new metrics, the company has a lot of untapped growth potential ahead of it. Facebook is practically the gold standard when it comes to providing an interactive experience, which could ultimately be leveraged with marketers. In terms of Facebook gunning for YouTube, CEO Mark Zuckerberg said the company wants to be a distribution platform for video content and there's definitely an opportunity to monetize Facebook-hosted videos, which sounds to me like Facebook will be putting more of an emphasis on video in the future.
It's a win-win
Technology will continue to play a deeper role in how the world consumes media. As more content continues to be consumed online, advertising dollars are likely to follow suit. According to Arora, the tipping point will be when the majority of televisions become connected to the Internet, inviting the potential for targeted advertising. Arora reckons that if a user just purchased a car, they wouldn't want to see an advertisement for a new car. Eliminating this waste creates more value for marketers while simultaneously improving the user experience. When the Internet and television finally do converge in the coming years, platforms like Facebook and YouTube are likely to benefit as they continue to drive new levels of interaction and branding.
Ultimately, if Arora is correct, and five years from now online advertising sees a $300 billion increase in spending from today, investors in the right positions stand to make some exceptional returns.
Fool contributor Steve Heller owns shares of Google. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. 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.