Google and Facebook to Sign Advertising Truce

Google (NASDAQ: GOOGL  ) and Facebook (NASDAQ: FB  ) are two of the fiercest rivals in the tech space. The firms compete for both online advertising and social media. Therefore, more than a few eyebrows were raised when the two tech giants announced a partnership in their advertising operations. Obviously, the deal is expected to benefit both companies, or they wouldn't have signed it, but the move may signal a more collaborative stance in an increasingly complex Internet advertising environment.

Trading clicks
Under this freshly announced partnership, Google will be able to participate in Facebook Exchange. The service, launched in June 2012, uses cookie tracking to target visitors on third party sites with ads, which are then sold to advertisers. The integration process is expected to be finalized over the next few months, according to Google.

Facebook Exchange has grown rapidly since its inception, and has become a major marketplace for advertisers. The real-time bidding service has proven key to sustaining Facebook's enormous advertising revenue growth, and it seems as if Google wants a piece of the pie. More specifically, Facebook's growth in mobile has challenged Google's dominance in the industry.

Google will allow its clients to buy retargeted ads on FBX through its own DoubleClick service. DoubleClick, acquired by Google in 2008, gives users access to a number of different advertising marketplaces, which did not previously include Facebook Exchange. As excluding Facebook may have driven away prospective clients, the move is a largely strategic one for Google. Google views partnerships as key to its growth prospects, as improvement in the broader market may benefit all participants.

Regardless, Google's performance has not been idle. The company's most recent earnings report was a solid beat that had analysts almost salivating. Third-quarter EPS of $10.74, representing a 36% increase, thrashed analyst expectations, sending Google stock over $1,000 for the first time in its history. While average ad price was down, this was more than offset by the number of paid clicks, as volume surged 26% year-over-year.

Market maturing
Facebook's entrance into the online advertising market may have been a turning point for the industry, which was previously nearly a monopoly under Google's leadership. With more companies now active in online advertising, and gaining market share, competition is naturally growing, which would intuitively lead to lower prices across the board.

According to DoubleClick's Payam Shodjai, "a rising tide lifts all boats." Yet, one could wonder if the deal will lift Yahoo!'s boat as well. Facebook Exchange has proven to be a drag on Yahoo!'s ad revenue, and according to Yahoo! executives, the company has been struggling with ad revenue, particularly in mobile. Yahoo!'s global ad revenue per monthly unique user is around $1, which pales in comparison to Google's at nearly $6 per user.

As such, a partnership between Google and Facebook might not be very good news for Yahoo! at all. Aside from pinching away market share, lower industry pricing might negatively affect the company's top line, which didn´t look too hot to begin with. Its Q3 advertising revenue was more or less flat, with display ad revenue down 6.7%.

The bottom line
In a somewhat surprising turn of events, two of the world's fiercest tech rivals have announced a deal in online advertising. The move was certainly a strategic one for Google, as Facebook's growth has made it a daunting competitor. Expected to benefit both companies, as well as the industry at large, the partnership is slated to go live in a few months. It is, however, doubtful whether competitor Yahoo! will profit from this development.

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