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1 Number That Shows Facebook and Google's Competitive Advantage

By Adam Levy - Updated Oct 9, 2017 at 5:59PM

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Unlike their competitors, the digital advertising giants aren't using brute force to win more ad dollars.

It's no secret that in the world of digital advertising, there are Facebook (META -0.76%) and Google, and then there's everyone else. While smaller companies like Twitter (TWTR 2.25%) and Snap (SNAP 0.30%) might take a piece of the pie from the big social network company and the Alphabet (GOOG -0.27%) (GOOGL -0.21%) subsidiary, the two combine to take practically all of the growth in the market these days.

What's impressive is that Facebook and Google aren't using brute strength to grow their businesses. They benefit from most of their customers, i.e., advertisers, coming to them and using their self-serve platforms. Twitter, Snap, and most other digital advertising businesses are still heavily reliant on a sales team reaching out directly to advertisers, despite efforts to copy the extremely effective strategies of Facebook and Google. It's hard to turn a profit without a significant amount of ad sales coming from scalable self-serve platforms.

That fact is exemplified in just one number.

The "like" symbol at the entrance to Facebook HQ

Image source: Facebook.

Sales and marketing expenses as a percentage of ad revenue

Over the last twelve months, Facebook and Google have spent just 13% of their ad revenue on sales and marketing. While not all sales and marketing efforts go toward selling advertising (Google notably stepped up marketing for its hardware division), it's likely the largest contributor to the line item, considering both derive the vast majority of their revenues from ads. Look how that compares to two of their biggest competitors:

Chart showing Facebook at 13.0%, Google at 13.0%, Twitter at 39.1%, and Snap at 63.3%

Data source: Company financial reports. Chart by author.

To be fair, Snap's number is inflated somewhat due to its initial public offering in the first quarter this year, which resulted in a load of stock-based compensation for its employees. But Snap's marketing expenses still climbed significantly in the second quarter as it launched its self-serve platform. Management is confident it will eventually reap efficiencies from self-serve platforms.

But Twitter may prove a cautionary tale for Snap. Twitter launched its self-serve platform in 2011. Nonetheless, direct sales to big advertisers remain its largest source of revenue. Twitter's sales and marketing expense as a percentage of revenue didn't start to come down until it underwent a major restructuring of its workforce about a year ago. And those job cuts came at the immediate cost of further revenue growth.

Why can't competitors reach Facebook or Google's numbers?

It's very unlikely Snap or Twitter, or anyone else in the digital advertising market, will reach the same levels of efficiency in their sales teams as Facebook and Google. Advertisers actively seek out Facebook and Google; everyone else has to go seek out the advertisers. That's one reason we've seen Twitter's ad revenue decline as it pulls back on sales and marketing spend.

Advertisers are attracted to Facebook and Google because they command so much attention. Not only are their audiences massive, they're extremely well engaged. Google is to "internet search" what Kleenex is to "facial tissue," and 1.5 billion people watch videos on YouTube in an average month, with mobile viewers spending an average of one hour per day staring at their phones. Between Facebook, Instagram, and Messenger, billions of people spend another 50 minutes or so continuing to stare at their phones.

Yes, it is a fair comparison

Some argue that comparing Facebook to Twitter, or Google to Snapchat, isn't useful. They all appeal to different audiences -- Twitter's and Snapchat's audiences are more focused.

The counterargument is that they're all vying for the same advertising dollars. In that sense, they all appeal to the exact same audience. And advertisers can simply get more for their money from Google and Facebook than from any of their competitors: Creating one ad campaign on either platform can reach billions of people. Not only that, the two companies have superior ad-targeting capabilities, enabling advertisers to use their ad dollars more effectively.

Snap is taking steps to lower the barriers to advertising on its platform, but it still requires someone to edit video and images to fit the format. Some of Snap's most innovative ad products, like sponsored filters, require immense upfront costs just to target a few million teenagers (who are likely also to be using Instagram and YouTube).

Facebook's and Google's competitive advantages show up in their sales and marketing expenses. Neither has to spend much to attract new advertisers, because they dominate time spent on the internet. At the same time, they make it very expensive for anyone else to compete in the market.

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Stocks Mentioned

Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$160.03 (-0.76%) $-1.22
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,174.75 (-0.21%) $-4.51
Twitter, Inc. Stock Quote
Twitter, Inc.
TWTR
$38.23 (2.25%) $0.84
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,181.62 (-0.27%) $-5.83
Snap Inc. Stock Quote
Snap Inc.
SNAP
$13.17 (0.30%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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