Digital advertising is a megatrend that's benefiting pretty much anyone with a toe in digital media. We've seen a rush of traditional media companies, telecoms, and just about everyone else trying to get into digital media just to capitalize on the strong secular trend toward digital advertising.
And despite the growth in competition over the last few years, Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary Google continue to completely dominate the space, combining to take the majority of digital ad sales in the United States. What's more, by some estimates, the companies continue to gain market share despite their dominant positions.
That growth stems from the companies' killer advantage in digital advertising: producing better returns for their marketing partners than any of their competitors.
It starts with the audience
Facebook and Google have massive audiences across their various products. Google boasts seven different products with over 1 billion users: Search, Android, YouTube, Chrome, Maps, Google Play, and Gmail. Google Assistant and Google Photos likely aren't too far behind. Facebook, meanwhile, has over 2 billion users on its flagship app, 1.5 billion WhatsApp users, 1.3 billion Messenger users, and 800 million Instagram users.
What's more, the audience is extremely engaged. YouTube users spend an average of over 1 hour per day streaming video just on mobile. Google searches are increasing as more consumers now have access to Google Search on their phones or via smart speakers. That same trend is pushing more people to use Google Play for app purchases. Meanwhile, Facebook's 2 billion-plus users spend around half an hour per day in the app. Add another 20 minutes to 30 minutes on Instagram. And there are billions of messages sent everyday on WhatsApp and Messenger.
While competing apps like Snap's (NYSE: SNAP) Snapchat boast average engagement of over 30 minutes per day, and consumers still watch hours and hours of television every day, Facebook and Google really shine by aggregating user data and using it to target advertisements. That targeting data on such a broad audience is what really gives the companies a killer advantage.
Getting the right ad in front of the right person at the right time
There's a great quote from John Wanamaker, a late-19th century department store merchant, about marketing: "Half the money I spend on advertising is wasted; the trouble is, I don't know which half."
Facebook COO Sheryl Sandberg doesn't think that has to be true anymore.
Not only do Facebook and Google have constantly improving measurement capabilities to show advertisers just how well their campaigns are performing (solving the second half of Wanamaker's quote), they have the data and technology to put ads in front of the right person at the right time in order to improve conversion in the first place (solving for the first half).
Of course, competitors like Snap and other digital media and advertising companies will argue they can do the same thing. But none can do it at the level of Facebook and Google for most advertisers.
In a survey of U.S. ad buyers in December, 86% specifically said a Google or Facebook product produced the highest return on investment. And while fringe cases may find better returns on Snapchat or other platforms, Facebook's and Google's broad audiences ensure they produce the best returns for the vast majority of advertisers.
That's a killer advantage that's tough for anyone to overcome. Not only does a company have to build a multibillion-person audience, they have to produce ad products that provide value, and targeting capabilities to make sure they convert well. I don't see that happening anytime soon, and I expect Facebook and Google to continue to benefit from the megatrend toward digital advertising.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares) and Facebook. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Facebook. The Motley Fool has a disclosure policy.