TikTok is a big reason Alphabet's (GOOG 0.72%) (GOOGL 0.83%) Google and Meta Platforms (META 2.67%), which owns Facebook and Instagram, saw their combined share of the digital ad market decline to less than 50% last year for the first time since 2014.

The short-form video app saw its ad sales more than double in 2022, while Meta and Google's ad sales slowed significantly. Meta might end up posting an ad revenue decline for 2022 after flat sales through the first nine months of the year. Google, meanwhile, is faring somewhat better -- ad sales are up 11.6% year over year in the first three quarters of 2022.

So, what's pushing TikTok's market share gains, and can investors expect Meta and Google to overcome its advantages?

Two factors driving ad sales at TikTok

There are two reasons advertisers are flocking to TikTok: lower ad prices and higher engagement.

TikTok's ad prices are nearly 50% less than comparable ads on Instagram Reels, according to data from VaynerMedia reported by the Financial Times. In fact, TikTok's average price per impression is lower than the prices of most major social media companies.

Lower ad prices are a product of simple economics. There's more supply on TikTok and less demand for its ad products. TikTok only started testing ads in 2019. Meanwhile, it's seen its userbase explode. As a result, its ad inventory is growing quickly as it not only adds new users but also increases the number of ads each user sees. Since ad budgets are generally slow to shift, the total amount being spent on TikTok ads has yet to catch up to its supply. That may be changing now, but it'll still take some time for ad prices to climb to the levels of other social media platforms.

Instagram Reels benefits from the broader Meta family of apps. Meta can easily move advertisers across its ad formats to optimize their budgets, and that benefits how well it can monetize its short-form video feature. Likewise, YouTube Shorts, YouTube's short-form video format, can take advantage of the broader YouTube and Google advertiser bases.

TikTok may also be able to produce higher engagement rates than Reels or Shorts. That's a tough metric to properly quantify, though, as the definition of engagement may vary from platform to platform.

The fact is that TikTok has more users spending more time on its app than Meta or YouTube have for their competitors. Meta says 20% of time spent on Instagram is in Reels. YouTube says it has 1.5 billion monthly users on Shorts. But average time spent on TikTok surpasses all of the time spent on YouTube or Instagram. So, engagement with the app itself is very high, which means more opportunities to engage with advertisements.

What can Meta and Google do to stop it?

Investors worried about TikTok's growing effect on the digital ad duopoly's dominance shouldn't be too stressed out.

First of all, TikTok's total share of the advertising market remains relatively small. As the business matures, advertisers will find it more difficult to eke out those low cost-per-impression figures relative to Reels or Shorts. Ad prices will climb as demand growth outstrips supply growth.

More importantly, few other companies beyond Google and Meta have the resources to invest in making ad measurement better following the implementation of Apple's App Tracking Transparency policy in iOS 14. Measuring ad efficacy requires advanced artificial intelligence (AI), now that platforms can't effectively just "see" if an ad impression turned into a sale by tracking users across apps. It's going to take billions of dollars in capital expenditures to build the resources necessary for that level of compute.

As such, both ad giants ought to be able to command higher ad prices and maintain demand for their ads, since advertisers will have a better idea of the returns they're receiving on their ad spend. It's one thing to get more ad impressions per dollar; it's another to see them convert into actual sales.

Additionally, those same resources both Meta and Google are building can also help improve algorithmic models for ad and content targeting. That could lead to meaningful improvements in engagement. Meta has already shown how AI improvements increase engagement on Reels, noting a 15% bump in watchtime after implementing a new AI recommendation engine in the second quarter.

While TikTok has a big advantage right now to attract advertisers, it might not be the strongest moat. Ad prices will climb, and Meta's and Google's engagement levels could catch up. Meta and Google both have sustainable long-term advantages from their existing user and advertiser bases (network advantage), and their investments in artificial intelligence will only serve to improve their lead in technology. So, even if TikTok can take additional ad share from Google and Meta in the short run, it's no reason for long-term investors to avoid shares of either stock.