Google (NASDAQ:GOOGL) has built an advertising empire based on its ubiquitous search engine, but 2014 will bring more competition to the online-advertising market than ever before. The rise of social-media companies like Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR), with business models revolving around selling advertising, has created additional options for advertisers, especially when it comes to video advertisements. These companies represent the biggest threat to Google going forward.
Search is still king
Google generates almost all of its revenue from advertising. In the third quarter of 2013, 84% of the company's $14.9 billion of revenue was derived from advertising, with that number jumping to 91% if Motorola Mobility is excluded. While Google is still the dominant online-advertising company, with advertising revenue growing in the double digits year over year, the rise of social media is threatening that dominance.
Facebook claimed a 5.9% share of the digital-advertising market in 2012, and Emarketer expects that number to rise to 9% by 2015. Recently IPO'd Twitter, a company in the early stages of monetizing its platform, is expected to take a 2.2% share by 2015, up from 0.6% in 2012. This isn't necessarily detrimental to Google, however, since online advertising will likely grow faster than advertising as a whole, with money being shifted from offline to online.
Search ads are Google's bread and butter, with companies paying to advertise within search results. These are effective because the ad is often aligned with what the user is searching for -- a search for "cheap car insurance in Texas" yielding an ad for Geico is a pretty effective way to sell car insurance. Google's dominant share of the U.S. online search market, along with search engines remaining the key way to find information on the web, has led to Google's exceptional profitability.
Social media sites like Facebook and Twitter, while not very good at finding general information on the Internet, are quite good at serving content. If an article or video goes viral, chances are most people found it on a social network through a friend posting it or tweeting it. Facebook made an attempt to directly challenge Google last March with the release of Graph Search, a search engine which uses Facebook's vast trove of data to find answers to questions involving users and places tagged in photos. Graph Search defaults to Bing web search if nothing can be found.
Graph Search certainly has potential, but it's not a replacement for traditional search engines. The problem is that it only has access to information people willingly give Facebook, making it only good at answering very specific types of questions. There are possibilities for advertising, but Google's search ads will remain the gold standard for online advertisers.
The future is video ads
More money is spent in advertising on TV than on the Internet, so the push for video ads on the Internet is not surprising. Facebook has been testing video ads, and auto-playing video ads began showing up in users' news feeds a few weeks ago. Google owns Youtube, which plays video ads before content is played and allows advertisers to target certain demographics, a significant advantage over traditional TV commercials. However, Twitter may have the most potential of all.
Twitter launched its TV ad-targeting service a few months ago, a service which tracks when a company's ads are played on TV and cross references it with tweets about the program which was airing at the time. The company can then follow up with targeted advertisements, including videos, knowing that there is a high probability that the user recently saw the ad. Given how much people tweet about various TV shows, this product could be a real winner.
Video ads are an area where social networks can gain considerable market share, since Google doesn't really have much of an advantage there. For Facebook, its billion or so users represent a huge potential audience for video advertisers, although auto-playing video ads may drive some users away. For Twitter, integrating with TV advertisements is as innovative as it gets, and this should drive substantial growth for the company. The effectiveness of these ads remain to be seen, but it's a fantastic idea.
The bottom line
While Google's core search-advertising business is safe, social-media's push into video ads offers the most competition Google has felt in years. Facebook and Twitter have the potential to take a substantial amount of advertising dollars away from Google, although it certainly won't be easy. As more advertising dollars shift online, it seems that Google's complete dominance of the online-advertising market may be coming to an end.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Twitter. 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.