Source: Facebook.
If the newest report from strategic global media unit, Magna Global, is of any indication, ad spending is in the middle of a transition. For years, television dominated ad dollars but now the medium finds itself struggling against digital (Internet and mobile-based) advertisement. Next year, Magna Global expects U.S. ad revenue to increase 2.7%, but it expects television-related ad revenue to drop 1.4% while digital increases 15.5%.
And Magna Global is not the only company predicting tough times for the television, ZenithOptimedia notes that television globally accounts for nearly 40% of ad spending, but that has "now peaked" and will drop to 37.4% in 2017. In the classic "ad dollars follow eyeballs" maxim, ZenithOptimedia finds that online video -- just one facet of overall digital advertisement -- will grow to 2.8% of the market from 1.9% during that period, growing its market share percentage 47%.
Why Facebook?
Generally, most companies have a fixed dollar amount, or percentage of revenue they would like to spend on marketing, and then they shift that funding to the platform that provides the best return. Companies collect data, refine, and repeat the process frequently. And while it isn't quite a zero-sum game, as one platform grows higher than total ad spend growth, that has to come from another platform.
As one of the largest digital and mobile websites, Facebook (FB +1.11%) commands a lot of digital ad spend. And the company has been growing as well. Matter of fact, in its recent reported third fiscal quarter, Facebook reported an astonishing 64% increase in advertising revenue from last year's corresponding quarter by reporting $2.96 billion. Mobile represented nearly 66% of that figure, up from 49% of ad-based revenue last year's quarter.
Another major player in the digital advertising space is Google (GOOG +1.91%) (GOOGL +1.45%). Although the company increased its revenue 20% in its recent reported third fiscal quarter, the company saw its average cost-per-click decrease 2% during that period. With more ad dollars flowing to digital platforms, Google investors could benefit from this shift as well.
And why will my cable bill increase?
Led by Facebook and other digital sites, Magna Global expects digital media in the U.S. will surpass TV ad revenues by 2017. And here's the catch: As television ad revenue decreases (or even grows at less than the cost of content), television stations like Disney's (DIS +1.86%) ESPN and Time Warner's TNT and TBS will seek to pass along those excess costs to pay-TV providers who will, in turn, pass along those costs to the consumer -- after adding a profit margin, of course.
Using Disney as an example, in the recent reported 2014 fiscal year, its Media Networks division grew revenue 4% year over year. However, the bulk of that was due to an affiliate fee increase of 6% versus ad-based revenue growth of only 1%. Unfortunately for cable subscribers, affiliate fees specifically refer to the costs they receive from pay-TV providers.
In the event stations are unable to increase their share of ad-based revenue, they could ask for higher affiliate fees to cover their programming costs. In the end, while we hate those pesky commercials, they serve as an important revenue driver to keep affiliate fees lower. If ad dollars continue to defect to Facebook, cable subscribers could be stuck with the bill.
