Facebook (NASDAQ:FB) recently announced that it now has 2 million monthly active advertisers on its site, up from 1.5 million last July and 1 million in June 2013. That steep growth trajectory makes the social network a significant threat to Google (NASDAQ:GOOG) (NASDAQ:GOOGL), which Macquarie analyst Ben Schachter estimates has roughly 4 million active advertisers.
In 2014, Google's advertising revenue rose 17% year over year to $59.1 billion. Facebook's advertising revenue soared 64.5% to $11.5 billion last year. Between 2013 and 2014, Facebook's share of the digital advertising market rose from 5.8% to 7.8%, but Google's share slipped from 33.6% to 31.1%.
If Facebook's ad revenue maintains its current growth rate, should Google start worrying? Let's compare the advertising strategies at the world's largest search engine and biggest social network to find out.
Google's three weak spots
Google still dominates online search advertising, but it has three big weaknesses: mobile graphical/video ads, a frustrating inability to "get" social networking, and single sign-ons (SSOs).
Last year, Google generated more than twice as much revenue as Facebook from mobile ads (from search and third party sites), yet Facebook generated three times as much revenue as Google from graphical and video ads on mobile devices. Since Facebook's graphical and video ads are concentrated within its News Feed, rather than spread across the Web, they arguably have a more captive audience.
Facebook cleverly limits the number of ads it displays, causing demand and ad prices to spike. Last quarter, the average cost of Facebook ads soared 335% year over year as total ads served fell 65%. By comparison, Google's average cost per click fell 3% year over year last quarter, and cost per click across Google sites slipped 8%.
Since Google+'s monthly active users come nowhere close to matching Facebook's, Google lacks a proper "news feed" to deliver targeted ads. Meanwhile, SSOs for third-party apps and websites have become widely accepted replacements for cumbersome sign-ups and logins.
Since Facebook users are often inclined to play games or share website postings with their friends, Facebook's SSO can be more appealing than Google's. Therefore, Facebook leverages its presence in social networking to tether more website and app users directly to its website, giving it more data to craft targeted ads with.
Making things easier for small businesses
Facebook attributes its advertising growth to its ad platform's ease of use and new tools for ad management. For example, Facebook's new Ads Manager App lets advertisers create, manage, and track all their ad campaigns from a phone. This makes it easier for individuals and small businesses -- who might otherwise be intimidated by the process of ad buying -- to purchase and manage ads.
That's probably why the majority of Facebook's 2 million advertisers are small- to medium-sized businesses. Although Facebook did not disclose the exact ratio between small, medium, and large businesses, COO Sheryl Sandberg noted that the fastest areas of growth for small business advertising were in the Asia Pacific and EMEA (Europe, Middle East, and Africa) regions.
However, smaller businesses also spend less on ads. An average small business advertiser spends $5 to $50 per day on ads, compared to millions spent annually by larger companies, according to Reuters.
Could Facebook disrupt Google's ad business?
It wasn't that long ago when Google and other online portals and search engines disrupted traditional print advertising with digital ads.
Looking ahead, Facebook's three-pronged strategy of integrating ads into its News Feed, giving advertisers streamlined ad management tools, and using SSOs to expand its ecosystem could disrupt traditional methods of digital display advertising. If that happens, Google could see the value of its ads continue to decline as advertisers decide to buy Facebook's tightly focused ads instead.
Leo Sun owns shares of Facebook. The Motley Fool recommends Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Facebook, Google (A shares), and Google (C shares). 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.