As leaders in digital advertising, it's no secret that both Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) rely heavily on selling more, and more expensive, ads to drive growth. About 90% of Google's $17.26 billion in revenues last quarter were from ads, and Facebook relied even more heavily on its marketing partners to generate sales. While both have plans to further diversify their respective revenue streams going forward, it's safe to say advertising will continue to be the primary source of top-line growth in the foreseeable future.
For Facebook, digital ad sales are expected to become even more critical -- in the near term at least -- according to CFO Dave Wehner, due to slowing PC game usage. Continuing to focus on its app development efforts and taking the wraps off its soon-to-be-released Oculus Rift virtual reality headset early next year should help Facebook spread the revenue generation wealth, but ad sales are where its bread is buttered.
Based on Facebook's past success and new data that suggests consumers are considerably more amenable to online advertising from their local small and medium-sized business owners (SMBs), Facebook's focus on selling ads to the "little guy" will continue to be instrumental for future growth.
Customers prefer home cooking
The disparity among U.S. Internet users in their response to ads from local businesses versus those by national brands left no doubt as to who is more likely to generate sales from their respective digital efforts. A whopping 96% of domestic Internet users said their local business owners were better at "personalizing" their digital ads than the larger national chains. Over 90% of the respondents felt SMBs were also more trustworthy and were likely to treat consumers more fairly than their bigger but less in tune advertising brethren.
The disparity among digital advertisers is due in part to SMBs' focus on further developing and improving their websites and online advertising initiatives. As per another report, a full two-thirds of U.S. consumers have noticed improved websites from SMBs in the past couple of years, and many are now focused on enhancing their sites to become compatible with the fast-growing mobile user market. Nearly 40% of the consumers surveyed said they were "impressed" with their local SMBs mobile presence, and that figure is likely to grow.
Make no mistake, COO Sheryl Sandberg made it clear last quarter when asked about luring more brand-name advertisers into the fold that Facebook is working to do just that, and the unveiling of its high-priced video spots -- it charged as much as $1 million a day during the testing phase -- are ideally suited for the big boys. That said, Facebook's Q1 revenues didn't jump 42% year over year due to reeling in advertising behemoths; it has SMBs to thank for that.
Why it matters
Not surprisingly, Google isn't forthcoming about the number of advertisers it has in the fold, but estimates suggest it's around 2.5 million, and with over 30% of the world's digital advertising market, that figure may be on the low side. Which makes Facebook's rapid ascent to 2 million advertising partners that much more impressive. Sandberg didn't say how many of Facebook's advertisers were of the SMB variety, but it's safe to say it makes up a majority of sales.
The opportunity for Facebook, and Google for that matter, isn't necessarily from big brand names and existing SMB ad customers; it lies in the millions of SMBs that aren't marketing partners, yet. Facebook alone boasts 30 million SMB-sponsored pages on its property that aren't currently advertising. That presents a world of opportunity, which Facebook said during last quarter's earnings call it intends to capitalize on.
According to the data, local consumers respond best to personalized ads they can trust, and more SMBs are beginning to realize the value of digital ad spend. With 30 million potential customers already in-house, Facebook is ideally positioned to continue gaining online ad market share from the likes of Google. Sure, securing multimillion-dollar deals with the world's largest brands will be nice, but Facebook's future lies in the hands of SMBs.
Tim Brugger has no position in any stocks mentioned. 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.