Facebook's (NASDAQ:FB) display ads are crushing Google's (NASDAQ: GOOG) (NASDAQ:GOOGL) ads in terms of relevance and interest, according to Adobe (NASDAQ:ADBE) Digital Index's (ADI) second quarter report.
Between the second quarters of 2014 and 2015, Facebook's click-through rate (CTR) -- which measures how often its display ads are clicked -- surged 99%, compared to Google's 24% gain. ADI also found that 51% of consumers thought Facebook ads were more relevant than Google's display ads, which are mainly found on YouTube. A mere 17% preferred Google's ads over Facebook's.
Google generated over five times as much ad revenue as Facebook last year, but ADI's numbers indicate that gap could narrow soon. Why is Google having such a tough time showing consumers relevant ads compared to Facebook?
The impact of Mobilegeddon
Back in April, Google updated its search algorithm to penalize websites which didn't offer mobile versions for smartphones. That move, dubbed "Mobilegeddon," caused companies which weren't ready for the change to shed up to 10% of their traffic.
As a result, Google's ads on those sites delivered less value (measured in CTR) at a higher cost (measured in cost-per-clicks, or CPCs). ADI reports that mobile CTRs across the industry declined 9% annually, although mobile CPCs improved 16%. This problem, known as "click inflation," forces advertisers to "spend more just to stay even," according to ADI analyst Joe Martin. This means that advertisers will flock toward platforms with more cost-efficient CTRs like Facebook.
With Mobilegeddon, Google tried to match Facebook's mobile relevance with one sweeping change. However, Google's advertising business had too many moving parts, with display ads scattered across the web. By comparison, Facebook maintains tight control over its ads, which are only shown on its News Feed and third-party apps within its Audience Network. 1.25 billion of Facebook's 1.44 billion monthly active users (MAUs) accessed the site from mobile devices last quarter, and 73% of its ad revenue coming from mobile devices -- up from 59% a year earlier.
Why Facebook serves better ads
Thanks to its more streamlined model, Facebook is crushing Google in mobile display ads. According to eMarketer, Facebook's mobile display ad revenues in the U.S. were more than three times higher than Google's last year.
Last year, Facebook started throttling the number of ads which were displayed across its network, so that it would only show customers relevant ads. As a result, costs soared. Last quarter, Facebook's average price per ad rose 285% annually, although ad impressions fell 62%. Facebook apparently found a magic formula for selling premium ads which users were willing to click on.
The key difference between Facebook and Google is how data is collected for targeted ads. Facebook uses everything in a user's profile -- which includes personal information, places visited, interests, and more -- to create an profile for ads. With single sign-ons, it "follows" users across the web to track their interests. By comparison, Google mainly relies on search histories, locations, and single sign-on records across sites to create a profile for targeted ads. Its social network, Google+, isn't nearly as popular as Facebook, so it lacks detailed social profiles to use for targeted ads.
In short, Facebook bases ads on a person's digital personality, but Google bases them on digital echos and footprints.
Google could soon lose the video battle, too
eMarketer estimates that annual spending on video ads in the U.S. will soar from $5.96 billion in 2014 to $12.82 billion in 2018. In April, Facebook claimed that it was serving over four billion video views per day -- up from three billion in January. A recent report by Ampere Analysis revealed that Facebook had 315 billion video views in the first quarter, versus YouTube's 756 billion views.
But Facebook is delivering videos where it counts -- on mobile devices. 75% of Facebook's video views come from smartphones, compared to just 50% for YouTube, according to RBC Capital Markets analyst Mark Mahaney. Unlike YouTube videos, which must be clicked on individually, Facebook videos autoplay while a user scrolls through the News Feed. An advertiser only has to pay for an ad if a user watches over ten seconds of the video.
Facebook has been serious about killing YouTube with its video platform. In March, it allowed users to embed Facebook videos on third-party sites to challenge YouTube. Earlier this month, it mimicked YouTube by sharing ad revenues with video creators.
Facebook hasn't disclosed how much revenue it generates from video ads, but a recent report from Kinetic Social claims that 27% of its clients' ad spending during the second quarter went toward Facebook's video ads. YouTube, on the other hand, still isn't profitable -- it merely broke even last year due to soaring expenses.
Watch your back, Google ...
Looking ahead, Facebook will keep leveraging its strength in social and mobile to attack Google's core advertising business. Google still generates much more revenue than Facebook, but its ad revenues only grew 11% annually last quarter, compared to Facebook's 46% gain. If that trend continues, Google might eventually lose its title as top Internet advertising company in the world.
Leo Sun owns shares of Facebook. The Motley Fool recommends Adobe Systems, 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.