Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google and Facebook (NASDAQ:FB) dominate the digital advertising market so thoroughly that any move either company makes has huge reverberations for the entire industry.
The Alphabet's search giant had about one-third (31.1%) of all global ad sales in 2014, while the social-media network commanded 7.75%, according to Statista. Combined, that's more revenue between the two industry leaders than all the other companies that command at least 0.5% of the market put together.
Thus, both Alphabet and Facebook have incredible power to define exactly what advertising is. It's not impossible for rivals to sell using different criteria from Google and Facebook to define how ad impressions are measured, but it's very difficult.
The two industry leaders set the standard, and pretty much everyone else has to follow. Now, Google has decided to change a facet of digital advertising that will have reverberations for every brand spending money on ads and every website making money from them.
The search giant will only charge customers for ads that are actually seen.
Well, that's obvious, right?
While it seems logical that advertisers would only pay for ads that are viewed, that's never really been how it works. For example, in the broadcast world, ratings measure how many people watch a show, which gives you an idea of how many saw any given commercial.
Ratings can't, however, tell you which people stop paying attention as soon as a show goes to commercial or how many times their bathroom, snack, and other breaks cut into those times. Similarly, a company selling a billboard can tell prospective advertisers how many cars will drive by, but it can't break down which drivers won't look as they pass the ad.
In the digital world, ad impressions have in many cases been a vague thing. For example, a company usually pays whenever a page with its ad is loaded. Even if the ad is off-screen and a consumer never scrolls down to it, the impression counts and is billed for. Certainly, ad pricing takes into account some of these factors -- that's why premium spots at the top of the page cost more -- but it's likely that billions of ads get paid for each year, but are never seen.
Google plans to change that.
What is Google doing?
The search company has changed the rules for its Google Display Network after conducting a study of its display advertising platforms, including Google.com and Doubleclick. The findings were eye opening, and the company laid out in a blog post what it found and the changes it intends to make:
Most display ads -- 56%, in fact -- never had a chance to be viewed because they were below the fold, scrolled out of view, or in a background tab. Soon, we'll make the GDN one of the only media platforms where advertisers don't pay for an ad impression unless it was viewable. This means your media dollars will only be spent where they can have an impact. In the next few months, all campaigns that buy on a CPM basis will be upgraded to be viewable CPM (vCPM).
When Google does this, it should affect every other website that sells ads. In some ways it's less relevant for sites that engage people for longer periods of time, but for every business built on the idea of cramming pages with ads that may or may not be visible upon a page loading, this changes how everything works.
This should make ads more valuable
This move from Alphabet's Google will almost certainly cause advertisers to factor viewability into any ads they purchase, and it should lead them to refuse to buy ads that aren't seen. That's bad for Web properties that pack their pages with low-priced ads, many of which have little chance of ever being viewed, but there should be a positive impact from Google's actions.
If companies are paying only for ads that are seen, the rate they pay for those impressions should increase. This approach could, maybe even should, create a world where engaging content -- which keeps people around long enough for the ad to count -- commands better prices.
That's a model Facebook has embraced indirectly. Since its ads are served contextually based on a user's interests, friends, and other habits on the site, it's long been using a viewability model on much of its advertising. In general, Google's actions should benefit quality sites with well-targeted ads and harm ones that were largely just page-view scams.
Ultimately, this move will be good for advertisers and good for consumers. It should cause people to see better ads -- ones that target them more directly. It should also lessen the amount of times when a page clicked on from a search result brings you to a less-than-quality site packed with so many ads that whatever you were actually looking for is obscured.
Daniel Kline owns shares of Facebook. He hates those ads where clicking the x to get rid of them launches a page. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Facebook. 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.