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YouTube Appeals to Small Businesses. Will They Spend Money With Alphabet Inc.?

By John-Erik Koslosky - Jan 19, 2016 at 12:00PM

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A Homer Simpson video targets local advertisers. The market is huge, and big digital players such as Alphabet and Facebook are eyeing an increasingly bigger share.

YouTube, part of the Alphabet (GOOG -1.79%) (GOOGL -1.77%) empire, rolled out a video last month starring the Simpsons characters that targets small businesses as advertisers on the popular Web video platform. The move highlights what's soon to become a major battlefield for the big online players such as Google and Facebook (META -2.57%) and the ad tech they've been developing.

The video, which plays off Homer's famous scheme to start a snowplowing business, shows the character trying to get his "Mr. Plow" business off the ground by tucking promotional leaflets beneath car wipers, only to see them all blown away by gusting winter winds.

Money wasted, and a small business headed for destruction, is the plotline. Until, of course, Lisa advertises her dad's business with a spot on YouTube, complete with his famous "Mr. Plow" jingle, and targets local customers.

The phone starts ringing off the hook. Business for Mr. Plow thrives. Homer gets a key to the city.

The company's message to potential advertisers: "YouTube isn't just a place for brands with primetime budgets; it has become a powerful tool for small and medium businesses, too."

Big growth potential
There's good reason YouTube is appealing to small businesses: The market for local advertising is huge. In early 2015, it was estimated at more than $115 billion. For perspective, that's nearly double Google's revenue in 2014, and 10 times the ad revenue Facebook brought in over that fiscal year.

The local market, however, has long been elusive to the major online players for a number of reasons. Local advertising had for generations been the domain of local media and traditional ad vehicles such as mailers and billboards.

Until about a decade ago, newspapers were a thriving industry that generated the vast majority of its revenue from advertising and the lion's share of advertising from local small and medium-sized businesses. Local radio stations also pulled in their fair share of the small-business ad market.

Advancing ad tech, combined with the rise of mobile computing, is changing that situation at a rapid pace.

Online advertising was set to grow more than 40% in 2015 and potentially eclipse the 40% growth mark it reached a year earlier, according to research from Borrell Associates. Local ads have been seen as a significant driver of that booming business.

Consider newspapers, which had long been the most popular vehicle for local businesses to advertise in. Between 2008 and 2015, advertising revenue for newspapers tumbled by some 43%, dropping from nearly $26 billion a year to less than $15 billion. Radio, which also commands a big slice of local advertising, watched as ad revenue fell by 26% over that time.

Over those same years, the online ad market enjoyed a nearly fourfold increase, climbing from just more than $12 billion to nearly $48 billion.

Two big weapons in the war for ad dollars
Platforms such as Google and Facebook long ago demonstrated that they have incredible reach. Facebook counts more than 160 million Americans and Canadians as daily users. YouTube, meanwhile, claims some 85% of all adults with Web access as regular users. But most local advertisers are trying to reach customers within a stone's throw. 

As tech advances, it should have two distinct advantages to the local advertiser. The first is the platform's ability to target. Google and Facebook collect vast amounts of data on their users. This collection allows the platforms to get the right ads in front of the right eyes, and often at the right times, especially now with mobile location tracking.

The second is the platform's increasing ability to deliver measurable, customized results to advertisers. Facebook executives have talked this point up during recent earnings calls, noting how ad campaigns have translated into auto sales and visits to fast-food restaurants. Imagine for a moment the power of an ad that lets a local restaurant owner see not only how many people saw the ad, but also how many followed through with a visit to the establishment.

A long runway ahead
While this type of customized measurement is still in the relatively early stages, the potential is abundantly clear.

The growth in online advertising will slow at some point, but there's still plenty of room to run for online ad platforms that prove effective. Between newspapers, radio stations, cable TV, business directories such as phone books, direct mailers, and billboards, there's still more than $56 billion in advertising that traditional media controls.

And as technology moves forward and is able to scale for smaller advertisers, it should also be able to reach businesses with budgets too small to take out a display ad in a regional newspaper or metro, or produce a spot for radio or cable TV.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John-Erik Koslosky owns shares of Alphabet (A shares) and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (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.

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