Competition in digital advertising is on the rise

In September eMarketer reported that Amazon had climbed into third place in the U.S. online ad market. It has a 4.1% market share in contrast to market leader Google at 37.1% and Facebook at 20.8%.  This is not a blip caused by a one-time tax accounting change. The research firm projects that in 2020, Amazon’s share will climb to 7.0%, a growth rate of over 144%, while shares for Facebook and Google are expected to decline.

According to PwC, online ads account for around $100 billion in 2018, making it the largest part of the U.S. advertising market in the U.S., about $30 billion larger than the TV ad market.  It is projected to grow much faster than the TV market too, 7.7% versus 1.3% over the next 5 years.

More and more of the TV ad market is digital, taking advantage of new technology to personalize ads to the viewing audience.  But digital is outperforming traditional TV ads – partly because of the weakness of the traditional TV business model – audiences are declining, lured away to ad-free video services like Netflix and Amazon – and partly because the digital ads are more effective at reaching the desired audience.  Traditional TV remains best for marketers seeking to launch a new product or seeking quick access to a mass audience, but for other marketers trying to find consumers as they are making purchasing decisions, digital is the right choice.

Amazon is gaining ground

Amazon’s skill at getting an ad to a customer when they are about to make a purchasing decision partly explains Amazon’s rise to number three. When a customer enters a search term on Amazon’s retail site, the first search results returned are sponsored by marketers seeking to get their product in front of consumers at a key point in their decision-making process. Much of Amazon’s digital ad revenue comes from these “sponsored product” placements.

Marketers are drawn to the online shopping site because that’s where the shoppers are. Nearly half (46.7%) of US internet users start their product searches on Amazon, according to a May 2018 Adeptmind survey. Google’s share is in the mid-30s.

With the wealth of data Amazon has on its own customers and on the customers of retailers who use its sales platform, Amazon is in a good position to fine tune its ads.  With the added clues provided by product search information, Amazon is in an even better position to provide top of the line service to marketers.

Moreover, Amazon has good information on whether the ads resulted in actual sales on its own site, thereby gaining a crucial advantage over other ad services that struggle to verify that their ads led to sales. According to one Amazon ad sales executive, “roughly 92% of shoppers who start their search for a product on Amazon end up purchasing that product there.”

The competition is fierce and is heating up. According to industry executives, some clients who sell products on Amazon are moving between 50 and 60 percent of their allocated Google search ad dollars specifically to Amazon.  Starting from a solid 4% share, Amazon has plenty of room to grow and challenge the two market leaders.

Don’t forget about Verizon

Over the last few years, Verizon has been positioning itself to be a major challenger to Google and Facebook.  In 2015, it bought AOL, and followed this in 2017 with a deal to acquire Yahoo. Together these properties generated 207.2 million unique monthly visitors in September 2018, which put them in fourth place behind Google, Facebook and Microsoft. Verizon merged these legacy ad platforms into a rebranded ad division called Oath and seemed set to use the combination of its own subscriber data, including their interactions with websites, and the huge audience of the older platforms tech to become a digital advertising powerhouse.

The expected ad competition from Verizon didn’t really materialize this year.  In fact, Verizon’s ad performance was far worse that projections, with ad revenue declining 6.9 percent in the third quarter of 2018.

This shaky start might be attributable to the uncertainty created by the broadband privacy regulations that the Federal Communications Commission adopted in 2016 which would have required opt-in consent for the use of website information for ad purposes.  Congress repealed these regulations in March of 2017, but the uncertainty over what rules would apply to the Verizon ad business was not really resolved until February 2018, when an appeals court finally ruled that the Federal Trade Commission had jurisdiction.

But the inherent advantages of Verizon’s access to broadband subscribers and huge online audience suggest that it is only a matter of time before it becomes a major player in the online ad market.

AT&T is on the move

At the same time, AT&T is seeking to enter the targeted ad business through its acquisition of Time Warner.  Through its Turner division, Time Warner has some of the most popular cable properties in the market including CNN, TBS, TNT, Turner Classic Movies, and Cartoon Network.  AT&T owns DirecTV, with 40 million subscribers, the second largest video distributor.  It also has 130 million mobile smart phone subscribers and 16 million broadband customers.

The TV ad business is challenging.  TV ad revenues are in decline – down an estimated 2% in 2018.   Audiences are dwindling for traditional video services such as broadcast and cable channels, and advertisers are seeking the accuracy of targeted digital ads.

But the combination of the AT&T and Time Warner offered a significant opportunity to increase ad revenue through merger and analysis of the separate AT&T and Time Warner data sets, thereby bringing to the TV ad business some of the targeting capabilities of digital advertising.

But in 2017, the Justice Department challenged the merger in court, arguing that the vertical integration of DirecTV and the Turner cable properties created competitive concerns that would increase subscriber prices.  AT&T argued, among other things, that the merger would help them compete more effectively with Facebook and Google. The trial judge rejected the DOJ complaint in June of 2018, but the case is still under appeal.

This protracted legal struggle has delayed AT&T’s efforts to bring the advantages of personalization to the TV ad business. As in the Verizon case, it is only a matter of time before this merger enables AT&T to play a much bigger role in the digital ad space.

If you think the digital ad business is lacking competition today, you haven’t been paying attention.  The fact is that for now two companies are winning, but the race is far from over.  Amazon is gaining ground and two of the biggest and most powerful companies in America are poised to get into the game for real.