Macro Wrap – The Future of Internet Advertising, $GOOG, $FB, $NFLX

by Enis August 9, 2013 7:57 am • Commentary

The Internet was the future, and it has arrived.  Imagine how your day was spent 20 years ago, and then think about what you do today.  From kids to grandparents, and everyone in between, our lives are dominated by staring at screens, in all shapes and sizes – our portal to the vast, endless Internet.

For better or for worse (and I’m on either side at times), the Internet captures the majority of the developed world’s eyeballs.  But the medium itself has drastically changed compared to even just 5 or 10 years ago.  Today, you will no longer find bulletin boards or AOL chat rooms.  But you will find an increasing amount of shopping conducted online, way more photos and videos rather than text, and more trolls than ever (ask Doug Kass).

Just like TV became the medium of choice compared to radio and the newspaper, online video is rapidly encroaching on what used to be an all-text Internet domain.  Much faster connection speeds have enabled this transition.  Aside from just displacing Internet text though, my hunch is that online video will take an ever-increasing share of TV advertising dollars.

Along those lines, I posted some thoughts about NFLX and the Future of TV in mid-June.  The key industry takeaway for me:

1)  Online video is a new frontier.  Internet speeds globally have finally advanced enough that streaming video has quickly become a viable alternative or attractive supplement to traditional TV.  Mary Meeker had her popular internet trends slideshow last month, and this slide was one of the most frequently cited:

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The intended takeaway was that mobile had plenty of room to grow in terms of advertising dollars.  While that’s likely true, one thing I took away from this chart was the continued dominance of TV for the advertising industry.  In that sense, the simple fact that NFLX has 40 million global subscribers is quite valuable for its future potential.  Even though NFLX does not advertise now, I could see them introducing advertising in the future for potentially reduced rates for their subscribers, especially if their original content library grows.  But how do you value that future opportunity?  Very hard to say.

That’s why I view YouTube as the crux of Google’s online advertising dominance going forward.  From my Q2 earnings preview:

One area of concern for GOOG has been the decline in online advertising rates for traditional display ads over the past 2 years.  That was part of the reason for their poor Q3 result in 2012 that halted the stock’s strong momentum last year.  However, one gem for GOOG in the shift in the online advertising landscape is YouTube.  YouTube is the leader in online advertising by a large margin.  See comScore rankings from earlier this year.

I was not surprised then, to see an article in the WSJ last night that Facebook is beefing up its video services.  While Facebook is far behind Google in online video, that same comScore ranking had Facebook currently in second place for total unique online viewers (though Google, through Youtube, currently hosts 30% of all online videos, vs. just under 2% for Facebook).  Even as all online platforms race to catch up to Google, the sheer size of Facebook’s platform is an obvious advantage as it looks to grow its online video advertising revenues.

For the industry as a whole, online video is more and more likely to be supported by the traditional TV advertising model rather than the subscription services of NFLX and Hulu.  At least that’s what’s suggested by Accenture’s recent Internet consumer survey, in which global internet consumers are becoming more unwilling to pay for online video:

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As more free, ad-supported online video content proliferates, I expect that shift in attitudes to continue.  In that sense, subscription services are more likely to resemble HBO and Showtime in the current TV landscape.

The online video market is still in its infancy.  Even in the U.S., the pioneer in all things Internet, a minority of the population consumes online video over the Internet.  From that same Accenture survey:

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The global reach of online video also speaks to the future rewards for the leading content providers.  If you’re a content trailblazer, you have a much larger reach today than you did 20 years ago.

Skeptics of online video question the willingness of attention-constrained consumers on the internet to watch online ads in the first place.  But Youtube has been quite effective in gradually introducing an increasing number of 15 second – 2 minute ads over the last few years, in a relatively non-intrusive manner.  Particularly as live streaming of events, shows, and content picks up, online video advertising is likely to work quite similarly to existing TV advertising, and in a more targeted fashion to boot.  Welcome to the future.