Google and Facebook Will Be the Last Ad Platforms Standing
The unthinkable is happening: Ad sales at Facebook and Google are falling. Analysts predict annual revenues at both firms will decline for the first time ever.
That’s the focus of this New York Times story, which ran on Tuesday. As the coronavirus pushes the global economy deep into recession, ad rates are falling to record lows.
And that is, paradoxically, good news for Facebook and Google.
It’s a strange time. Most of the developed world is at home, with 92% of the population living under some form of social distancing. Malls, restaurants, movie theaters and everything in between are closed. Peopled are holed up at home, and they’re consuming a lot of digital media.
In March, a Facebook blogpost noted that demand for its services was going through the roof. Total messaging using its Messenger and WhatsApp services was up 50% month-over-month. During the same time, time spent across company properties rose a staggering 70%.
During this same time, usage was so high at Google-owned video platform YouTube that managers in March made the unprecedented choice to decrease video quality. The decision helped internet service providers save as much as 25% bandwidth by shrinking the amount of data being pushed across congested infrastructure.
While usage and engagement are way up, the other side of the ledger is getting clobbered. Online ads are mostly local, funded by millions of small and medium sized businesses trying to get internet searchers out to their restaurant, show or blowout sale. COVID-19 has shuttered those businesses. They’re not buying any ads. And the outlook is not much better for larger enterprises.
Pathmatics, a digital analytics firm, notes that online ads for entertainment and sports fell 20% in the second half of March. For example, back in February, entertainment company Cirque du Soleil was spending $140,000 daily on ads. That figure slumped to less than $40,000 in late March, according to the Times. Today, the contemporary circus producer has no online ad budget. None.
It’s a story repeated at Korean Air, Norwegian Cruise Lines Holdings Ltd. (NCLH) and countless other firms. Airbnb, the highly popular homestay marketing company, suspended its $800 million annual ad budget indefinitely.
Thus, Facebook and Google are certainly feeling the effects of the downturn. Together, the companies absorb 50% of the spend for digital ads. John Blackledge, an analyst at Cowen, forecast that revenue for both firms might fall 20%. He predicts annual revenue at both will decline for the first time ever.
Many smaller online competitors are also feeling the pain from this pandemic. But for them, the outlook is worse. That’s because even if they make it through the pandemic, many of their customers will not.
Let’s face it: Operating a small business is tough even in the best of times. The Bureau of Labor Statistics finds that only 50% survive beyond three years. Throw in a global pandemic that forces people to worry endlessly about hygiene and invisible germs, and the odds for small businesses only get worse.
A Yelp (YELP) blogpost highlights the extent of the problem. Interest in restaurants is down 64% since March 10. Nightclub searches cratered 84%. The numbers are equally bleak for gyms, salons and other small businesses. Many of these businesses will never come back. To survive the downturn, Yelp is laying off 1,000 staff members and furloughing another 1,100.
Small business’s downfall is an opportunity for giants like Facebook and Google. The reason is simple: These companies have economies of scale that give them powerful competitive advantages.
They’ll be able to get to the other side of weak demand and falling ad prices. They have the best internet properties. Facebook.com and YouTube have 2.2 billion and 1.8 billion monthly users, respectively. Advertisers will always pay to access those markets.
The weakness in online ads is going to lead to plenty of fallout for smaller internet companies. Ultimately, marketers will have fewer choices, and they’ll be forced to work with these tech giants whether they like it or not.
Facebook shares (shown below in red) are up 19% over the past month. The stock trades at 17.7 times forward earnings and 7.1 times sales.
Alphabet (GOOGL), the parent company of Google, is up 4.2% over the past 30 days (shown below in blue). The stock trades at 22 times forward earnings and 5.3 times sales.
Given the prospect of weaker results as the shutdown continues, there’s no immediate reason to chase either stock. However, longer-term investors should use weakness to accumulate shares.
The bottom line is this decline in online ad rates is, ultimately, a good thing for big internet companies. And it will create opportunities to own them at attractive prices.
Jon D. Markman