Why Google’s And Facebook’s Dominance Is Normal Market Evolution

“Data-Driven Thinking” is written by members of the media community and contains fresh ideas on the digital revolution in media.

Today’s column is written by Nico Neumann, assistant professor and fellow, Centre for Business Analytics at Melbourne Business School.

One key theme in 2017 was the domination of Google and Facebook, which grabbed large shares of the ad market and are likely to continue doing so.

Numbers vary, but estimates for Google and Facebook’s combined market share range from 63% to 84%.

The key questions now are: How special is the market concentration in the digital ad industry? And what are the main drivers of Google and Facebook’s growth?

Reading some of the headlines, one may get the impression that these two organizations lack legitimate reason to be at the top and have played dirty tricks to get ad dollars.

Certainly some pressing issues merit further investigation of some of their practices, such as privacy invasions, antitrust violations or responsibility for spreading fake content. However, these unfortunate incidences didn’t help Google and Facebook conquer the ad world. Industry consolidation is inevitable when markets mature and technology enters the game.

No One Forces Advertisers To Spend Their Money On Google and Facebook

Let’s also not forget that advertising is a free market. Marketers and agencies have long chosen to shift more of their media spend to Google and Facebook, as the numerous upfront deal announcements of several holding groups show (see here, here, here and here).

Moreover, if we recall all the issues in open programmatic markets, such as fraud, brand safety and hidden arbitrage by middlemen, it can’t be a surprise that many media buyers see Google and Facebook as safe bets for digital ad spend.

Google: Convenient Ad Tech Integration And The Leading Search Engine

Google has two distinct competitive advantages that explain why it is the world’s No. 1 ad revenue earner. First, it provides integration across almost all important ad tech tools and probably can claim the most advanced full-stack mar tech solution. Consider the interplay, convenience and significance of Google Analytics, DoubleClick Ad Server, Big Query and buying platforms AdX, DBM and AdWords.

Second, Google’s major product is its search engine, which is driving about 85% of its ad income and is, with 92% global usage share, the clear market leader. The most reasonable explanation for Google’s longstanding search engine popularity is that consumers probably think it works better than the many other freely available alternatives.

In addition, search will always be one of the most efficient channels on which to advertise. There is no annoying experience or entertainment interruption as with TV, banner or radio ads. Search ads naturally help people find products and solutions because they are searching for something and not involved in a different task, such as reading, listening to music or watching a movie.

Facebook: Unique First-Party User Data And The Largest Reach on This Planet

What if banner or online video ads work well for a brand or marketers don’t want to only bet on search advertising? Then Facebook appears to be the most rationale next choice. Advertisers’ needs often fall into two buckets: a) mass marketing and b) user-specific targeting and communication. Facebook can cater to both demands. It has the biggest reach on the planet and allows detailed targeting for numerous user attributes that are based on its users’ first-party data.

Google And Facebook Offer Accessible Ad Tech Automation Solutions

The goal of automation technology is to make people’s lives easier and safer. Sadly, many programmatic vendors and product offers have done the opposite by introducing complex user interfaces, big minimum spend levels and long supply chains.

In contrast, Facebook and Google offer easy-to-use entry solutions to marketers interested in automated media buying. Anyone with a credit card can run a targeted campaign on Facebook or Google AdWords. Google and Facebook tend to be the first platforms media buyers trial when they want to learn more about programmatic solutions.

Market Consolidation Toward Few Key Players Is A Natural Phenomenon

Facebook and Google account for most digital ad spending. However, they seem far from untouchable and there other strong contenders can compete with the two advertising behemoths, such as Amazon, Snap, Twitter and Verizon/Oath. Many market observers even expect that Amazon could, in the long run, become more relevant than Google because of its rich ecommerce data, internet product experience and deep pockets.

Whatever the market constellations may be in a few years, consolidation toward a few market leaders would be in line with the natural development of most industries. In my first AdExchanger piece two years ago, I wrote about the Rule of Three, which dictates that when fragmented markets mature, most end up with three major competitors and several niche specialists.

With regard to digital advertising, we need to distinguish between search and display marketing. Search ad allocations are mainly driven by user preferences for online search engines. Considering display advertising alone, Google and Facebook have an estimated combined share of 51.3%, whereby Facebook is the market leader with approximately 39.1%.

Interestingly, this number is even below the threshold of 40% that professor Can Uslay and his colleagues defined as “excessive market share” and found with market leaders in other industries when they carried out their work on the Rule of Three. However, the authors also found that 30% of the more than 160 industries they studied had only two major competitors.

In summary, there are plausible reasons for the continuous growth of Google and Facebook, and strong industry consolidation appears to be ordinary market evolution. While a duopoly is not uncommon, most industries advance toward three major competitors, and there are compelling theoretical reasons for this. A structure with three dominating key players can be seen as optimal as it resembles a tripod that stabilizes an industry and protects against hypercompetition and collusion, according to Jagdish Sheth and Rajendra Sisodia, the authors of the Rule of Three.

Will we have a third stabilizing force in digital advertising? And who would it be?

Only time can tell.

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This post was syndicated from Ad Exchanger.