Google and Facebook’s road to becoming the advertising kings!

In the world of ad-supported services, experts unanimously cite the maxim that “if you are not the customer, then you are the product.” Interestingly, this maxim is often forgotten when it comes to measuring the viability of a service, and Twitter is a perfect example.

Here’s a response to my post “How Facebook Squashed Twitter”:

The fundamental problem, as I've argued for years, is that Twitter is often compared to Facebook, and it shouldn't be. Facebook's audience is billions of people, covering most of the world's population, while Twitter's audience is only hundreds of millions. Twitter's achievements are undoubtedly admirable and contain enormous value, but it is not Facebook. No matter how many new features developers add to Twitter, they can never make it as popular as Facebook. Randomly adding new features will only dilute Twitter's core value, thereby greatly reducing Twitter's popularity and usefulness.

From a user's perspective, I completely agree with this statement. But what that proverb reveals is this: the most important thing is undoubtedly the customer. From the advertiser's perspective, we will find that Facebook and Twitter are completely comparable, which is a fundamental problem that Twitter needs to overcome. The digital advertising landscape is evolving toward a simple proposition: Either rely on Facebook or rely on Google, and everything else is just empty talk.

The Killing in Consumer Services

On Friday, LinkedIn's stock price experienced one of the most tragic episodes in stock market history: Even though the company exceeded analysts' expectations on both revenue and adjusted earnings, its stock price still experienced a 40% drop. Such a huge drop was completely beyond investors' expectations.

LinkedIn must realize that the company's stock price is not a scorecard of the company's performance; it reflects the market's valuation of the company's future performance. Changes in a company's valuation from its current revenue level reflect investors' expectations of its future performance. Admittedly, LinkedIn's relatively mature core business (which primarily caters to recruiters ) is performing well, which is why the company's business performance has exceeded expectations. But since there are bound to be natural limitations in the market, companies need to seek growth elsewhere. LinkedIn hoped to make a breakthrough in the advertising field, but unfortunately, its performance in this regard did not meet expectations. With the suspension of the off-site advertising project "Lead Accelerator" (LinkedIn had previously decided to stop displaying ads on its pages), it has become even more difficult for LinkedIn to achieve growth in the advertising field.

Yelp's stock price also fell 11% after it released relatively modest revenue numbers on February 8. The company's biggest one-day drop in its shares (up 28%) came last summer after performance fell short of expectations and a decision to halt a brand advertising program.

As revenue and earnings continue to decline, the value of Yahoo's core business has become worthless. Twitter's valuation has been cut to less than $10 billion, which pales in comparison to the company often compared to Google ($460 billion, one of the world's most valuable companies) and Facebook ($267 billion).

The reason for such a sharp contrast is due to the most important and critical "customers": advertisers who choose to purchase advertising services on "free" consumer service platforms.

A brief history of the advertising industry

Newspaper is the oldest advertising tool used by advertisers and for many years it was the only tool used by advertisers. This did not present any problem at the time, as newspapers had the magic power to continue expanding based on daily advertising sales. From a business perspective, anything other than advertising is just filler.

During the first half of the 20th century, U.S. newspaper revenues grew at roughly the same rate as GDP. For as long as records can be found, advertising has accounted for about 1.2% of the U.S. economy. In the second half of the 20th century, with the advent of radio and television, the growth of the American newspaper industry declined slightly.

Compared with newspapers, advertising based on radio and television has obvious advantages, both in terms of narrative and efficiency in capturing the attention of potential customers. However, although newspapers no longer have a monopoly on the market, due to the inherent limitations of radio and television, the growth of newspaper advertising is still encouraging. The inherent limitations of radio and television are as follows:

1. Since both radio and television programs are time-sensitive, the space left for advertising is limited. When supply and demand are too low, advertisers who want to place ads on radio or television programs will have to bear high costs.

2. Compared with advertising in newspapers, advertisers have to bear high costs to create effective radio or television advertisements.

3. It is difficult for advertisers to measure the input-output ratio of radio and television advertising. Although the newspaper industry does not have a significant advantage in this regard, at least coupon-style advertising can give advertisers a more intuitive experience.

Eventually advertisers (also known as “brand managers” in the consumer packaged goods industry) came up with some marketing strategy that combined all three mediums with on-site promotions in hopes of attracting more willing-to-pay customers:

In terms of awareness creation, television and radio are undoubtedly the two most effective channels for making customers aware of the existence of a product and thus building brand affinity. In this case, customers will form a subconscious preference for your product in their minds, and they will be more likely to choose your product when purchasing similar products. Newspaper advertising, on the other hand, targets the “consideration” level: newspaper advertising can help consumers decide which specific product to buy (coupon-style advertising is particularly important). Finally, brand managers spend a lot of time and money to build close relationships with retailers because the latter can often drive customer conversions. When it comes to customer loyalty, their views are very ambiguous.

Digital Advertising 1.0

The first wave of digital advertising targeted the extreme end of the three levels: computers record everything, so the purchase behavior caused by an advertisement is very intuitive in the computer world. In this case, the biggest beneficiary is undoubtedly Google. Since customers who type in keywords to search already have the intention to buy (enter the conversion level), search-based advertising is very effective. For example, for users who have already expressed the desire to purchase services such as insurance, travel, or lawyers, Google can charge high advertising fees to advertisers of related businesses.

In order to make good use of digital advertising tools, advertisers have made various attempts. The boldest and most effective way is undoubtedly to target users who have viewed related content as marketing targets. This approach allows customers to skip the consideration stage, although it can often seem weird to customers because it’s too direct. But the top layer of consciousness remains unimproved: people have not yet figured out how to efficiently and effectively establish consciousness in the digital world.

To conduct brand marketing on the Internet, brand managers need to overcome two major problems: First, the Internet does not have good advertising units. Banner ads are just a poor imitation of print ads, and the display effect of this form is not even as good as immersive radio, let alone TV; second, due to the speculative quality of brand marketing, advertisers want to push ads to as many customers as possible, so compared with the method of placing more banner ads, advertisers will undoubtedly prefer immersive TV ads that can reach many potential customers at the same time.

But all this is no longer the same today.

Digital Advertising 2.0

Facebook COO Sheryl Sandberg once talked about an interesting anecdote that happened during Facebook's recent conference call:

On Black Friday, Shop Direct, the UK’s second-largest online retailer, released a GIF mocking the upcoming sales extravaganza in an effort to build product awareness. The company then launched a one-day promotion targeting users who viewed the gif. On Black Friday, they promoted products that users were interested in through our ads based on data processing algorithms. The profit they made from this promotion was 20 times the cost. For them, this Black Friday was undoubtedly the most successful one ever, breaking their single-day sales record.

Here, Sandberg reveals a detail that shouldn’t be underestimated: Facebook is accelerating conversions for Shop Direct customers at every level. From the awareness layer originating from Instagram video ads to the consideration layer of retargeting users, to the conversion layer relying on Facebook dynamic product ads, the consumer conversion speed has been greatly improved. It is not difficult to foresee that in the future Shop Direct will establish direct contact with customers through Facebook's "Messenger" application, thereby enhancing customer loyalty.

Google can also provide similar services to advertisers: YouTube corresponds to the awareness layer, DoubleClick corresponds to the consideration layer, and AdSense corresponds to the conversion layer. At the same time, both Facebook and Google assure advertisers that using their services can achieve better profit results: since both companies have excellent customer positioning and conversion identification capabilities, their services will undoubtedly enable advertisers to achieve better benefits; at the same time, advertisers can monitor the effective conversion of advertisements through the interfaces provided by these two companies, and then optimize the overall cost configuration of advertising through management.

At this stage, Facebook and Google have successfully overcome the inherent limitations of radio and television:

1. Facebook and Google have ample inventory, and both have growing user bases and ad loads, and neither company has time constraints. To further expand advertising coverage, Facebook also plans to apply its data to platforms outside of Facebook.

2. The cost of making ads for Facebook and Google is lower than other advertising platforms with different specifications.

3. Facebook and Google have outstanding tracking capabilities. They can not only track online purchases, but also offline purchases.

Both companies (Facebook being the most obvious) dominate the advertising industry. Compared with other digital platforms, their advantages are self-evident: high efficiency, wide reach and significant cost-effectiveness. Smaller platforms such as LinkedIn, Yelp, Yahoo, and Twitter mentioned above can only struggle.

The model of "the winner is the king and the loser is the enemy"

I've long believed that the entire tech sector is fine, and ad-based services are a good example of my point: Google, Facebook, Twitter, LinkedIn and Yelp, considered as a group, grew 19% last year. Although the performance of the last four companies declined by 53%, the performance of Google and Facebook increased by 31%.

It's not hard to understand: while advertising as a whole is a zero-sum game, it's shifting from print to radio, TV, and digital, so we're seeing significant growth in digital advertising. But the digital advertising industry is also subject to Aggregation Theory, and the key to this theory happens to be the "winner is the king, the loser is the bandit" model. Therefore, as the "kings", Facebook and Google can naturally receive all the rewards.

I think this trend will accelerate further: first of all, in the digital advertising industry, it is difficult for us to see substantial growth from third parties other than Facebook and Google (the ones with the best chances are Verizon, which is considering acquiring Yahoo, and Snapchat, which has already reached a partnership with Viacom; Verizon has scale, and the latter has a broad young market). In the digital advertising space, any business that wants to leap over the “carp gate” needs to show advertisers why they’re worth spending their time on.

In a broader sense, the aggregation theory that advocates "the winner takes all" also rings the alarm bell for investors who are afraid of missing out. Many unicorn companies are scrambling to become the "king" in their fields. I think the recent cooling in valuations and funding is partly because these unicorns are in a position very similar to that of Facebook and Google's competitors: they have either lost their dominance in their categories or their categories are not attractive enough.

In part, we can attribute this to inequality in the tech sector: mediocre companies will be further divided. This is not a bubble, but the result of industry rebalancing. In the field of science and technology, the true "king" will stand before us with unprecedented prosperity and strength.

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This article was written by @stratechery and compiled by Ruan Jiajun. It is compiled and published by (APP Top Promotion). Reprinting this article must be approved by Top Promotion , and please attach the link to this article!