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State of online advertising worldwide.

The general advertising market is expected to become increasingly digital. IDATE forecasts digital advertising spending worldwide to surpass 125 billion EUR in 2016, reaching close to 25% of total advertising spending. By 2020, the digital advertising market is expected to reach 186 billion EUR, representing a CAGR of 10.3% from 2016. By then, it will have overtaken the TV advertising market which is expected to represent 178.3 billion EUR in 2020, with an average 2.6% annual growth rate.

A growing market largely dominated by Google and/or Facebook

The online advertising market can be broken down into several segments, as can be seen in the figure below.

A mature search advertising market, more innovation in display advertising

The online market can be broken down by advertising formats, of which the two main formats are search and display, which account for over 90% of the market. Perhaps unsurprisingly, the search advertising market is dominated by Google, while the display advertising market is dominated by Facebook, although some regional variants are also strong in their particular countries, notably in China and Russia. Further, within the display advertising market is the programmatic advertising market, which is discussed in more detail later in this feature. For 2020, IDATE predicts that search advertising will reach 95 billion EUR worldwide with a CAGR of 9.0% from 2016 to 2020, while display will show higher growth with a CAGR of 12.4% for the same period, reaching 80 billion EUR in 2020.

Social, video and mobile to drive the market forward

The online advertising market can also be broken down by type of consumption, namely social, video and mobile. Social, as with display as explained above, is dominated by Facebook. Video display is more competitive, but it is in fact mainly a battle between the two giants Google and Facebook; the former through YouTube, and the latter through video posts within its network. Mobile is a similar story, with a great many players moving into mobile and/or declaring a mobile first approach, but the success of Facebook in moving their business into mobile is worthy of note. As can be seen from the figure below, Facebook has succeeded in transitioning their advertising revenues from fixed to mobile, with 77% of ad revenue coming from mobile in 2015, up from 11% in 2012. As a comparison, IDATE estimates that roughly 20% of Google's 2015 advertising revenues came from mobile advertising.

The growing importance of programmatic advertising

As the advertising market becomes increasingly digital, more of its revenues will be generated through the technologies of programmatic advertising. As a way of introduction, IDATE has clarified the main technologies used within online advertising, as follows.

Programmatic expected to account for over 50% of display advertising by 2017

In short, programmatic advertising automates the decision-making process of buying advertising space. It can be used within display advertising, also incorporating social, mobile and video advertising, and is also expanding to traditional TV advertising marketplaces. The key component provided by programmatic advertising is efficiency, making the bidding process more efficient, and therefore cheaper, by removing humans wherever possible to do the "tedious" work. This does not mean however that humans are no longer needed; in fact, programmatic advertising allows advertisers more time to concentrate on setting targets, planning sophisticated campaigns, etc. to make better use of programmatic systems.

IDATE forecasts global programmatic advertising spend to surpass 46 billion EUR by 2020, with a 19.3% CAGR from 2016 to 2020.This means that programmatic is expected to account for over 50% of display advertising by 2017, which equates to 21% of all digital advertising. By 2020, it is expected to account for 58% of display ads (which equates to 25% of all digital ads).

RTB (Real time bidding) the main technology within programmatic advertising

An important advertising technology within programmatic advertising is RTB (Real-time bidding), which remains the fastest growing advertising technology since 2012 (although its growth is slowing). In a nutshell, it is a technology which provides real-time added value to the existing automated bidding process, mainly through ad exchanges.

The process of RTB is as follows:

* A user accesses a Web page or an application (the publisher's site) that contains advertising by RTB

* When the access request is received (by the publisher), an auction is launched (by the ad network) for this advertising space and user profile (a cookie with this profile is read by the Website)

* Advertisers receive the bidding and start auctioning

* The advertiser with the highest bid wins and will be able to display their advertising on this page

IDATE predicts that the global RTB advertising market will reach 23 billion EUR by 2020, with an expected CAGR of 17.5% from 2016 to 2020. It is expected to account for 29.2% of display advertising by 2020, which equates to RTB accounting for 12.4% of online advertising in 2020.

Reliance on personal data and advertising varies according to strategy

As already mentioned earlier in this feature, Google and Facebook are the global juggernauts of digital advertising. The importance of advertising to these two players can be seen in their annual revenues, where 90% of revenues are made up of advertising. It is worth noting, however, that both Google and Facebook are trying or have tried to diversify, to not be solely reliant on their advertising revenue.

Google streamlining their non-core activities, trying to find new revenue streams

Google has restructured into "Alphabet" in order to streamline their diversified activities. Google is now a subsidiary of Alphabet, but remains in control of core activities which have already been successful (search, maps, Android, etc.). On the other hand, all of the other highly diversified activities, i.e. those which have been recording low turnover and negative operating results, have been grouped under a single "gambling on the future", and aims to regain losses and generate new revenue streams. Still, these new activities remain isolated, with little cross-referencing with data from the traditional services. As a result, at least for the time being, Alphabet remains very reliant on the advertising revenue generated through Google.

Facebook focusing (successfully) on mobile advertising following their IPO

At one stage, Facebook also aimed to become less reliant on advertising revenues. An example of this is the introduction of paid services such as Facebook Credits and Gifts in 2011, and looking at the financials it appears that such efforts were paying dividends, with their reliance on advertising revenues indeed declining (albeit still high at 85% in 2011). However, a change of strategy coinciding with the IPO in 2012 saw Facebook focusing on mobile advertising, and as a result Facebook has in fact become increasingly reliant single handedly on advertising revenues. As explained earlier, 77% of Facebook's 2015 advertising revenues came from mobile, up from a mere 11% in 2012, demonstrating the success in this transition.

Other Internet giants are less reliant on advertising, while social networks big and small are highly reliant on advertising

As for Amazon and Apple, the remaining two players making up the GAFA, (Google, Amazon, Facebook, Apple), these players do not have advertising within their core strategy.

Amazon is often referred to as the sleeping giant, as an estimated less than 1% of net sales is generated through advertising (the vast majority of sales coming through the e-commerce business). Yet, Amazon owns the largest database in actual shopping history which is unique to Amazon, and such data has massive potential for marketers, for better targeted advertising.

Apple on the other hand had launched iAd, a mobile advertising platform in 2010, only for it to be shut down in June 2016. Expensive pricing and closed model restrictions within iOS (no cross-platform ads) are thought to have been burdens to growth, but Apple's main revenues come from device sales (90% of 2015 Apple revenues came through device sales), and thus advertising remained peripheral in the large picture for Apple's business anyway.

Finally, it is the social networks such as Twitter and Instagram that are heavily reliant on advertising for revenues. Search advertising is already a mature market dominated by Google, so it is in the field of display where the main innovation is taking place, led by social networks whose core revenue stream is advertising.


IDATE DigiWorld, Montpellier

Figure 3 - Facebook's share of advertising revenue fixed vs mobile,

2012  11%  89%
2013  45%  55%
2014  65%  35%
2015  77%  23%
Source: IDATE DigiWorld, State of Online Advertising Worldwide,
September 2016

Figure 5 - Global programmatic advertising revenues (billion EUR)
and their share (%) of display advertising revenues, 2014-2020

2014  11  31%
2015  16  36%
2016  23  48%
2017  30  52%
2018  36  55%
2019  41  56%
2020  46  58%

programming revenue % of programmatic revenue in display ad revenue

Source: IDATE DigiWorld, State of Online Advertising Worldwide,
September 2016

Figure 7 - Global RTB advertising revenues (billion EUR) and their
share (%) of display advertising revenues, 2014-2020

2014   6  17%
2015   9  21%
2016  12  24%
2017  15  26%
2018  19  29%
2019  21  29%
2020  23  29%

programming revenue % of programmatic revenue in display ad revenue

Source: IDATE DigiWorld, State of Online Advertising Worldwide,
September 2016

Figure 8 - Google total and ads revenue breakdown, 2009-2015
(Million EUR)

2009  17 252  96.8%
2010  21 282  96.3%
2011  27 535  96.4%
2012  32 927  94.9%
2013  38 495
2014  44 940  90.3%
2015  50 494  89.9%

Figure 9 - Facebook total and ads revenue breakdown, 2009-2015
(Million EUR)

2009    576  98.3%
2010   1408  93.6%
2011   2377  85.0%
2012   3225  84.1%
2013   5266  88.7%
2014   8662  92.2%
2015  12873  95.3%
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Copyright 2016 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Firms and Markets
Author:Nakajima, Soichi
Publication:DigiWorld Economic Journal Communications & Strategies
Date:Oct 1, 2016
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