Google Inc (NASDAQ:GOOGL) has barely outpaced the S&P 500 in 2015, and the outlook doesn’t promise much outperformance.
Tuesday buzz centered around Verizon Communications Inc’s (NYSE:VZ) plans to buy AOL Inc (NYSE:AOL) for $4.4 billion, putting VZ directly in competition against Google billions in worldwide mobile advertising revenue.
In 2014, Google derived 89% of its revenue from ads, and GOOG’s recent quarter showed total ad revenue increase 11% to $15.5 billion.
But as the race for mobile ads is crowded with competition from the likes of Amazon.com Inc (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB), Spotify, Twitter Inc (NYSE:TWTR), and VZ, Google stock may go from flat to nosedive as the search giant’s ad revenue come under assault.
Mobile Ad Revenue is The Holy Grail for GOOGL
Let’s jump straight into the problem: In addition to the heavyweights like AMZN, FB and VZ, there are many more smaller contenders all vying for what Google so long took for granted — its dominance on personal information.
So far, in 2015, Pew Research found that 39 out of 50 news sites experienced greater mobile traffic over desktop. The relevance of ads in our mobile first world is increasingly reliant on personal data to appeal to consumers on the micro level. Google’s search algorithms gave the company a leading advantage, but the competition is wise to GOOGL’s game.
For instance, the VZ-AOL deal gives Verizon access to AOL’s vertically integrated ad-tech stack to combine with VZ’s own troves of customer data, making it a force to recognize. Clearly Google took notice, revising its search algorithms to favor sites with strong mobile designs in a bid to get websites to design mobile-friendly stores to get back traffic GOOGL has lost out to from AMZN.
In 2014 alone AMZN grew searches by 73%, as the Seattle company benefited from mobile surpassing desktop searches and the aforementioned general lack of favorable mobile stores.
Investors should be worried.
Enter Spotify
Spotify, the private music streaming behemoth is allegedly readying a web-video service, although critics cite Spotify’s need to grow content as a significant barrier.
Rumors suggest Spotify has approached YouTube’s content creators and distributors for potential acquisitions of existing shows and collaborations on original content.
It wouldn’t be the first time a company successfully pivoted its business from music to video: Apple Inc (NASDAQ:AAPL) did the same thing with its iTunes store.
The real meat here is Spotify’s access to personal data about its user’s music tastes, which it could effectively spin into targeting video to consumers on a “taste-by-taste” basis, making it a mobile video advertiser’s dream.
Spotify could make an official announcement this month. And the potential that Spotify could cut into Google’s advertising revenue generated from YouTube by stealing its content creators, Google stock investors may go running for cover.
The Bottom Line Doesn’t Look Good for GOOGL
FB actually surpassed GOOGL in web video views in August last year, causing video advertisers to favor FB even more than YouTube.
Facebook has a dagger at the heart of GOOGL ad revenue, and its “Instant Articles” feature is another thrust toward the king of search. Through Instant Articles, FB is creating major partnerships with news outlets like The New York Times Co (NYSE:NYT) and BuzzFeed to publish content directly on FB rather than linking out to content.
Facebook anticipates more news sites will sign on as the web news industry, grappling with how to monetize a mobile audience, will be attracted by FB’s 37% mobile ad share.
Facebook also offers publishers a better deal than GOOGL, letting publishers keep all of the revenue generated from articles posted directly on the site and 70% from ads FB sells itself. Compare that to Google, which has fielded complaints from YouTube creators that GOOGL welcomes itself to 45% of ad revenue, leaving barely more than half for the content publishers.
Essentially, FB is looking for publishers to create content that stands out from the questionable sources that plague social media, emphasizing content optimized for mobile viewing.
Facebook is effectively creating another venue for advertisers, much like Google’s search algorithms gave rise to SEO (search engine optimization). Facebook’s policies offer publishers a way to raise content above the of dreck littering the online, and now mobile, landscape.
Considering the increasing importance of mobile advertisements and Facebook’s steady success with mobile, GOOGL investors have plenty to worry about.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.
