In the realm of digital advertising, two unmistakable behemoths reign supreme: Google and Meta. Their unparalleled eminence stems from vast global outreach, with billions of users, and their product dominance in search and social media, respectively. Moreover, both companies have established themselves as frontrunners in the rapid race of artificial intelligence. The recent earnings reports of Alphabet Inc. (GOOGL, 3.16%; GOOG, 3.04%) and Meta Platforms Inc. (META, 4.06%) solidify their commanding positions once again.
Despite recent fluctuations in digital ad sales, Google and Meta have managed to bounce back successfully, courtesy of their enormous consumer reach and ambitious plans to capitalize on AI for generating ad sales. Google has been dabbling with AI for nearly seven years, while Meta's Chief Executive, Mark Zuckerberg, emphasized their focus on AI to develop agents, incorporate ad features into existing products like Instagram and Reels, and enhance internal productivity and efficiency. Acknowledging the challenge of forecasting AI outcomes, Zuckerberg candidly admitted their complexities.
Conversely, less fortunate entities like Snap Inc. (SNAP, 2.03%) and X (formerly Twitter) faced discouraging news. Snap projected disappointing third-quarter sales due to increased spending to attract advertisers.
"We expect that it will take several quarters of improved execution to instill greater investor confidence in the long-term prospects," remarked JP Morgan analysts in a note on Snap earlier this month.
Google, the advertising leader, sought to reiterate its long-standing involvement in AI, whereas Microsoft Corp. (MSFT, 2.44%), a significant investor in AI pioneer OpenAI, approached the matter with a more tempered stance, according to Josh Wetzel, the Chief Revenue Officer at OneSignal, in an interview. He highlighted the immediate value of AI for Facebook advertising, especially after Facebook faced data-privacy challenges following changes made by Apple Inc. (AAPL, 1.64%) to mobile devices.
"Meta's impressive quarter provides further evidence that advertisers prefer to allocate their budgets to market leaders like Facebook and Instagram, rather than smaller social media networks like Snap," observed Jesse Cohen, a senior analyst at Investing.com.
Jon Oberlander, Executive Vice President of social at digital marketing agency Tinuiti, added, "To a large extent, the game still belongs to Meta/Google, especially for performance advertisers, given the ROI and scale they can achieve in the mid-lower funnel, surpassing other platforms."
Simultaneously, Forrester analyst Kelsey Chickering projected a slowdown in linear television ad revenue between now and 2027, declining from $70 billion to approximately $65 billion. This decline is attributed to traditional TV's waning appeal among the under-25 demographic, who have migrated to streaming services and creator-heavy platforms like Snapchat and TikTok.
Digital advertising is expected to grow in the high single digits or more in 2023, slightly exceeding the forecasts made by GroupM and Magna in June, each estimating around 8% growth. Brian Wieser, Head of Madison and Wall, a media and advertising consultancy for investors, asserted that Google, Meta, and Microsoft's LinkedIn would be the primary beneficiaries of this growth, as per data from Emburse. Conversely, Emburse reported a significant 54% drop in ad spending on Twitter/X compared to last year in May, before Elon Musk's acquisition of the company.
"Google, Meta, and LinkedIn are platforms where people flock to consume information, explore ideas, and contextualize their personal or work experiences," noted Emburse's Chief Experience Officer, Johann Wrede.
During an earnings call, Alphabet CEO Sundar Pichai proudly boasted of their "continued leadership in AI and our excellence in engineering and innovation that drive the next evolution of Search" and other services, along with improved YouTube ad sales. In contrast, Meta's introduction of potential X-killer Threads could significantly boost their ad sales in the future.
Zuckerberg envisions long-term potential for Threads despite a decline in user sign-ups, as X continues to lose advertising clients. In response, they have reportedly reduced ad costs to entice business customers.
"The launch of Threads holds great promise for Meta. While the app currently lacks ads, it's inevitable that they will be introduced, and the prospect of utilizing data from other Meta properties for targeting is a highly lucrative proposition for brands," expressed Aaron Goldman, Chief Marketing Officer at Mediaocean, in an email.
This translates to further near-term challenges for smaller platforms like Snap and X, which are experiencing negative growth, as warned by Michael Nathanson of SVB MoffettNathanson in a note on Wednesday.
"The truth is that Alphabet initiated the integration of machine learning and artificial intelligence into their products and ad solutions almost a decade ago," he pointed out, while highlighting the struggle of Snap and others to catch up.
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