An early morning in Greenwich Village sparks an epiphany about the growing chasm between the old and new worlds of advertising. My television displays the outdated stationary, scattershot approach to selling products: The talk show I’m watching is interrupted by a commercial for feminine incontinence pads. Wow, did they ever get my profile wrong!
Minutes later, out on the street, I step into the new era of mobile digital advertising. When I search my smartphone for running shoes on sale, Google instantly locates me and suggests a nearby Skechers store. But Facebook waylays me. As I pass a Starbucks, a hard-to-resist two-for-one promotion for lattes pops up alongside the news feed on my phone screen.
Over the past decade the traditional advertising market has been shattered by a high-tech earthquake. Internet advertising — dominated by Facebook and Google — has devastated print publication revenue and is now devouring the main income source of the TV broadcasting and cable industry. By the end of next year, digital ad spending will probably exceed TV revenue from commercials.
The two Internet giants use different strategies to capture ad revenue: Google depends on its search engine, whereas Facebook uses its vast social network. Eventually, marketers may be forced to decide which strategy best suits their products. But the advertising market is so large that the two companies have thus far avoided confrontations. “I don’t think they are headed for a showdown,” says Paul Greene, portfolio manager of the T. Rowe Price Media & Telecommunications Fund, which holds both Facebook and Alphabet, Google’s parent, among its $3.6 billion in assets. “There are still enormous pockets of revenue out there for Google and Facebook without attacking each other.”
Google, headquartered in Mountain View, California, makes headlines with its projects for driverless cars, cloud computing and smart-home devices. Facebook, just ten miles away in Menlo Park, has become the mightiest source in the news industry. But above all, the two Silicon Valley giants are advertising platforms — the most effective and pervasive the world has ever known. Ads provide more than 90 percent of their revenue and profits.
Google enjoys a near-monopoly of online searches. As its chief executive officer, Sundar Pichai, tirelessly proclaims, “Google’s mission is to organize the world’s information and make it universally accessible and useful.” Facebook has a stranglehold on social networking. Its mantra, cited at every company presentation by co-founder and CEO Mark Zuckerberg, is “to give everyone in the world the power to share anything with anyone.”
Investors wax enthusiastic over both approaches to advertising. Google is unbeatable for consumers who have already decided to purchase a product and are searching for a favored brand at the cheapest price. “Per unit of time spent, search monetizes dramatically better than any other form of advertising, and it always will,” says Gavin Baker, who manages the Fidelity OTC Portfolio, whose $13.3 billion in assets include Alphabet and Facebook.
But there is a whole advertising market that search cannot address: the ability to offer products to consumers based on the interests and preferences they have shared in their Internet communications with friends and family. And Facebook, which pioneered social networking, is virtually unchallenged in this market. “Advertisers increasingly view Facebook as a platform where you can reach very large audiences and target people down to the micro, individual level,” says Eric Sheridan, a New York–based media analyst for UBS Securities.
For now, Google parent Alphabet is the much larger company, with a market cap that is almost 50 percent higher than Facebook’s and revenue last year that was four times greater than its rival’s. But Facebook’s earnings grew more than three times faster than Google’s in the first half of 2016. And Facebook keeps users glued to its apps twice as long as Google does. More “eyeball” time eventually translates into higher ad revenue.
Google is obviously concerned by its competitor’s rapid gains. A spokesman said it was company policy not to make Google executives available for a story that would include interviews with Facebook executives. By contrast, Facebook offered interviews without preconditions with two of its leading advertising managers: Will Platt-Higgins, vice president for global client partnerships, and Patrick Harris, global director of agency development.
Both Alphabet and Facebook bask in Wall Street’s admiration. They are rated buys and strong buys by an overwhelming consensus of equity analysts; not a single analyst has a sell or underperform rating on either one. Both companies have gross profit margins that are almost without historical precedent: 62.4 percent for Alphabet’s Google and 84 percent for Facebook last year.
Margins like these are obliterating any remaining trace of the Mad Men era of advertising. The slow, costly face-to-face pitches to clients by Don Draper have given way to cheaper, faster computer-generated ads on five-inch iPhone and Samsung Galaxy screens. An oft-repeated maxim on Madison Avenue is that agencies must deliver the right ad to the right person at the right time. “But increasingly, the right person at the right time of that equation is being handled by machines,” says Ian Schafer, chairman of Deep Focus, a New York–based ad agency. “And while machines may not yet be responsible for creating the right ad, it also gets chosen by machines.”
No companies have smarter machines — armed with the latest artificial intelligence — than Google and Facebook. After claiming two thirds of the $59 billion in U.S. online advertising revenue last year, the pair stand to increase their market shares in 2016 thanks to their mastery of the two foremost media trends: the shift from desktop computers to mobile phones and the increasing use of video rather than words in advertisements.
“The most intimate device in our lives is the smartphone,” says Rich Greenfield, a New York–based media analyst at global brokerage BTIG. “So the whole media world is trying to go mobile.” Facebook is the leader. Only four years ago desktop computers accounted for almost all ad revenue at Facebook; today 84 percent of this income is generated on smartphones. At Google mobile ads account for slightly more than half of revenue.
But Google is far ahead of Facebook in video because of the explosive growth of YouTube, which Google bought ten years ago for $1.65 billion. In the coveted 18- to 34-year-old market, YouTube reigns supreme, even over broadcast and cable television. “While TV networks are losing audiences, we are growing in every region and across every screen,” YouTube CEO Susan Wojcicki boasted to an audience of some 20,000 ad executives at VidCon, an annual online-video conference held in Anaheim, California, in June. “Today more Millennials tune into YouTube on mobile alone during prime time than to cable or broadcast TV networks.” According to investors, the future looks ever brighter.
“If anything, everybody is underestimating YouTube’s potential,” says T. Rowe Price’s Greene.
Even before Google and Facebook fully exploit their video potential, both companies are hard at work on competing devices for augmented and virtual reality. Zuckerberg believes VR can someday supplant the smartphone as the main connection to the Internet and as a platform for advertising. The headset by Oculus, a company Facebook purchased two years ago for $2 billion, is considered the most advanced VR device on the market. “Clearly, Facebook is further along in virtual reality thanks to Oculus,” says Ben Schachter, a New York–based media analyst for Macquarie Capital. “But Google is making a lot of investments.”
Given the extraordinary speed of Internet developments, there is no assurance that Google and Facebook can stave off future threats. Amazon.com, for example, could leverage its e-commerce might into advertising. Snapchat, a five-year-old messaging and photo-sharing service with enormous appeal among younger people, is growing at a Facebook-like pace.
But for now the most serious problems facing Google and Facebook are linked to the fear their mammoth size provokes around the globe. In Europe, Google stands accused of abusing its dominant position to ward off smaller rivals and as a result is battling several suits that could cost it billions of dollars. In the U.S., Facebook has aroused suspicions among conservatives that its news coverage is slanted toward liberals. Meanwhile, news publications of every political stripe are becoming beholden to Facebook as a vehicle for wider exposure of their content and a source of ad revenue.
Some investors are wary of the new shareholding class created by Google’s and Facebook’s founders to ensure they will continue to guide their companies without pressure from Wall Street (see “Facebook and Google Embrace Innovation, Not Corporate Governance,”). “Some founders seem to feel that just because shareholders supply capital doesn’t mean they should enjoy corresponding rights,” says Brian Wieser, a senior analyst at New York–based Pivotal Research Group, an equity research firm.
Such hubris is understandable when geniuses in their 20s build enterprises that within a few years soar to the pinnacle of the business world. Sergey Brin, a Russian immigrant, and Larry Page were Ph.D. students in computer science at Stanford University when they created a search engine as a research project in 1996. A year later they registered it as a web domain, Google.com, and in 1998 they formally incorporated it as Google. By then it was already vaulting past more-established search engines, like Yahoo! and Lycos.
In 2000, Google began to display text-based ads on its web pages. The business accelerated so rapidly that in 2001, on the advice of investors, Brin and Page hired Eric Schmidt, a seasoned software executive who had headed Novell for four years, as Google’s first CEO. Three years later came an IPO, which valued Google at more than $23 billion. Today Brin and Page, both only 43, are worth more than $37 billion apiece. Schmidt, 61, is now executive chairman of Alphabet, with an $11.3 billion fortune of his own.
Facebook’s ascent has been even more spectacular. The hit 2010 film The Social Network chronicled Zuckerberg’s sharp-elbowed sprint to create Facebook with several college classmates in 2004 before dropping out of Harvard University and moving to Silicon Valley. A key step in managing Facebook’s fast growth was the hiring of Sheryl Sandberg as chief operating officer in 2008. She had spent the previous seven years at Google, in charge of global online ad sales. Numerous other talented Google alumni also flocked to Facebook, which gained a reputation as the Internet’s hottest company.
In the four years after its 2012 IPO, Facebook reached a $300 billion market cap faster than any business in history. And today Zuckerberg, 32, is the sixth-richest human on the planet, with a personal worth of more than $55 billion.
But Facebook’s path was not trouble-free. In 2011, Google launched its own social network, Google+, in a head-on challenge to its upstart rival. Moreover, the shift from desktop to mobile was under way. Doubts among analysts and investors that Facebook could manage the transition led to an initially disappointing response to the company’s IPO. “We had a sell rating at the time,” recalls BTIG’s Greenfield. “But Facebook succeeded because Zuckerberg pivoted the company better than anybody else in media has ever been able to do.”
Even before proving that its move to mobile was successful, Facebook went on a $25 billion acquisition spree aimed at enlarging its number of users and keeping them online longer. The largest of these purchases were defensive: $1 billion in 2012 for Instagram, a photo-sharing app, and a whopping $21.8 billion in 2014 for WhatsApp, a messaging service with a vast majority of users living in countries outside North America. In both cases Zuckerberg determined that these fast-growing start-ups were competing for the same young audience Facebook had.
Today Facebook counts 1.7 billion users. Many of them overlap with the 1 billion users each at Facebook Messenger and WhatsApp, and the 500 million users at Instagram. For now only Facebook and Instagram are advertising platforms. This has left investors drooling over the company’s growth prospects once monetization begins at Messenger and WhatsApp.
The rocketing upward trajectory has induced a sense of invincibility at Facebook despite the large lead Google still enjoys. With a $542 billion market cap that is second only to Apple’s among publicly listed companies, Alphabet’s valuation is well ahead of Facebook’s $373 billion. And Google’s $74.5 billion in 2015 revenue dwarfed Facebook’s $17.9 billion. But Facebook is growing at a torrid pace. In the first half of 2016, the company’s $11.8 billion in revenue was 66 percent higher than the same period a year earlier, and net income exploded by 254 percent, to $4.2 billion. Google’s first-half revenue was $41.8 billion, a 19 percent rise over the same period last year, and net income increased 23 percent, to $9.1 billion.
During recent quarterly earnings calls, Zuckerberg has evoked a limitless future, with a tripling of Facebook users to 5 billion-plus and a 20-fold rise in business advertisers within a decade. Meanwhile, COO Sandberg gets high marks from analysts for answering arcane financial questions with lively examples and anecdotes about business clients large and small. “She does a very good job of putting a human face on what Facebook is trying to do with both their advertising and user engagement platforms,” says UBS’s Sheridan.
By contrast, Google earnings calls can seem dry. There is more emphasis on cost control, in part because the company’s far-flung, futuristic projects have yet to show profits. The creation last year of Alphabet as Google’s holding company was aimed at appeasing investors by demonstrating that management’s primary focus remained on Google advertising revenue. Unproven, money-losing ventures such as self-driving cars, smart-home devices and life science research are now grouped separately as Other Bets. In recent months there have been three high-level executive departures from these noncore activities: in June, Tony Fadell, head of Nest, Alphabet’s smart-home devices, followed in August by Chris Urmson, a leader of the self-driving car project, and Bill Maris, chief executive of GV, the venture finance arm.
“The company wasn’t as aligned with shareholders as it should have been,” says Michael Nathanson, analyst and partner at New York–based MoffettNathanson, a leading media research firm. “So the separation of Google and Other Bets is hopefully a step in that direction.”
But Google has fallen short on other fronts. Despite owning Android, the world’s leading mobile operating system, Google has lagged Facebook in the transition from desktops to smartphones. Although Google was an early pioneer in cloud computing, it has dropped far behind market leaders Amazon and Microsoft Corp. Even more disappointing, Google+ — the social network that was supposed to provide an alternative to Facebook — has fallen on its face. Alphabet does not disclose the number of Google+ users, but some analysts estimate it has no better than a low-single-digit share of the social networking market. In 2014, Vic Gundotra quit as head of Google+ and left the company. Nowadays little is heard about Google+. “To some extent, Google has become a reactive company,” says Colin Sebastian, San Francisco–based analyst for Robert W. Baird & Co.
These setbacks have been easier for Google to bear because of the phenomenal success of YouTube. A billion viewers — almost half of everyone on the Internet — use the app. In terms of viewing hours, YouTube is six times larger than Facebook’s video total. Although Google does not disclose its YouTube revenue, an April 2016 UBS research note estimated that the video app contributed $8.5 billion, or 12.6 percent of Google’s advertising revenue, in 2015; that was double YouTube’s share just two years earlier.
As part of Google’s search engine, YouTube can instantly gratify users curious to view and hear anything from Winston Churchill delivering his “blood, toil, tears and sweat” speech to Parliament in 1940 to Maria Callas singing her famed “Casta Diva” aria from Bellini’s Norma at La Scala in 1957 to the horrifying opening scene of Jaws (1975). Like almost all YouTube offerings, these video clips are preceded by ads.
As a streamer of popular music, YouTube is fast catching up to market leaders Spotify and Apple Music. Among cord cutters who have abandoned television in favor of video streaming, YouTube has become a serious alternative to Netflix and Amazon Prime.
YouTube’s ballooning audience and ad revenue are terrible news for the broadcasting and cable industry. Advertisers that can afford it have always favored TV for its reach. If an advertiser wants a male audience of 30 million viewers, it buys slots on ESPN. But YouTube is just as efficient as ESPN at targeting a male audience, and a lot cheaper. “Reach can be manufactured on the Internet,” says T. Rowe Price’s Greene. “You can go to Google and ask to buy ad time for 30 million male viewers. Does it matter whether they are watching a college football game on ESPN or a travel video on YouTube?”
Increasingly, brand-name companies are coming to the same conclusion. In a testimonial at YouTube’s Brandcast conference for advertisers, held in May at New York City’s Javits Center, Jack Hollis, chief marketing officer for Toyota Motor Sales U.S.A., recounted how and why his company became an early adopter of online video.
Back in 2010, Toyota launched the Sienna. Like all minivans, the Sienna was burdened with a boring, suburban image. “We set out to change that perception,” Hollis said. A TV commercial would be too costly and brief, so Toyota chose a zanier, less expensive approach on YouTube. To a background rap beat, a balding, middle-aged dad and streaky-blonde mom in a shapeless sweater sway to the music. In the next scene Dad, with a feather boa around his neck, plays tea party with his little girl and suddenly sends the cups flying off the table with a sweep of his arm. The music volume rises and the lyrics extol the Sienna: “It’s the swagger wagon.”
The offbeat, two and a half minute ad went viral. “It became an instant hit, connecting millions of parents who just wanted to feel a little bit cool,” Hollis said. More to the point, he added, the commercial helped drive a nearly 50 percent boost in Sienna sales year-over-year.
Most video ads, whether on YouTube or Facebook, aren’t nearly as long. YouTube ads run an average of six seconds before allowing viewers to skip to the video clips they searched for. Facebook video ads tend to last only three seconds before a viewer can hit the skip button. Facebook’s silent video ads, known as autoplay, place the brand on the mobile screen immediately with an overlay of captions to ensure the message gets through to viewers before they scroll through their news feeds.
But in late September, Facebook admitted to clients that it had exaggerated the time autoplay viewers actually looked at the video ads before skipping to content. For months before the disclosure, critics had urged Google, Facebook and other Internet advertisers to turn to independent firms for measuring viewer data time. “Companies are paying for ads that in some cases aren’t ever viewed, and that’s causing marketers to ask new questions about the effectiveness of their digital marketing,” says Jonah Goodhart, chief executive of Moat Analytics, a New York–based firm that measures the effectiveness of digital ads.
Still, there is little dispute that Facebook and Google target audiences far more effectively than television or print publications can. “When you show an ad on television, you don’t know who’s watching it or if they are sitting in front of the TV or have gone to the bathroom,” says Fidelity’s Baker. By contrast, Google and Facebook have immense data troves on their users. “They have built ad inventory exchanges that enable advertisers to use that data to target people wherever they are,” says Deep Focus chairman Schafer.
The depth and granularity of the data plumbed by Facebook and Google can sometimes surprise corporate clients that thought they knew their consumers better than any outsiders. In a now-classic advertising case, Wendy’s Co. approached Facebook two years ago to help launch a new barbecue sandwich. Wendy’s wanted the ad campaign to focus on 25- to 34-year-olds living in southern and western states, whose residents were known barbecue lovers.
But Facebook’s news feeds uncovered two surprising data insights that ended up shifting Wendy’s campaign: The best potential market was states like Vermont, where consumers complained about not having access to quality barbecue, and barbecue lovers in the targeted 25- to 34-year-old demographic group had a strong affinity for TV and film stars from the 1980s.
Wendy’s responded by pushing the new barbecue sandwich with quirky Facebook video ads featuring Ralph Macchio from the Karate Kid movies and (Stone Cold) Steve Austin, a former World Wrestling Entertainment star. “It wound up being Wendy’s best-selling sandwich to date,” says Patrick Harris, Facebook’s agency development chief.
Such data-driven advertising is a far cry from the world depicted on Mad Men. Among the most memorable episodes of the hit series is “The Carousel” (2007), in which Don Draper makes his pitch to Eastman Kodak Co. to market a new revolving slide projector. Using photos from his own failing marriage, Draper goes back and forth in time to recapture the best moments and create a sense of nostalgia around the new product. The two Kodak ad executives are left speechless. So were real-life ad people. “As I watched the episode, the hair on my arms went up because I have been in a room experiencing that kind of presentation to a client,” recalls Nancy Hill, CEO of the American Association of Advertising Agencies (4A’s), a century-old industry lobbying group.
Unfortunately for traditional ad agencies, such moments are rare nowadays. “Some of that still exists on the ad creation side of our business,” says Deep Focus’s Schafer. “But in ad distribution — the media-buying side of the business — it’s driven by machines.” Soon machines may claim the creative side.
Two start-ups, Wochit and Wibbitz, with offices in New York and Tel Aviv, use machines to analyze and summarize newspaper and magazine articles, then locate photographs and videos from news industry sources to accompany the stories. The firms’ clients include Gannett Co., Hearst Corp., Time Inc. and Tronc (formerly Tribune Publishing), among others. It’s a short step to using the same automation techniques to create and sell video ads. In June, YouTube began offering YouTube Director, an app that allows businesses to produce their own video ads.
Traditional ad agencies are being transformed into intermediaries between clients and the brave new Internet world. “It’s hard going for agencies,” concedes Will Platt-Higgins, Facebook’s global accounts vice president and a former ad agency executive with Saatchi & Saatchi and Grey Group. “Clients want their agencies to take them by the hand and lead them through this new world of advertising and tell them it’s all going to be okay.”
Traditional television also faces a diminished role. Digital ad spending — with the lion’s share going to Google and Facebook — is expected to overtake TV by the end of next year, according to ZenithOptimedia, a London-based subsidiary of public relations and advertising multinational Publicis Groupe. The firm predicts that by the beginning of 2018 Internet advertising will account for 37.6 percent of an estimated $603 billion in global ad spending, compared with 34.1 percent for TV.
Rather than attempting to fight off the inevitable, TV is choosing to collaborate with the digital giants. Television advertising is still the best platform for selling a mass brand like Head & Shoulders shampoo, but it works even better when a version of the same ad is also shown on YouTube or Facebook to younger, cordless viewers. Broadcast and cable networks turn to the Internet to drive what they call tune-ins. “They use Facebook to encourage people to tune in and watch their shows, or to tease a commercial before it airs on TV,” says Platt-Higgins.
All this amounts to a daunting horizon for traditional ad agencies and television broadcasters. But small and medium-size businesses are living in a golden age of opportunity. Unable to afford TV commercials or print media ads, much less advertising agencies, these businesses are suddenly empowered by Google Search, YouTube and Facebook to reach customers within their zip codes and across the country.
Sparkle in Pink, a Riverton, Utah–based small business selling girls’ clothing, went national and increased its monthly sales by 9 percent beginning last year after uploading a slide-show ad and instant-shop button on its Facebook page. Patsy’s Pizzeria, whose clientele is mostly within a five-block radius in Greenwich Village, is on YouTube with a mouthwatering demonstration of a pizza’s preparation, from raw, kneaded dough to its retrieval from the oven by a wooden paddle.
There are already more than 3 million small and medium-size businesses advertising on Facebook, and the digital giant estimates that total could rise to 60 million globally over the next five to ten years. “If you are a dry cleaner just starting a business from scratch, you don’t have the money to retain an agency,” Platt-Higgins says. “But you own a smartphone that allows you to shoot and edit film and use the Facebook targeting tools to reach your audience, which is often a very local one. That’s a total game changer.”
The power of the smartphone multiplies exponentially for larger businesses. In their war with Amazon-led online retailers, brick-and-mortar giants like Wal-Mart Stores and Target Corp. initially viewed smartphones with dismay: Shoppers walked down store aisles comparing prices with Amazon deals. But today chain stores embrace mobile and team up with Facebook and Google to develop online products that draw shoppers.
“Mobile is the front door to Target,” Jeff Jones, the retailer’s then–chief marketing officer, told an audience of advertisers at the Consumer Electronics Show in Las Vegas in January. More than half of Target’s digital sales are made on smartphones, a 200 percent jump since 2014.
Much of that increase is linked to an app called Cartwheel, developed by Target and Facebook. It allows Target to upload its entire catalogue and offer products to Facebook users who are mulling purchases. A commuter on the morning train might browse the Internet for bunk beds for her kids but postpone the transaction. The next time she goes on her Facebook news feed, a Target ad for the beds will pop up on her mobile screen, and she will qualify for future discounts if her Facebook friends purchase the product as well.
According to Jones, who recently was hired by Uber Technologies CEO Travis Kalanick as president of the ride-sharing service, Target shoppers were four times more likely to buy a product if their friends had purchased the same item. Cartwheel claims more than 22 million active users and $3 billion-plus in sales for Target in the three years since its launch.
Invulnerability isn’t guaranteed in the fast-shifting high-tech era. Search engine pioneer Yahoo! reached a peak valuation of $125 billion in January 2000; this past July its Internet business was acquired by Verizon Communications for $4.8 billion.
An overdependence on advertising revenue could prove risky for both Google and Facebook. A popular backlash is building against the flood of mobile ads. According to PageFair, a company that tracks this phenomenon, one in five smartphone owners worldwide are using mobile ad–blocking browsers. That’s a whopping 90 percent rise in the year ended March 31.
“There is no question that ad blocking is a threat,” says 4A’s Hill. “It has come about because we have created a horrible experience for consumers. We have crammed a ton of advertising into very small spaces.”
New Internet advertising rivals also pose potential headaches for the reigning duopoly. Snapchat, a privately held messaging and photo-sharing service that rejected a $3 billion acquisition offer by Facebook in 2013, is now valued at more than $18 billion; it has become Facebook’s most serious social networking threat and claims almost half of all Americans between 18 and 34 years old among its daily users.
Amazon, the world’s largest online retailer, poses an altogether different and more potent danger, with plans to introduce its own consumer product brands. Customers already use Amazon to locate goods at the lowest prices and have them delivered for free (along with video streaming) if they sign up for Amazon Prime at $99 a year. That means the company has little need to advertise or market on Facebook and Google.
For now, however, the biggest threat facing Google and Facebook stems from regulators and politicians concerned by the digital giants’ size. In Europe regulators have accused Google of using its overwhelming dominance as a search engine and owner of the Android mobile operating system to stifle rivals. “Google’s magnificent innovations don’t give it the right to deny competitors the chance to innovate,” said European Commissioner for Competition Margrethe Vestager at a July press conference in Brussels, at which she announced the third set of antitrust charges against Google in 18 months. The company, which could face fines of more than $7 billion, is contesting the charges.
Meanwhile, Facebook has come under criticism in the U.S. because of its overpowering role in the news industry. In May it faced accusations from conservatives in the media and in Congress that its news feed had a liberal bias. Assurances by Zuckerberg and other Facebook executives in meetings with Republican politicians defused the controversy. But only a few weeks later, Facebook was again the focus of media concern, this time for announcing that it intended to give more prominence on its news feed to text, photos and video exchanges among friends and relatives than to articles and videos from news organizations.
Consternation among publishers over the shift underscored the immense influence that Facebook has accrued as a platform for news dissemination and media ad revenue. According to a 2016 study by the Pew Research Center, 44 percent of all American adults regularly depend on Facebook for news; the vast majority of those under 40 years of age have made Facebook their first choice for political news. Publications have discovered that their stories are more widely read on Facebook’s news feed than on their own websites.
These controversies haven’t dampened ambitions or rivalries at Google and Facebook. The digital giants are battling each other for future advantage on two fronts: extending their reach to the billions of people in emerging markets who aren’t yet connected to the Internet, and increasing the user time spent on their platforms through augmented and virtual reality technology. The ultimate prize — an ever-larger share of global advertising revenue — remains the same.
While some 2 billion people now access the Internet, Google and Facebook believe an additional 4 billion users, many of them living outside mobile communications grids, could come online over the next decade. Google is investing in a project called Loon that would use balloons in the stratosphere to beam free Internet access to poorer communities. With a project dubbed Aquila, Facebook is betting on solar-powered drones to do the same.
Both companies are also spending billions of dollars on transoceanic cables. Facebook is joining Microsoft in installing a transatlantic fiber-optic cable, while Google is investing in undersea connections between the U.S. West Coast and Asia and from the U.S. East Coast to South America. “These are the kinds of projects that carriers, not Internet companies, normally undertake,” says Akshay Sharma, research director at Gartner, a technology advisory firm based in Stamford, Connecticut. “But you add a lot of value by owning your own infrastructure network.”
In markets that are already online, the next frontier for Google and Facebook is augmented and virtual reality. AR involves the use of computer-generated input — including sound, video and graphics — to augment live, direct views of the real world. Its potential has been highlighted by the recent Pokémon Go craze, in which players using smartphones try to capture monsters in different settings, such as shopping malls, parks and public buildings.
Analysts already are extolling the possibilities of monetizing AR experiences on Facebook and Google mobile platforms. “In the near future you will be able to walk into a Home Depot or Lowe’s, provide salespeople with the measurements of your kitchen and be shown on your smartphone how and where a refrigerator would fit into the space,” says Macquarie’s Schachter. “It’s hard to say if that’s advertising or a sales tool or both.”
Virtual reality offers a more immersive experience, as I discover by testing an Oculus headset at Facebook’s New York office. The goggles and earphones completely block the outside world as the computer to which I’m tethered launches a 30-minute program. I am plunged into a series of 360-degree environments: a bucolic landscape with wildlife, an underwater setting where schools of fish swim past me and a fight ballet staged by cartoonish robots.
There are more-ominous episodes as well. A romantic evening view of Manhattan, with lights twinkling on buildings and on the span of the Brooklyn Bridge, suddenly provokes a sickening sense of vertigo when I realize I’m standing on the ledge of a skyscraper. Worse is yet to come. At the end of a long, dark, cavernous hall, I make out the roars and silhouette of Tyrannosaurus rex. Suddenly aware of my presence, the monster charges, its massive jaws, legs and tail missing me by inches.
Though it’s easy to understand the potential of such VR programs to keep viewers online, it isn’t yet clear how they will evolve into advertising platforms. One possibility being explored at Facebook, Google and a variety of ad tech firms catering to the digital behemoths is “dynamic creative” — a process by which an ad is instantly assembled based on a customer’s known preferences. Clothing and sportswear video ads on Facebook or Google VR devices might be shown in shades of blue to one viewer and in reddish hues to another.
Virtual reality videos on smartphones, desktops or TV will take ad enhancement a quantum leap forward. “It sounds spooky, but there will be cameras behind the screen so that advertisers know exactly who is watching, which helps greatly with targeting,” predicts Fidelity’s Baker, looking ten to 15 years ahead. “Eventually, you will see yourself in the commercial for a convertible car.”
But maybe by then the vehicle will be driverless, powered by Google technology. And the subject of the commercial — maybe shown on a Facebook app — will be sitting in a passenger seat.
