Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is in trouble. Social network giant Facebook (NASDAQ:FB) is overtaking Google's core business -- digital display advertising. While Google is in the news for its Android operating system and a host of other innovative products, advertising is its bread and butter as it accounts for around 90% of its total revenue. So, the latest development in advertisements is a big red flag for Google.
As reported by adexchanger.com:
"Although Google is the $4 billion darling of the US display ad space, players like AOL, Amazon and Facebook are closing in on that share.
Most noticeably, Facebook, which for the first time last quarter served more ad impressions on mobile devices than on the desktop, experienced a 50.5% increase in US digital display ad revenue last year to Google's 33.3% growth rate, according to eMarketer.
If eMarketer's estimations are accurate, Facebook has already pulled ahead of Google in US display ad spend. Although Facebook was nipping at Google's heels in 2012, totaling $2.18 billion in display ad revenues to Google's $2.26 billion, the social platform pulled ahead of the search giant last year totaling $3.28 billion in display ad revenue to Google's $3 billion.
Fast forward to the end of this year and Facebook is expected to reach some $4.8 billion in digital display revenues to Google's $4 billion. This is a markedly higher estimation than one year ago, when eMarketer forecasted Facebook would generate $3.35 billion in digital display ad revenues by the end of 2014."
Hence, there's no doubt that Google's search business is under threat from Facebook. Going forward, it is highly probable that Facebook will continue gaining share as its user engagement is strong.
Facebook is growing rapidly
Facebook now has 1.28 billion users, and almost 63% visit the social network daily. It has reached new milestones as a mobile company, with more than one billion monthly active users on mobile. Moreover, almost 55% of its daily active users only connect to Facebook through mobile.
Its advertising business is growing at a rapid rate, jumping 82% in the previous quarter, clocking the strongest annual growth rate in nearly three years. Also, mobile accounted for 59% of its advertising revenue. Facebook is focusing on execution and is carefully improving its core products and business to bolster growth going forward.
Facebook is building new apps as a part of its Creative Labs effort. It's working hard to develop the technical foundations for these services so that it can rapidly launch new products and then refine them based on the initial feedback from its community. The next priority for Facebook is to grow users for Creative Labs projects to 100 million people before it starts developing them into significant businesses.
Facebook has doubled the number of people using mobile data with its partners, and brought almost three million more people onto the Internet by partnering with mobile operators in the Philippines and Paraguay.
Improving the ad platform
The company sees a big opportunity to continue improving the relevancy of the ads people see on and off Facebook. This will help mobile developers better monetize their apps, and to help provide greater reach for marketers. Facebook is of the opinion that advertising and the ability to reach people more broadly is one of the most important technology platforms for achieving growth. So, it is investing aggressively to serve four major kinds of partners: small businesses, brands, developers and e-commerce partners.
After the introduction of News Feed ads by Facebook, which increased the supply of ads in its system, its recent efforts have primarily focused on improving the relevance and quality of these ads. To implement this, it has been working to improve the tools it provides for marketers, so they have access to better targeting capabilities, simpler ad products, and more useful measurement tools.
Focusing on the product experience
Facebook is concentrating less on developing new products for marketers and more on improving its existing ones and helping businesses to use them efficiently. Management's goal is to make its ads as interesting as organic content on Facebook, so that more people find ads useful and businesses can engage effectively with its community and grow.
Management is also focusing on growing the number of marketers using Facebook, apart from getting more revenue from existing advertisers. Since Facebook is investing to improve and expand its ad products, it should continue to develop new ways to help marketers reach their customers. As a result, Facebook can see more growth in advertisement revenue going forward.
Along with Facebook's reach and scale, marketers value its proprietary targeting to help them reach the right customers and create more personalized, and therefore, more efficient and effective ad campaigns. Due to the company's strong features, marketers using its Custom Audiences targeting feature have increased ten times compared to last year.
Facebook is simplifying and enhancing its ad tools for over one million advertisers on the company's website. The tools previously available only to the biggest and most sophisticated advertisers like Custom Audiences and Partner Categories are now available in its self-service ad creation process.
Facebook's ongoing focus will continue to be on improving the quality, relevance and performance of its ads and demonstrating value to marketers. So, the company is making all the right moves to improve its advertisement business going forward. As a result, it won't come as a surprise if Facebook overtakes Google's ad business going forward. And ads being Google's primary source of revenue, investors should think of shifting allegiance to Facebook as its ad platform is seeing terrific growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.