A Shift In Advertising Spending To Online Will Benefit These Companies

by: Jayson Derrick

Over the next few years, the advertising will experience a drastic change. As more consumers are regularly connected to the Internet, advertisers will increasingly look to this lucrative venue to communicate, publicize, and attract customers. The shift from traditional print and TV media to online will attract billions of dollars that will mostly benefit a handful of companies. The following three companies are well-positioned to benefit in this new era of online advertising.

Video ads on your Facebook News Feed
Facebook (NASDAQ:FB) will likely be advertisers preferred choice of online advertising due to the company's targeting capabilities. Facebook can provide advertisers access to more than 128 million U.S. users who visit the site daily. Countless Facebook users have already volunteered demographic information as well as hobbies, interests, travel habits, etc., which can all be tapped into by advertisers. Even in the mobile environment, advertisers can effectively send out their message to users, since the user has to log in to the site from their device. This represents a significant competitive advantage, as Facebook offers advertisers the ability to extensively connect with desktop, as well as, mobile users in an equally effective way. To put things in to perspective, Facebook's daily active users represents a potential target market for advertisers which is substantially higher than what is available through TV commercials. 6.3 million viewers tuned in to watch AMC's third to last episode of Breaking Bad, while 10.4 million viewers tuned in to watch the Cincinnati Bengals win 20-10 over the Pittsburgh Steelers on Monday Night Football.

Facebook is expected to launch a video ad function for the U.S market (with a potential asking price of anywhere from $1 million to $2.5 million per segment) that will appear in a user's News Feed. Facebook's ability to accurately target consumers, especially in the coveted 18-34 age group can put the popular social network company in direct competition with TV advertising. Total spending by advertisers on TV in 2013 is estimated to reach $66.3 billion according to a Bloomberg article, with this number set to increase to $81.6 billion by 2017 according to industry studies. In a video interview with Bloomberg (available on YouTube here), Rob Jewell, CEO of Spruce Media, stated that Facebook is the first company that can attract a TV sized audience in the online world. Large companies could take advantage of this opportunity to target the public, while utilizing multi-million dollar marketing funds.

If Facebook is able to decisively capture even 1% of the TV advertising market, the immediate payoff will be substantial and can set a trend for years to come. Video ads are expected to start rolling out toward the end of this year, with some reports indicating as soon as October. Longer term, Facebook can continue to grow their video ad revenues by expanding the offering to international users. Even a small share of the projected $214 billion of global TV advertising spending by 2017 can bring in additional revenue streams in the billions of dollars.

Opportunity in the online radio market
Pandora Media (NYSE:P) does not have the ability to collect as much information as Facebook does from it's users but is still well positioned to gain momentum, due to a shift from the traditional off-line radio advertising toward mobile advertising. Pandora has the ability to target consumers based on gender, age, and location which provides the company a unique opportunity to expand advertising revenues.

Pandora's recent August data shows that users listened to 1.35 billion hours of music, up 16% year over year. These numbers indicate that the demand for Pandora's services continues to grow and the ability to attract and monetize a new user base will help the company overcome its content and other large costs. Pandora can anticipate a steady increase in earnings, eventually leading to a consistent profit.

Management is expected to continue investing in its local sales efforts and the necessary infrastructure, in order to continue to capture the attention of advertisers as the company continues to receive a greater share in the radio market.

Pandora's approximately 70 million user base regularly stream music through their smartphones, and this number is expected to grow exponentially by 2015, as the company's momentum in gaining customers is currently in full force. By 2015, Pandora could grab a 4.4% market share of the $24 billion mobile ad revenue, which would place Pandora in an excellent position to derive a consistent revenue stream for many years to come.

The company recently named Brian McAndrews as the new CEO and so far investors seem to like the new hire, for good reason. McAndrews was very well respected at his former company, aQuantive where he built the company into the fastest growing (and one of the world's largest) digital marketing organization at the time. The company was eventually bought by Microsoft (NASDAQ:MSFT) for $6.3 billion in 2007.

Investors seem to believe that McAndrews is a strong fit for Pandora, given his experience in media (having also held senior positions at ABC) and in advertising space. Pandora is entering a stage of growth, as it has laid a strong foundation of solid usage and market share. McAndrews is well-positioned to lead the company into it's next phase as it focuses on increased monetization in order to usher in an era of a sustained profitability.

Most effective way for local restaurants to advertise
Yelp (NYSE:YELP) is the leading online local search player which consists of a large global user base of 108 million. The company remains one of the most trusted go to sites for reviews of restaurants, bars, and businesses.

In addition to Yelp's large merchant base, the company boasts 1.2 million claimed business pages and more than 50,000 paying advertisers as of the second quarter 2013. The best aspect of the business model is that the company spends no money to acquire new users. Since content is also user generated in the form of reviews, Yelp will be a very high margin business for years to come.

A study by Nielsen found that four out five people that explore Yelp.com (or their mobile app) with the intent of purchasing a product (or visiting a location) do so within one week.

The company derives around 83% of total revenue from local company advertising, 12% from brand advertising (i.e. large national chains), and 6% from other services. Businesses advertise on the site in order to have their products or location more prominently visible in a search. These ads are integrated into search results, where they are displayed in the lead position highlighted in a light yellow background that more readily captures the users attention. According to Yelp, about 40% of its local ads are viewed on mobile devices, and 59% of searches originate from mobiles, including the mobile app and the Web.

The company has done a great job at becoming the leader in monetizing on the "local Internet". Other companies have attempted to duplicate their success, such as TripAdvisor (NASDAQ:TRIP), which has made an effort to build a similar community of reviewers. A quick comparison of a restaurant I recently visited in New York City, Les Halles Brasseries on Park Avenue (celebrity chef Anthony Bourdain's former place of employment, popularized through his TV shows and books), has 1207 reviews and 263 pictures on Yelp, compared to 622 reviews and only 76 photos on TripAdvisor.

Yelp has the potential to see a larger revenue opportunity over the coming years, especially given their integration with Apple's (NASDAQ:AAPL) iOS platform. The integration makes Yelp's reviews and advertisement capabilities available to the millions of Apple users who search for a local restaurant on the iPhone, iPad, and iPod. An interesting study conducted by Quantcast and investment firm Piper Jaffray tracked 1 billion monthly page views from around the Internet. The findings showed that Apple's iOS share came in at 65% compared to Android's 28%. As such, Yelp is well positioned for future growth being a part of Apple's search results.

Facebook is an ideal investment choice as they are a global company with over a billion users. Mark Zuckerberg released a somewhat ambitious 27 year plan to add 5 billion new users which boggles my mind! The revenue potential that this company can realize in this timeframe could satisfy investors for decades to come. Even over the next few years, if Facebook can effectively connect advertisers with users through video ads, the company could immediately change the dynamics of marketing in their favor within the entire multibillion dollar ad market.

Despite the fact that Pandora will benefit from increased ad spends over the years, it might not be my top investment choice due to the lack of international expansion. According to the company CEO, Joe Kennedy: "We continued to be both patient opportunistic in terms of our position with other markets and continue to have exploration there but there is nothing to share or update at this point in time". As emerging markets continue to grow, I hope Pandora will eventually offer their services to the global community like Facebook is doing.

Finally, Yelp is unlikely to see anywhere close to the market share of advertisements that Facebook and Pandora will occupy in the next few years. Nevertheless, the company can operate in a niche market as the go to site to discover local businesses. CNBC's Jim Cramer recently suggested that Apple purchase Yelp for $75 a share, which helps solidify the case that the company has an attractive business model and tremendous opportunities for monetization for years to come.

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.

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