We read with considerable interest coverage of eMarketer’s latest forecast for the three amigos of digital advertising – Google, Facebook, and Amazon. We thought it would be helpful to dig a little deeper and provide some additional perspective.
In 2019, the combined ad revenues of the three companies were just over $82 billion. This alone is a staggering number. Back in February 2019, eMarketer forecasted the entire U.S. ad industry to be $258.4 billion in 2020.
The three companies account for just under 32% of the U.S. ad market and just over 54% of the digital ad market. So much is concentrated in the coffers of these three companies that when any of them hits a bump, the rest of the ad industry feels like its riding in the back of a 1980 pick up truck speeding down a gravel road.
Looking Under the Hood
Lets’ take a closer look at the three companies. eMarketer forecasts a rare 5.3% decline in top-line ad dollars for Google to drive a year-end total of $39.6 billion. By contrast, eMarketer expects both Facebook and Amazon to grow in 2020 to $31.4 billion and $12.8 billion, and at growth rates of 4.9% and 23.5%, respectively. While 23.5% may seem incredible in this environment, we actually think it could be higher.
According to eMarketer, Amazon’s ad business grew 40% last year. In that context, 23.5% seems reasonable. But we see it differently. We expect Amazon to grow at least 30% year over year.
With the backdrop of COVID-19 and millions of consumers looking to buy essentials from Amazon – from detergent to wipes, from socks to underwear – we are confident its ad inventory has grown accordingly. This means Amazon can expand its advertising customer base into many more categories and customers.
Following in Amazon’s Lucrative Footsteps
Amazon’s success in selling into the current brutal ad market makes us wonder if companies like Instacart have an opportunity to follow in Amazon’s footsteps.
Like Amazon, we have to believe the inventory on Instacart’s ad platform has expanded greatly. CPG (consumer packaged goods) digital ad spend in 2019 was already $11.1 billion. So we’d expect CPG spending to grow as more of the buying public shelters in place.
We believe Instacart’s ad business is already in the $250 million – $400 million range. And this could easily swell to more than $3 billion within a couple of years. Brands’ local and regional ad budgets are key to this equation. After all, food is bought and consumed locally.
Then there is, of course, the streaming services, at least the ad-supported ones. These include music, podcasts, and television/movies. In early 2019, eMarketer pegged Hulu’s 2019 ad revenues at about $1.8 billion, growing to $2.7 billion by year-end 2021. We expect an even greater acceleration of that curve. We think Hulu’s ad business will probably reach closer to $4 billion by the end of 2021.
We’d expect Magna will revise the estimate in the chart below to reflect a larger streaming audience driven by COVID-19. Our sense is that by the end of 2020, OTT ad spending will probably be closer to $6 billion or even $6.5 billion. Compare this to the $5 billion predicted in April 2019.
The local angle here is that with advertising inventory growing in parallel with jumps in audience, there will opportunities for smaller regional and local companies to begin reaching their target audiences via product search (Amazon, Instacart) and streaming (e.g., Hulu, AT&T Home) services. As these platforms open up, these new advertisers will compare the ROI to what they’re getting on Google and Facebook. We will be watching how this develops.
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