Categories: Life

Google and Facebook Diversifying Away from Advertising

YouTube and Instagram content production

Rick Webb wrote an article last year on how Google and Facebook will eventually suffer from a massive devaluation. This is because while they dominate the digital advertising market, they cannot displace TV advertising easily.

There’s an interesting comparison to traditional media companies, Disney, Time Warner, and Viacom:

Disney made $55 billion in revenue last year. Of that revenue, just $8.5 billion of it came from advertising, or just 15 percent. This includes all the revenue from ABC, the various Disney channels, ESPN, and A&E.

A full 17 percent of Time Warner’s revenues come from HBO alone, making its ad-to-non-ad ratio better than either Facebook or Google. In total, just 43 percent of Time Warner’s revenue comes from advertising. For Viacom, it’s 38 percent.

“Google’s $350 billion haircut”, Rick Webb

Google and Facebook are heavily reliant on digital advertising for their revenue and this puts them at a disadvantage unless they start to diversify their income streams. Right now, if you are trying to get your product or service in front of consumers on the internet, you’re going to use Google or Facebook to advertise. This makes them powerful, but also vulnerable as they extend their reach into other marketplaces and try to dismantle TV’s dominance for brand advertisement.

According to the article, tech companies do not have an inherent advantage when it comes to content production. Disney, Time Warner, etc. already make a lot of content and own the equipment, spaces, software, and hire a huge number of script writers and actors and producers to create their content.

Tech companies, like Facebook and Google and Netflix and Amazon, who try to produce content will basically be cloning the processes that Disney and others already have in place. They will be running behind in the marathon race to create more content that can be bundled with ads (and specifically brand advertising).

Traditional Content Production vs. User Generated Content

However…what the article forgets is that Google and Facebook are sitting on possibly the largest amount of UGC (User Generated Content) in comparison to all other companies.

Google has YouTube, which has a massive amount of user-generated content, over 5 billion videos uploaded with over 1.9 billion MAU (Monthly Active Users). Facebook has Instagram which has 1 billion MAU and over 100 million photos and videos uploaded.

There is absolutely no way that Disney and other media companies can come close to that amount of content production. The traditional process is to hire producers, script writers, actors, wardrobe and makeup artists, and a whole set of staff to produce many 30 minute episodes or 1 to 2 hour movies. While it’s possible to make this process very efficient, it can never match the scale that Google and Facebook have.

Platforms that produce user generated content (UGC) vs TV/movie production studios. UGC scales in ways that the traditional TV/movie production process cannot.

Instead of relying on producing hit after hit, Google and Facebook can diversify and rely on their users/creators to produce content and let the users worry about producing hit after hit. Netflix and Amazon do not have that option, they have very little user-generated content which is why they are going down the same path as traditional media companies and why they do not have an inherent advantage.

YouTube and Instagram are the content production places of the future. If Google and Facebook double-down on making it easier for users/creators to create new content, and making it easier to produce higher quality content that can compete with the highest quality content from Disney, HBO and traditional media companies, then Google and Facebook will own the future and disrupt TV advertising.

Also, I mentioned Amazon above. They actually do have a way to get a lot of user-generated content and rely on their users/creators to produce lots of content: Twitch.tv. Right now it’s for gamers and video game streaming, but Twitch has roots in Justin.tv which was made for life/selfie streaming which means it’s possible for more content like talk shows and selfie streams to start appearing on Twitch, which would put it directly in competition with YouTube and Instagram.

Future of Digital Ads and Content Production

This is why Google and Facebook have such high valuations. As long as they treat users/creators with respect (fewer privacy scandals, better content production tools) and shower them in advertising dollars and give good ROI to advertisers, they will continue to dominate the digital advertising platform and eventually pose a significant threat to TV advertising and gain lots of market share in brand advertising. I think brands will have to start getting used to going niche though and finding their true fans and followers instead of massively advertising to everyone.

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Rudolf Olah is a software development expert with over 8 years of professional software developer experience. He has produced the video courses "Reactive Programming in Python with RxPy, PyQt5 and Tornado" and "Learning AngularJS Testing" for PacktPublishing. Rudolf offers web development training courses for individual developers and for web development teams. He writes about tech leadership, career coaching and project management.