
The math’s not pretty on digital advertising’s future revenues? (2017) - taigeair
https://medium.com/s/which-half-is-wasted/googles-350-billion-haircut-fa1a0f33ace1
======
manigandham
Another nonsensical article about adtech. This is not how the industry works.

Apple does not have a chance at buying Google because they have the same
market cap. Google and Facebook have a massive advantage in scale and
precision which is why 2 of the top 10 biggest companies on the planet are ad
networks. The valuations come from the sheer profit they generate, not their
assets, and how much Disney spends on content is utterly irrelevant. You
cannot easily replicate what they do otherwise it would've already been done.
Half of the world's population still isn't online so there's plenty of room
for growth in the future too.

Everyone loves to talk about waste but skip over how much worse it is with TV
and print ads. What matters is getting a positive return. Even if you can't
measure anything else, you can see what sales were like before and after doing
any advertising, and that's as simple as it gets. Advertising is a key
component of marketing, and marketing is how a company grows and creates
customers, so unless you change human behavior advertising is not going away.

~~~
disishhsha
> Half of the world's population still isn't online so there's plenty of room
> for growth in the future too.

The offline half doesn’t have that much money to spend, right? Making some
assumptions and approximating, would it be wrong to say that potential gains
from bringing new people online ≈ global GDP growth? Currently that’s in the
low single digits.

~~~
manigandham
Low single digits is fine when you're among the biggest companies on the
planet. We're talking about 10s of billions in profit. Amazon is now getting
into the space and is a strong contender to become #3 biggest player.

~~~
village-idiot
Size is not insurance against failure. Go ask Novell.

~~~
manigandham
Nobody is claiming that it is. The point is that single-digit growth is fine
when you're big because they are percentages.

The 1000% growth when you're a startup does not exist when you're worth half a
trillion.

~~~
village-idiot
True, it just depends how fast your next competitor is growing.

------
MarkMc
Wow this article is so very wrong - Google and Facebook have enormous
advantages over Disney because (a) they have other people producing valuable
content _for free_ ; (b) they know much more about each viewer than Disney.

Google's revenue today is six times as large as it was a decade ago. And I
expect its revenue in a decade to be at least 3 times as large as it is today.
The reason is that many of the causes of past growth will continue for the
foreseeable future:

1\. The people who are connected to the internet will continue to become
richer - in particular booming poor countries like India and Indonesia

2\. The amount of time people spend on the internet will continue to grow

3\. The amount of advertising Google can show people per hour will continue to
grow. For example, Google can show many more ads on YouTube and still be less
saturated than the old network TV model. Another example: The Economist app
currently shows untargeted ads copied from their print magazine - but in 10
years these ads will probably come from Google.

4\. Google can continue to improve its algorithm for placing of ads. Google
knows so much about me yet I'm amazed how stupidly untargeted its ads
sometimes are. Eg. if my photo stream doesn't include pictures of cats, don't
show me ads for cat food!

5\. Google can continue to collect more personal data. Right now it doesn't
know when I last purchased toothpaste, but it might in 10 years from now.

6\. The number of people connected to the internet will continue to grow
(although of course at a slower rate than in the past)

[Disclaimer: I own shares in Google and Facebook]

~~~
themagician
The content that Google and Facebook produce is garbage. It’s only barely
better than nothing at all. Most people would not pay for the kind of content
that shows up on Facebook and YouTube by so-called “content creators”.

Facebooks ads are garbage except in certain circumstances. Everyone knows
this, including the big brands, but they continue to do it because it makes
the board happy when they see their brand on FB.

AdWords is the only ad platform that works, works well, and is pretty
universal.

Disney has a real good chance here though because Disney has actual valuable
content. As in, literally valuable. You know, because people pay for Disney
content with money.

~~~
hyperbovine
I would pay to use Google. Especially if it meant they would remove the
tracker from out of my ass.

~~~
harry8
Pay me and I'll lie to you about what Google will do if that's what will make
you happy. No sillier than paying Google given their credibility is zero and
there are so consequences to them for lying.

~~~
judge2020
What are you referring to? I can't think of one incident where Google straight
lied to the customer about what they do. They also remove tracking and ads
from certain partner websites if you do decide to pay for it:
[https://contributor.google.com/v/beta](https://contributor.google.com/v/beta)

~~~
harry8
Do you really, honestly, truly believe they don't track you if you pay them
not to? Genuine question.

~~~
Wowfunhappy
Um, yeah, I do, unless there's evidence to the contrary. Do _you_ really
honestly truly believe Google is outright lying?

~~~
harry8
Absolutely.

------
samspenc
But... here's the revenue and profits for Google and Facebook since 2017 (when
the article appears to have been written), including analyst forecasts for the
next year (* are analyst forecasts).

    
    
                                2017        2018*     2019*  
      Google revenue          $110.86B    $136.47B   $162.64B
      Facebook revenue         $40.65B     $55.36B    $68.87B
      Apple revenue           $265.60B    $277.91B   $289.25B 
    

While Apple's growth rate seems to be slowing down (due to iPhone sales
slowing), both Google and Facebook are apparently predicted to be growing well
(by 20% - 30% growth each year.)

Sources: Google:
[https://finance.yahoo.com/quote/goog/analysis/](https://finance.yahoo.com/quote/goog/analysis/)
Facebook:
[https://finance.yahoo.com/quote/fb/analysis/](https://finance.yahoo.com/quote/fb/analysis/)
Apple:
[https://finance.yahoo.com/quote/aapl/analysis/](https://finance.yahoo.com/quote/aapl/analysis/)

~~~
T2_t2
The article is weird in that Google has the single greatest advantage -
YouTube. Ctrl + F youtube and ... nothing.

TV ad revenue is going to start changing, but the value of video ads is
massive. Google has not just YouTube, but the best video advertising platform
for others to use.

If 15% of the US$70B on TV ads moves to YouTube, Google's growth should be
sustainable. Multiply that by not just by the USA but Europe, Japan and Asia,
and Google's growth looks fine.

If Google reaches the point they can buy the NBA TV rights for YouTube, heck,
start small and buy the TV rights for a major Australian sporting league as a
test run, or perhaps a single college conference like the ACC, and lets see
how that article ages.

~~~
ThrowawayR2
> _If 15% of the US$70B on TV ads moves to YouTube, Google 's growth should be
> sustainable_

What do you base that estimate off of? The last anyone heard, there were leaks
saying that YouTube was barely break-even as late as 2015 and then the
"Adpocalypse" occurred in 2017 that dropped ad spending on YouToube
significantly. Articles corroborating both are easily found on Google.

------
tomrod
This is an open secret among techonomists and others in the arcane space of
digital campaign measurement.[0][1- preprint] Digital advertising has a lot of
smoke and mirrors. There is _some_ incrementality, but it seems oversold.

[0] [https://academic.oup.com/qje/article-
abstract/130/4/1941/191...](https://academic.oup.com/qje/article-
abstract/130/4/1941/1914592)

[1]
[https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2498290_cod...](https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2498290_code1130222.pdf?abstractid=2367103&mirid=1)

~~~
everdev
And how much of the internet is powered by digital advertising? The web will
look a lot different if that bubble bursts.

~~~
qha
Going back to what it was 20 years ago? I'm sold!

~~~
manigandham
There was basically nothing on the internet 20 years ago.

~~~
humanrebar
MapQuest and Amazon both started around then. People stood up personal sites
at places like GeoCities. There were chat services like ICQ.

~~~
joering2
Oh boy memories.. i still remember my six digit ICQ number. It had to be circa
2000?

------
chillacy
> But these stocks are based on a reality that no longer exists. The emperor
> has no clothes.

Ok, buy deep OTM put options for tech stocks then?

They say the market can stay irrational longer than you can remain solvent.
I’d say the market wasn’t all that rational to begin with. At some level
investing is a big game of chicken where you try to get out before everyone
realizes how inflated it’s become.

As Taleb says, don’t tell me what you think, show me your portfolio.

~~~
whatshisface
"Buy options" and "don't put this in to your passive retirement fund" are two
very different levels of gloom-and-dooming. The market might actually become
rational over the next 50+ years; there is such a thing as true information
that can't be used to make money in any reasonable term. Another example of
true information that can't be used to make money is information that is
already priced in. Since this author is not exactly the first tech doomsayer I
would be surprised if the future where everyone goes back to highway
billboards is not already contributing to the price.

~~~
whttheuuu
The difference between "buy options" and "don't put this in your passive
retirement fund" is the same difference as

"I'm confident in the advice im dispensing" and "I have no idea what I'm
talking about".

~~~
palebluedot
_The difference between "buy options" and "don't put this in your passive
retirement fund" is the same difference as "I'm confident in the advice im
dispensing" and "I have no idea what I'm talking about"._

No, it's not at all. Buying options is actively betting on both price and time
targets, and carries a much different risk profile compared to simply avoiding
a specific investment.

~~~
whatshisface
Buying a stock is a "rise eventually" bet, I wonder if it is even possible to
buy a "fall eventually" bet. Probably not because nobody would be willing to
bet that a company will be around forever!

~~~
monochromatic
Short selling. But be careful with margin calls.

~~~
whatshisface
Shorting has a specific delivery date, which is different from holding stock
because you can choose when to sell it.

~~~
monochromatic
I don’t believe that’s right.

------
millstone
This should have 2017 in the title. In particular Facebook's P/E has dropped
from 37 to 20.

~~~
carlivar
It also says Facebook's market cap is $500 billion. It is now ~$383 billion.

Although it lists Google market cap at $690 billion. It's currently $728
billion and that's after a bit of a haircut recently with the overall market.

------
sologoub
This article completely missed the forest for the trees - the battle for TV is
not just a battle for content, it’s a battle for the delivery medium itself!

Think about it - how was TV delivered to you before? There are over the air
broadcast, satellite, cable/settop, and what’s been called OTT. Except, more
and more settop boxes are Rokus, Android TV-based and even some Apple TVs
(Verizon 5G was offering those in test markets). So now you have a convergence
of what was OTT/cord-cutter audience with the settop box. And who owns these
platforms? Hint, it’s not the cable company.

So now the battle ground for those as dollars looks very different - why
bother produce content when you can own the entire ecosystem where that
content is delivered?

Amazon doing an amazing job with this - their FireTVs include ability to
target based on your purchases and search/other activity within Amazon. That’s
insanely powerful for brands and where brand dollars will definitely be spent.
Not all of the dollars, but enough to matter.

~~~
petra
This is true.

The problem, for Google, is they lose market share in the platform market:

[https://i2.wp.com/www.cordcuttersnews.com/wp-
content/uploads...](https://i2.wp.com/www.cordcuttersnews.com/wp-
content/uploads/2018/05/Streaming-Player-Report.jpg?w=500&ssl=1)

And my guess is that Amazon will win this, because like you say, it's better.

But also - Since Amazon controls all the buyer's journey, it can make more
money per each ad. Which equals better content.

And in any case, FireTv is a loss leader for Amazon. Hard to compete against
those.

~~~
pbalau
Here is a question to ponder about: is Google loosing market share or is the
market expanding?

~~~
sologoub
I suspect it’s growing more than google losing, but this chart is almost
useless as each stack is not labeled.

Sony - is this PS4 or Sony smart TV (which is android as well)?

------
chiefalchemist
> "There is zero reason to think that a tech company can create content better
> than anyone else — which is the only way anyone knows of to capture any
> future ad growth. They have zero advantage over Disney."

I was following but til this point. Unfortunately, it is false assumption,
fatally false.

I'm going to over-simplify a bit but...The tech companies know what you
watched, how much you watched, at what point you stopped, what you shared (or
didn't), etc. If Spotify can guess / predict what you might want to hear, the
same can be done for other content.

Furthermore, the traditional media companies spent a fair amount on marketing
hoping to get the message out to the appropriate target markets. FB and Google
already know who is where, when, why, etc.

Correct me, but didn't Netflix use viewing data / analysis to understand which
film's and even scenes "worked" and which did not in order to grow their own
content.

~~~
arthurofbabylon
I think you’re fundamentally misinterpreting the value of creativity here.
While audience data is valuable for marketing existing shows, it currently has
almost no value for creating new shows.

Just take a look at YouTube creators. Some guy in Australia who ignores data
and makes things with mud and plants produces content more popular than almost
anything else.

Sure, Google owns the platform, but they remain reliant on the creative, anti-
data processes of others.

~~~
HillaryBriss
> Some guy in Australia who ignores data and makes things with mud and plants
> produces content more popular than almost anything else.

As a great screenwriter once said: In Hollywood, nobody knows anything.

But in Hollywood, they're used to that reality. Disney really _does_ know how
to actually create media content that billions want to consume. They know how
to play this game.

Tech companies are trying to learn too, and they've noticed something, as the
article points out: it costs a shit ton of cash.

Because nobody knows anything.

~~~
chiefalchemist
As a side note the book "Creativity Inc" is excellent. Recommended.

------
tanilama
Well, when people abandon TV they go to YouTube, and Google owns YouTube, end
of story...

Video hosting is, by surprise, a very technology driven business, not as
simple as upload a file then waiting for the profit. And as regulations
tightens up, Google's advantage is only going to grow.

------
gpsx
The article talks about people companies and factories, and I think it is
calling a tech company a people company. Lawyers and engineers are not the
same in the sense that lawyers have to spend hours of time to bill clients (in
theory at least). With a software company, if all the engineers walk out, the
company can still go on serving the same product (in theory at least). Once
software is made you can make as many copies as you want essentially for free.
And there is a huge barrier to entry for something like Google or Apple, or
any large software product, so it is difficult to replace these companies. So
I think they deserve to be in a different multiples category.

But this isn't the only reason someone like Google can have such a large
multiple. I think there is the possibility of transformation into a new
market, not just dominance of its existing market. You could call Google an AI
company instead of an advertising company. There might be some big economic
potential for AI and that is what the large multiple can capture. The same
applies for Amazon in that they could become a strong player in everything
that is purchased, not just in online shopping. And they seem to have a real
chance of moving in this direction. And, to underscore the fact that they are
trying to do this, they are taking a very small profit right not to try to
build their presence, and then they will start pulling profit later when they
have a more dominant position.

------
icelancer
This guy not knowing why Amazon's P/E ratio is _intentionally_ over 200 sums
up his "expertise" on the situation - he has absolutely none.

------
jameslk
Troll bait 2017 article that compares the P/E of growth stocks with heavy R&D
budgets to blue chip stocks. The author and those reading would be better off
spending time reading this instead:
[http://www.efficientfrontier.com/t4poi/Ch1.htm](http://www.efficientfrontier.com/t4poi/Ch1.htm)

------
nicodjimenez
In media you roughly have 3 segments:

1) High end (HBO, Disney, ...) 2) Medium end (TV, Netlix, ...) 3) Low end
(Youtube, Facebook, Instagram)

The supply of (1) and (2) are limited. There's only so many shows that can be
produced at the quality of Sopranos, and only so many sports people are
willing to sit though commercials to watch (in the US it's NFL, NBA, MLB, NHL,
UFC).

The supply of (3) (mostly user generated content) is nearly infinite because
the curation is low touch and automated with software.

Ultimately the big constraint for media is the amount of time people are
willing to spend watching either high end content with no ads, or low end
content with ads. Time is precious.

In the long term there will probably be a backlash against tech addiction and
people will spend less time on low end user generated content. But even that
is hard to predict.

------
HillaryBriss
> _There is zero reason to think that a tech company can create content better
> than anyone else — which is the only way anyone knows of to capture any
> future ad growth. They have zero advantage over Disney. They are coming from
> a position of weakness — Disney already has significant TV ad revenue, and
> extensive experience in making content we love._

totally agree. and, in November, we had this crazy agreement between Google
and Disney for online digital ads:
[https://variety.com/2018/digital/news/disney-google-
digital-...](https://variety.com/2018/digital/news/disney-google-digital-
advertising-deal-1203037372/)

I gotta wonder what kind of terms Disney squeezed out of Google for this.

------
o_nlogn_420
It's important to bring up that in the last year AT&T bought Time Warner,
Direct TV, and other media companies, as well as As Tech pioneer AppNexus to
try and merge Digital, OTT, and linear advertising all together in an effort
to make up ground on Google and Facebook

~~~
manigandham
They're already failing at that with nonsensical rebrands and rotating
leadership. You can't compete with the giants by buying a bunch of companies
and strapping their products together. That just leads to a dysfunctional
mess.

They need to build from scratch with a focused approach as seen with The Trade
Desk, but their corporate politics won't let that happen.

------
harry8
Elon musk seems to have digital advertising figured with a spend with
goog/facebrick/etc of precisely $0. Why is this so seldom mentioned when
digital advertising is mentioned?

He sells a crapload of stuff with fantastic advertising campaigns with no paid
spots at all.

~~~
simonsarris
By that metric, so does Trump. Twitter doesn't send them a bill because they
make money for Twitter by existing, so maybe it's really Twitter that has it
figured out. The big names work for Twitter for free!

It's true that for certain kinds of people and circumstances you can sell your
own brand. But generally people cannot be Musk or Trump (least of all want to
take any risks) so they have to pay for eyeballs.

~~~
harry8
I'm avoiding politicians because sensible discussion points are obscured by
emotion, to put it nicely.

Rather than a politician. try "Wendy's" burger joint twiter feed and it is
largely the same point. Advertising works a hell of a lot better when you're
not paying for the slots. I can't see a meaningful discussion of digital
without addressing it. Musk hires talent from "the onion" \- we can assume it
isn't to design rockets and cars, right? Flamethrowers, awesome, right. Can't
make money selling them obviously. How much did that campaign cost him?
Nothing in placement slots right but there it was in a better slot than can be
bought from facebrick all over facebrick. In a better slot than can be bought
from google in newspapers with google ads being ignored somewhere on the same
page.

Remember when google were hiring engineers like they meant it and had all that
nonsense about secret codes and quizzes all around the web? Remember when they
hired 17 year olds in a fanfare of publicity? Remember when they placed an ad-
sense ad saying they were hiring? Well that last never happened as far as I'm
aware and the cost to google would have been next to nothing, so maybe it
wasn't worth even that. They hired a lot of direct marketers to ring us and
tell us we should apply though, right?

Pick your successful ad campaign. It doesn't involve paying google, or
facebrick, or does it? Do go ahead and list any examples that have escaped my
notice. I can't think of a business that got on ad-sense or facebrick early
and took a huge market share out of their competition as a result, can you? Do
you even have to think to come up with a list for TV early adopters?

I can't see how digital advertising discussions can be fruitful without
addressing these things.

------
z3t4
Web ads is already dead, but if you have users, you can still monetize, for
example by product endorsement, up-selling additional services, etc. Companies
will still pay for the top spots in the search result though, and Facebook
will make it harder to block ads. But for normal web sites, like news sites,
they have to focus on quality instead of quantity in order to make people pay.
And also we badly need micro-payments for the web.

------
therealmarv
This is a bubble which will not burst because we are speaking of Google. If
(theoretical) Google will be valued by it's real profits and downgraded by ads
profit the WHOLE online ad industry will go bankrupt. But this is really
unlikely because ads pricing is not the same as stocks on an a stock exchange.

------
partingshots
The funny thing is that Disney is now using the Google Ad platform for 100% of
it’s online advertising.

------
mudil
Regardless of the article's arguments regarding tech's p/e ratios, I believe
that Disney stock is a screaming buy, esp since Disney is coming up with its
Disney+ service next year. But that's just my opinion.

------
beezle
A good way to get me to stop reading your article is to be sloppy or confused
with basic terminology.

Calling revenues earnings is an immediate stop, do not continue flag.

------
user5994461
>>> Eight seven percent of Google’s revenue comes from advertising

Is this eight or seven or eighty seven? First line and the author is already
confusing.

------
irishcoffee
2017

------
gaius
_So, here we are in 2017_

Here we almost are in 2019. The authors premise seems sound, but it hasn’t
happened (yet).

~~~
shhehebehdh
Looking forward to seeing this posted in 2021 and 2023 with the hypothesized
massive drop in google’s valuation having failed to materialize.

~~~
T2_t2
To be fair the P/E will start to move towards 12. That's just inevitable.

If the P/E moves from the 39.37 I just Googled towards 12, the profit needs to
triple to maintain share value. Heck, it was over 60 to start the year:
[https://ycharts.com/companies/GOOG/pe_ratio](https://ycharts.com/companies/GOOG/pe_ratio),
and that seems a little insane to me.

~~~
petra
It depends.

Assuming that there's some special r&d, and hard to replicate in their
moonshot division(IDK?), or at least the image of one, Some successful
moonshots could do wonders to their P/E.

------
jiveturkey
lead sentence: “Today, its market cap — the total value of the company ...”

really? there’s a single person reading this that won’t know what market cap
is? i stopped reading.

edit: also, TFA is dated material and could use a 2017 tag. also important
because its predictions have failed to come true.

~~~
jiveturkey
ok i just read the article. it is indeed written at the 8th grade level
implied by the opening, with naive understanding of google and disney’s
business. nice waste of my time.

can’t understand the downvotes but that’s HN i guess. have to spell everything
out here

------
goatherders
Thank you for posting this one. Saving for later.

~~~
hn_throwaway_99
The article was originally posted in October 2017, so your "1 year later" is
already passed.

~~~
goatherders
What's it to you? I was responding to a new thread for an article I hadn't
seen before. My favorite internet trolls are the ones that use throwaway
addresses.

