THE shock results of global advertising juggernaut WPP could prove to be the canaries in the Google and Facebook gold mines.
WPP’s revenue has slipped and concerns about its current outlook have sent its share price sliding in the past few days; its stock is down 25 per cent from its March peak.
It could be likened to the canary placed in coal mines to test the air for noxious gases. The question now is whether Google and Facebook will choke from poorer advertising results and regulatory concern about their growing monopolistic power.
In the past few years, the shares of these two giants have been gold dust for investors, and have outperformed bullion by a sizeable margin. Such has been their strength and popularity among institutional and individual shareholders that their combined market capitalisation has soared to around US$1.2 trillion.
This is nearly in line with individual gross domestic products of Russia, Spain and Australia, and exceeds the gross domestic product of Mexico, Indonesia, Turkey, Netherlands, Switzerland and Saudi Arabia.
Size, of course, is the worry, as it brings with it power and the need to satisfy a growing shareholder base with rising revenues and profits.
The need has become more acute. The price-to-earnings (PE) ratios of their shares, which have fallen slightly from their recent heady peaks, are estimated at over 40 for Facebook and more than 30 for Google. The market thus expects exceptional earnings growth in coming years. (In contrast, WPP, which pays a dividend, has an estimated PE of around 14.)
Despite corporate claims that Facebook and Google are technology companies – and indeed they have proved to be inventive with sophisticated communication techniques and search engines – their main source of revenue is advertising.
Martin Sorrell, head of WPP at last week’s corporate results meeting, said: “Google and Facebook do have a duopoly in the digital media.” He added that they account for nearly a third of the global digital market and about 20 per cent of worldwide media. Google and Facebook can thus be regarded as media companies directly in competition with television, radio, newspapers and magazines.
The other aspect of the Google and Facebook duopoly is that they are effective utilities; they service communities with communication possibilities, privacy issues and information from the Internet. Facebook alone now has more than two billion users on its platform; Google’s YouTube has 1 1/2 billion.
They therefore have the responsibility to control the placement of automated adverts from large and small companies and individuals. Following a scandal of placements on websites and pages that promote terrorism, violence and bigotry, both companies have promised greater controls.
Large corporate brand names were alarmed about the placements and several withdrew advertising in early summer. With alarm bells ringing, it has become common knowledge in the advertising world that companies are examining whether their ads on the giants translate into purchases.
A marketing specialist commented in The Wall Street Journal: “At one time, I was an auditor at a media company that, among other things, facilitated targeted ad campaigns on Facebook. It had many of the large ad agencies as clients. We asked how agencies measured the success of each campaign and how they justified the ad spend to their own clients. Apparently, creating ‘brand awareness’ in the ‘new social media order’ was the imperative, although the implied relationship between number of views/clicks/likes and actual product sales always seemed dubious to me.”
The other concern is that the companies are stifling creativity and competition from smaller rivals. They are either copying innovation or acquiring the competitors.
Jonathan Taplin, a specialist on digital media who wrote Move Fast and Break Things, said: “The enormous profits that have come with this concentration of power tell their own story.
“Since 2001, newspaper and music revenues have fallen by 70 per cent; book publishing, film and television profits have also fallen dramatically. Revenues at Google in this same period grew from US$400 million to US$74.5 billion. Google’s YouTube today controls 60 per cent of the streaming audio business and pays only 11 per cent of the streaming audio revenues. More creative content is being consumed than ever before, but less revenue is actually flowing to creators and owners of the content.
“If you think this is a problem only for musicians or journalists, you are wrong. With the re-allocation of money to monopoly platforms comes a shift in power. Google, Facebook and Amazon now enjoy political power on par with Big Oil and Big Pharma, which makes finding solutions to this problem even more difficult.”
So far, the US antitrust regulators have not followed the European Union, which fined Google US$2.71 billion, saying its search engine favoured its own comparison-shopping service over others. (Google has said it disagrees with the conclusions and will consider an appeal.)
Meanwhile Japanese and South Korean antitrust watchdogs are reportedly looking at the collection and use of data by Google and Facebook to see whether they have a monopoly over consumer web-surfing and online-buying data.
© Copyright Neil Behrmann
This article was first published in The Business Times, Singapore
Jack of Diamonds, the sequel to Trader Jack- The Story of Jack Miner will be published in early this year. Neil is also author of anti-war children’s novel Butterfly Battle- The Story of the Great Insect War. The updated 2015 Waterloo commemoration version of Butterfly Battle is on Kindle and e-books. Reviews are on neilbehrmann.net and Amazon and more reviews are welcome. If the books are purchased direct on this site, a proportion of the proceeds will go to low cost charities