The Business Of
Eyeballs | Alphabet | What Do They Do?
Morning All!
Hope you had a great week! Last time round, we finished our The Business Of Cars series. Which means this week, we start a brand new 3-week series. And it’s one that I know a lot of us have been waiting for. The series will involve two of the ‘Magnificent 7’ stocks. And it’s one of the most exciting industries we could explore. That’s right, we’re going to be diving into The Business Of Eyeballs (Digital Advertising)!
Over the next 3 weeks, we’re going to be looking at these 3 HUGE digital advertising companies - companies who are all competing for your eyeballs!
Alphabet - search advertising (5th biggest company in the world).
Meta - social media advertising (7th biggest company in the world).
Pinterest - a mix of search and social (a lot bigger than you may think!).
Now, I know everyone reading this will have used Google (owned by Alphabet) and Facebook (owned by Meta). But a lot of us may never have stopped to think - how are these companies so massive?
Alphabet is more valuable than McDonald’s, Netflix, Toyota, Nike, Coca-Cola, and JPMorgan Chase… combined! Which is crazy right? Fast food, streaming, cars, trainers, fizzy drinks, and banks - we use all of these things. But Alphabet is still bigger than all of them. And this week, we’re going to work out why!
A Whirlwind History Of Advertising!
Okay, so to set the scene for this week, we’re going to first briefly go back in time. Because advertising didn’t start with Google or Facebook! It’s been around for a long, long time! Companies have wanted to market their products/services to potential customers in order to drive sales for centuries. And by understanding the past, we’ll be a bit wiser about the present and where Google fits in!
So, we begin the story about 320 years ago, back in 1704 - and it was in this year, that we saw first ever ad appear in a newspaper! The newspaper was the Boston News-Letter and the person/company who bought the ad space, was trying to sell a plot of land. So straight away, we can see the dynamics. Newspaper selling ad space to make money. People buying that ad space to sell their product.
Now, fast forward ~180 years, to the 1890s - and this was the beginning of direct mail advertising. Sears Roebuck (once the largest US retailer) began mailing out postcards and catalogues to potential customers’ addresses. Remember, there was no internet at this time. So, how could companies tell customers about their new products? Sending catalogues to their houses! And amazingly, some big companies still use direct mail as a part of their marketing now - see Burger King below!
Okay, the next step in advertising came in 1922 - and by then, there was another way for companies to market their products to people... via radio! Back in the 1920s, the US economy was booming post WW1. Radios became a common feature in US houses, and hundreds of radio stations popped up. It’s not completely clear what the first ever radio advert was - but a lot of the early ads were targeted at women who would listen to the radio whilst working at home.
Now, fast forward another ~20 years to 1941, and we see the birth of one of the biggest advertising channels in history... TV advertising! The first ever TV advert was a 10-second, incredibly simple, ad by Bulova, a watch brand. But over time, brands began to find creative ways of selling their products. And we saw the introduction of famous brand icons - including Kelloggs’ Tony the Tiger! To see how TV ads still drive huge sales for brands, check out this article on the success of Kanye’s superbowl ad!
Okay, so the next main shift for advertising came in the 1990s/2000s. And this shift really turned the industry upside down. The birth of the internet sparked Display and Search advertising! Computers started to become more popular. All of a sudden, people had an incredible access to content through ‘the web’. And again, brands saw an opportunity! They wanted to be visible to potential customers online!
In 1994, AT&T released the first ever banner (display) ad - which was actually an ad for famous art museums - random! But if you click this link, you’ll actually see what the first ever display/banner ad looked like! Soon after, we started seeing search advertising - which are the sponsored links we see at the top of the first page on our Google Search results. The image below should hopefully clear up any doubts!
Now, as the internet exploded and more and more people started visiting websites, these display and search ads become more and more valuable. And companies like Alphabet did prettyyyyyy well from this… as we’ll see tomorrow!
Oh and by the way, the advertising journey didn’t stop with display and search! Over the last 2 decades, we’ve seen the birth of video, social media and in-app advertising. But this is more related to Meta’s business model - which we’ll be covering the week after next. So we’ll save this part of the journey for 2 weeks’ time!
Digital Advertising Is >2x Bigger Than Traditional Advertising!
Okay so, that’s a whistle-stop tour of the history of advertising. Now, let’s look at how big each of these different advertising buckets are!
And in the graphic below, we see the breakdown. The global advertising market is worth ~$770 billion (revenue). Of which ~2/3 is digital advertising, and 1/3 is traditional advertising. And out of the sub-buckets, search advertising leads the way with $250bn revenue, whilst social ($170bn) and TV ($140bn) follow further behind!
But I just want to touch on something here. Digital advertising is ~2x bigger than traditional advertising. Which is absolutely incredible when we’ve just seen that traditional advertising has been around since 1704. Whilst digital advertising only came along ~30 years ago!
So, the question is… why? Why does digital advertising bring in so much more revenue than traditional advertising? Well, the answer is because digital ads are so good at targeting potential customers - which is so valuable for advertisers!
What do I mean? Well, let’s pick a nutrition company, like Huel. Huel have just released a new flavour of snack bar and they want to raise awareness of this new flavour to potential customers. Huel decide to put an ad in the Daily Mail physical newspaper. Now, whilst the Daily Mail gets lots of readers - there are two issues here: (1) lots of people who have no interest in Huel’s products will see this ad, and (2) for the ones who are interested, Huel have no data of how successful the ad was! How many people saw the ad? Liked the ad? Bought the product after seeing the ad?
Well, digital advertising changed all of that! Now, by advertising on Google, Huel know how successful their ads are! How many people saw their Google ad, how many people clicked on it, and how many people actually bought the product! But that’s not all! Because of the amount of information Google and other digital ad companies have on their huge number of users, Huel can actually set their ads to only target the users who would find their products interesting… which solves the first problem from the Daily Mail example!
Google Search, Google Network, YouTube, Google Cloud + A Lot More!
We’ll dive into more of Google’s benefits for advertisers over the course of this week. But the main point is - digital advertising is more valuable for advertisers, and hence advertisers send a lot more money towards digital advertising channels compared to traditional channels!
Alrighty, to wrap up - let’s very briefly touch on Alphabet’s various segments. And first up, of course, it’s Google Search. Google’s search engine is the biggest search engine in the world. With >80% market share of global internet search and >8 billion searches/day, it’s no surprise that Google.com is the number 1 visited website in the world! We’ll see how Alphabet make money from Google Search tomorrow!
Now, if owning the number 1 visited website in the world wasn’t enough. Alphabet also own the second most visited website in the world… YouTube! In 2006, Alphabet bought the video sharing platform for just under ~$2 billion. And that acquisition has turned out to be one of the most successful acquisitions of all time! We’ll look at how YouTube makes money in some detail tomorrow!
And the final Alphabet segment we’ll cover this week is Google Display Network - which is an advertising platform run by Google. Now, how does this platform work? Well, basically, Google helps connect advertisers and publishers. So, let’s say Daily Mail’s website wants more advertising revenue. Daily Mail will partner with Google and join Google Display Network.
And then whenever an advertiser wants to gain exposure to the kind of audience Daily Mail has, Google Display Network will funnel this advertiser to Daily Mail’s ad slot! That way, the advertiser gets exposure to Daily Mail’s audience. Daily Mail gets ad revenue. And Google - of course - gets a cut! The graphic below illustrates!
Now, Alphabet also do a few other things. Google Cloud is the third biggest cloud provider in the world. Their Android phones are growing in popularity. And they also own the autonomous vehicle company - Waymo.
However, we won’t be covering these segments this week! One, because they aren’t to do with digital advertising - and this series is called The Business Of Eyeballs! But two, we just simply won’t have enough time! Oh, and fair warning - the newsletters might be slightly longer this week. But I mean come on, it’s Alphabet - it’ll be worth it!
26th Feb 2024
And that’s a wrap! A lot to look forward to this week. Tomorrow, we’ll look at how exactly Alphabet makes its money!
Have a fabulous day!
The Business Of Team