Facebook video is the epitome of ad revenue growth potential. Image source: Facbook.
It's been well documented that advertisers are shifting their budgets from TV to digital. Television ratings continue to decline as consumers spend more time on their mobile devices and watching streaming video. By 2017, the amount spent on digital advertisements will surpass that spent on television commercials, according to research firm Magna Global .
But even within the rapidly growing digital landscape, there's a shift going on indicating exactly where those TV ad budgets are going. The vast majority of digital ad spend growth is in video and social ads. Meanwhile, search advertising is growing slower than the overall digital ad market, and display advertising is barely moving the needle. This is great news for Facebook investors, but Alphabet investors will need to see YouTube make up for declining market share from Google's other advertising ventures.
The only vertical increasing ad sales
Marketers are expected to spend 17.2% more on digital ads this year compared with last year. Meanwhile, newspaper and magazine ad spend is projected to go down 8.6% and 10.1%, respectively, and all other verticals remain relatively flat. Indeed, all of the global ad spend growth (and then some) is accounted for by digital.
Within digital, search is still king. Search advertising accounts for more than half of the digital ad spend. That's why Google was able to pull in $45 billion from advertising on its own websites in 2014 -- around one-fourth of all digital advertising spend.
But search's share of digital ad revenue topped out around 2013, according to Magna Global's data. That corresponds with the rapid adoption of mobile devices and growth in social networks such as Facebook. Social advertising started growing significantly in 2011 and 2012 and will see the largest growth of any digital sector in 2015, at 43.9%.
Indeed, Facebook has seen its revenue boom since the end of 2012, when it first started monetizing mobile users with News Feed ads. Since that time, Facebook's trailing-12-month revenue has grown more than fourfold. By 2017, Magna Global expects social advertising to count for nearly one in every five digital ad dollar, while search's share falls to 47%.
The pressure's on YouTube
Following close behind social advertising growth is video advertising spend, expected to grow 38.9% year over year in 2015. Video ads still account for a small portion of total digital ad spend, around 10%, but they're expected to grow to 14% of the total within two years. That means of Google's three main advertising areas -- search advertising on Google, display advertising through AdWords and AdMob, and video advertising on YouTube -- only the latter will see market share gains going forward, driving an outsized portion of revenue growth.
YouTube accounted for about 6.7% of Google's total revenue in 2014. By 2017, it could account for closer to 9% or 10% of revenue. The question is, how profitable will that revenue be for Google? Search and display ads have proved tremendously profitable for Google, but YouTube has merely broken even on profitability in both 2013 and 2014. Revenue-sharing agreements with creators and continued investment in content and the platform put a cap on profitability for YouTube. As a result, Alphabet investors may see the company's margins fall slightly as YouTube makes up a larger share of the company's revenue.
Meanwhile, Facebook is investing heavily in the video space and now claims that its users watch 8 billion videos per day. While that number hasn't directly affected video ad sales, there's the potential that Facebook could become a significant source for video ad inventory, rivaling YouTube. If Facebook does unlock the value of those video views, it could put downward pressure on digital video ad prices (since there'd be a surge of inventory), reducing the value of YouTube.
Overall, the trends are good for any investor with holdings in digital advertising companies. Every part of digital advertising continues to grow. Still, those invested in social- and video-heavy companies such as Facebook are in a somewhat better position than those more reliant on search and display advertising like Alphabet.
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The article Social and Video Advertising Are Eating Search and Display originally appeared on Fool.com.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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