The global digital ad market is going through an unprecedented crisis. As the world plunged into the throes of the COVID-19 pandemic, so did the demand for digital advertising globally. Experts now believe that this particular situation is going to significantly hurt the internet giants Google and Facebook as both of them heavily rely on digital advertising revenue.
Digital Advertising spends can be considered as a very good proxy for broad economic health. In a booming economy, companies and organisations often tend to spend more on advertising. However, when things go south as they have right now due to the coronavirus outbreak, ad budgets are often the first thing companies squeeze in a bid to optimise their outgoings.
The global Digital Ad Spending was estimated to rise by 17% to $384 billion in 2020. But that was the estimation done pre-Coronavirus era. With the completely changed market scenarios and dynamics, brands are planning to cut their digital ad spending budget by 30%, on an average, in 2020.
Google and Facebook, which together account for a whopping 70% of the U.S market for digital ads, amid this global coronavirus outbreak, have themselves pulled back on their spending without yet laying off or furloughing any of their employees.
Sundar Pichai who is the current Cheif Executive Officer of Google has already instructed on cutting most of their marketing budget for this particular year and also told their employees that the company wouldn’t be hiring for the rest of the year because of this pandemic.
The net profit of Alphabet – the parent company of Google – tanked nearly 36% in Q1 2020. The forecast for Q2 2020 doesn’t seem to be much exiting either.
Google is not the only one staring at the tough market conditions. Facebook is also facing heat from the fast-changing market equations. The social media behemoth has already warned in the last month that their business is now on rocky waters due to the slump in advertising spend but didn’t provide any details as such.
In Q1 2020, the net profit of Facebook declined to $4.9 billion from $7.34 billion in the previous quarter.
To put things into context about the reliance of these tech giants on digital ads, in the fiscal year 2019, about 98.5% of Facebook’s global revenue was generated from advertising, whereas less than 2% was generated by payments and other fees. The situation is not much different with Google either. For Alphabet, Google’s parent company, advertisement accounted for 83.3% of its total revenue for the fiscal year 2019.
Many industry analysts now believe that a clearer picture of the damage done by the coronavirus on the revenues of many internet companies, likes of Google and Facebook, which largely depend on ad revenue, will be revealed when the results of the current April-June quarter is out.
As of now, it is being estimated that these two tech giants who have been enjoying ‘duopoly’ in the global online advertising market, with most travel frozen by the pandemic, are likely to see a massive decline in sales unless the threat of COVID-19 subsides.
Digital Advertising Spend: Not All Has Gone
However, on the flip side of things, one of the near future silver linings for both of the internet giant could be the fact that they can expect the digital ad spending to climb back up quickly after this pandemic ends as it doesn’t require the general planning that traditional media often does. Simply put, this means that all the companies who have pulled back on their advertisement spend because of this outbreak can immediately start off their various paused campaigns at the very first sign of recovery.
This coronavirus-initiated economic downturn will significantly hurt the entire digital industry which previously posted a whopping double-digit annual growth for a complete decade. According to the Interactive Advertising Bureau, it was also well on track to hit about $125 billion in revenue for the year 2019. The organisation still hasn’t released the ultimate figure for the previous year.
But, the situation doesn’t seem to be graving as brands have started diverting their traditional advertising dollars to digital advertising. Owing to the fact that almost every company has resorted to the internet or mobile app, it’s quite unlikely that the global digital advertising market will witness a drastic slump.
Magna Research estimates that the growth of digital-ad sales will slow down by 4% this year. However, they believe that revenues wouldn’t be showing any signs of shrinking despite the business slowdown sparked by the COVID-19. The company further mentioned that overall ad sales could fall by 3%, but that will be eased out by the political spending this fall during the U.S. presidential election.
Besides, it shouldn’t be forgotten that both the tech giants Facebook and Google have huge cash reserves. As of December 2019 the cash reserve with Alphanet and Facebook stood at $119.67 billion and $54.86 billion, respectively.
These cash reserves can very well be used by the two majors to acquire other potentially attractive services that can survive the recession on their own, unlike their humongous digital ads arm, not to mention for way cheaper.
Facebook has already utilised a buy-low strategy using their cash reserve by pouring in a whopping $5.7 billion in the Mukesh Ambani led telecom giant Reliance Jio – India’s largest telecom provider.Â
Therefore, analysts who believe that both these companies will come out even stronger after this economic downturn aren’t completely wrong. Be it whatever, we are surely going to keep an eye out for their April-June quarter results to further understand how badly did this pandemic bruise their revenues. Until then, stay tuned.
