How Google and Facebook Have Taken Over thDigital Ad Industry

How Google and Facebook Have Taken Over the Digital Ad Industry

Worlds Most Admired Companies

How Google and Facebook Have Taken Over the Digital Ad Industry

Photograph by Chris JacksonGetty Images

The good news is that the digital-advertising industry is growing strongly, with revenues up sharply in 2016. The bad news? Virtually all of that growth is going to exactly two companies:Googleand Facebook.

The latest figures from the Interactive Advertising Bureaushow that the third quarterlast year was the biggest ever, with a total of $17.6 billion spent on digital ads. Thats a 20% increase from the same period a year earlier, thanks to growth in mobile and video. This growth reflects marketers trust in the internets power to connect with todays audiences, the IAB said.

If you look beneath the surface, however, it also reflects the fact that a majority of those audiences are controlled by Googleand Facebookand if anything, their control is accelerating.

Get Data Sheet, Fortunes technology newsletter.

Last year, Pivotal Research analyst Brian Wieserestimated thatdigital advertising revenue in 2015 also soared by 20% from the previous year to a record of $60 billion. Close to 65% of that went to Google and Facebook, he said, with the search giant taking $30 billion and Facebook taking $8 billion.

Smaller companies will continue to operate in the shadows of the industrys two dominant players, Wieser told investors in a research note at the time.

Halfway through last year, Jason Kint of the advertising trade group Digital Content Next looked at the total ad revenue booked by those two companies as a proportion of the overall industry, andfound that they accountedfor about 90% of all the growth in the business.

Last week, Kint updated those figures, and the picture they paint has become even more bleak. Based on the IABs numbers and public financial numbers from Google and Facebook, the two digital giants accounted for about 99% of the $2.9 billion in advertising growth in the third quarterwith Google making up about 54% of the total and Facebook about 45%, leaving just 1% for everyone else.

updated duopolys. new IAB data came out yesterday. easy to run vs earnings for goog and fb, its evident everyone else is zero sum /wolgdpfcxp

Jason Kint (@jason_kint)December 30, 2016

This duopoly control has had an increasing impact on the advertising-tech market as well, something that used to be a growth area both for publishers and for ad networks. According to a recent analysis by theFinancial Times, both the number of financing deals and the amount raised by ad-tech companieshas declined sharplyin the past year.

The number of ad-tech companies raising money dropped 17% last year compared with the year earlier, data from CBInsights shows, and the total volume of funding fell 33% to $2.2 billion from $3.2 billion, putting it back where it was in 2013.

Ad techs struggle as a sector is absolutely to do with the dominance of Facebook and Google, Balderton Capital venture partner Suranga Chandratillaketold the FT. Ultimately advertising is about selling attention, and if most of that attention is focused on Google and Facebook, then naturally they can monetize it. He added:

Even if you manage to build a sustainable advantage for a few years, how do you scale to compete with Google or Facebook? Thats why traditional adtech does feel dead from a venture perspective.

In a recent interview with ad industry veteran Jay Sears, Pivotals Wieser said the digital-media industryhas effectively becomea giant duopoly in which Google and Facebook win almost everything, advertisers have to play by their rules, and other media companies fight for the scraps.

New York-based venture investor Fred Wilson, meanwhile, predictedin a forecast for 2017that the ad:tech market will go the way of search, social, and mobile as investors and entrepreneurs concede that Google and Facebook have won and everyone else has lost. It will be nearly impossible to raise money for an online advertising business in 2017.

This is how modern political advertising works:

In the past, digital advertising may have been seen as an add-on or supplement to traditional advertising markets, but that is no longer the case. According to estimates from eMarketer, spending on digital ads in the U.S. will likely grow this year to the point where it islarger than the amount spenton television, the former Goliath of the industry.

Data on users and their preferences and behavior is the Holy Grail for most advertisers, and the reality is that Google and Facebook have orders of magnitude more data than their nearest competitors, and more ways to slice and dice it.

In the case of Facebook, the company has more than 1.5 billion usersfar more than any other single media business commandsand it tracks what they see and click on in ways that most media companies can only dream of. And that means advertisers will continue to work with them even when they admit that their data was wrong,as Facebook has several times.

Twitter and Snapchat are trying to compete on the same playing field as Google and Facebook, but both remain bit players so far. So is the future for media companies simply one of deciding which of two giant walled gardens they wish to build a majority of their business on, or pay rent to? For the moment, at least, that appears to be the case.

Sign up now to receive FORTUNEs best content, special offers, and much more.

Subscribe today and save 79% off the cover price.

Sign up now to receive FORTUNEs best content, special offers, and much more.

Worlds Most Admired Companies

© 2018 Time Inc. All Rights Reserved. Use of this site constitutes acceptance of ourTerms of UseandPrivacy PolicyYour California Privacy Rights).

Fortune may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.

Quotes delayed at least 15 minutes. Market data provided byInteractive Data. ETF and Mutual Fund data provided byMorningstar, Inc. Dow Jones Terms & Conditions: