On Facebook, and the Backlash Against Youtube's Inappropriate

By Tal Smoller BI Industry Analyst

and Jitendra Waral BI Senior Industry Analyst Contributing Analysts: Worries about the spread of “fake news” on Facebook, Geetha Ranganathan (Media), Paul T. Sweeney (Media), Alex and the backlash against YouTube's inappropriate Wisch (Telecom), Mandeep Singh advertising placements, may inadvertently boost (Technology), and Sean Handrahan publishers' near-term monetization of online content.

The growing distrust of digital Proportion of Readers Paying for Online News media amid the proliferation of news from unverified publishers could spur subscription growth for established publishers, as users seek trusted sources. The New York Times and News Corp.'s Wall Street Journal alluded to this having contributed to 4Q subscriber additions. Almost two-thirds of specialists at Axel Springer's International Paid Content Summit in February noticed a Source: Reuters Institute Digital News Report 2016, June 14, 2016 rising willingness to pay for online content in their home countries vs. Publishers typically have a tenuous original source, based on a Digital 54% a year earlier. relationship with social-media Content Next study. News organizations in the U.S. platforms, which they argue derive Moreover, publishers lack control were among the least-trusted in a undue benefit from the distribution of over their content on social platforms 1Q16 Reuters Institute survey of 26 their content. and have a limited ability to leverage countries, closely followed by France. Social-media distribution the valuable user data associated with Germany ranked among the top platforms, such as Facebook Instant it, diminishing monetization potential. five countries where media companies Articles, Twitter and Snapchat The use of social media as a source were deemed most reliable. Discover, afford publishers extended of news almost doubled since 2013 to reach, potentially beyond typical 46% in the U.S. last year, and reached target audiences, and could drive an average 46% across the EU traffic to their sites. (weighted by population), with at least However, it also risks diluting their one in 10 in both the EU and U.S. using brand value, given 43% of social media it as their main source, according to users aren't able to identify the story's Reuters Institute Digital News Report.

The exodus of advertisers from Google's YouTube could raise questions about Facebook, which may also risk losing some revenue in the near term as marketers balk at ads appearing alongside fake news and other undesirable content.

YouTube was first to face Americans Increasingly Get News From Social Media advertisers' wrath in part because it controls the largest portion of the digital-video ad market globally. But consumers are increasingly using social media sites as their primary medium for news content, a trend that means Facebook will have to address similar challenges. About 44% of Americans sometimes or often get their news from social media, according to a Pew Research survey on news use across social platforms.

Source: Pew Research, May 2016

Google, Facebook and Hours of Content Uploaded to YouTube a Minute malware. other internet companies will Security companies update have a tough time platforms but can't guarantee guaranteeing that 100% of absolute protection. ads are viewed by real people In the long term, internet and aren't associated with companies may be able to the offensive and fake-news bolster viewability metrics by content that has advertisers integrating artificial up in arms. intelligence and adding Online platforms from stricter ad controls. YouTube to Twitter rely on a Advertisers might have to large volume of user- rely more on in-house tools generated material they Source: News Sources for verification and third- don't fully control. party measurement to TV, radio and print media make far more checks. optimize digital spending. This problem is somewhat analogous to viruses and

As brands re-evaluate their digital- U.S. Digital Ad Revenue Share by Company advertising strategies, publishers may have an opportunity to lure a greater share of ad spending for their websites and apps. Publishers' arguably more controlled, predictable content may prove a safe haven for brands. Google and Facebook's unrivaled scale has been a key challenge for publishers competing for digital ad revenue. This could reinvigorate alliances among rival publishers aimed at boosting their reach, targeting Source: eMarketer capabilities and bargaining power, by Magna Global CPMs, ComScore Ad Viewability Data pooling their ad inventory and usage data. Examples include the Pangaea Alliance among international publications, and U.K. newspapers' Project Juno. Others, such as Scandinavian- based media company Schibsted, are focused on creating a "digital ecosystem" in which its classifieds and publishing operations will leverage common platforms and logged-in apps, pooling their digital advertising Source: Magna Global, ComScore inventory and data. The aim is to bolster Schibsted's ability to compete in the online ad Digital advertising's costs may be CPM for display and video ads would market against Google and Facebook's higher than perceived because jump 43% to $17 and $35.70, dominance. internet companies have metrics respectively. Beyond increased scale, these challenges and can't guarantee Digital video ads are considered efforts should also spur data-enabled viewability. viewable when at least 50% of an ad's product development, particularly This results in ads viewed being pixels are visible in the browser for targeted ads. lower than total ads served. While an two continuous seconds, which differs average cost-per-thousand-ads served from someone having seen or "looked (CPM) is difficult to gauge, adjusting at" the ad, according to the Media the average CPMs reported by Magna Rating Council. Global for viewability may suggest the Programmatic ads may have lower true cost. viewability than direct sales. Assuming 70% viewability instead of 100% of ads served, the average

Facebook, Twitter and Snapchat are banking on video to bolster revenue this year, but YouTube's ad troubles threaten to slow digital video revenue in the near term.

Google's YouTube and other U.S. Ad Spending internet companies will need to address ad viewability and brand- safety issues to further open the tap on digital video ads, which haven't been able to attract budgets away from other formats as quickly as display advertising. Addressing advertisers' complaints may not be a quick fix for internet companies due to the sheer volume of content on their platforms. Digital video ad spending in the U.S. is projected to rise 23.6% in 2017 to $13.2 billion, according to eMarketer. Source: eMarketer Note: $ Billions In a bear case scenario for internet companies, marketers may seek U.S. Digital Ad Spending by Type digital-ad discounts in exchange for accepting some risk of ads appearing near fake news or on offensive videos, at least until a standard solution emerges. The ad-measurement and brand- reputation concerns that led advertisers to suspend spending on YouTube aren't limited to digital video or Google. The common thread is the platforms' struggle to classify and control a sea of evolving content. The issue likely will be addressed in the longer term. Source: eMarketer Note: $ Billions These issues largely affect the $41.7 billion digital display advertising Internet companies may not be relying on artificial intelligence space, with video representing only able to eliminate the problem but can techniques. 32% of the total. minimize the risk in the longer term by

TV networks may see a near-term bump in ad spending due to marketers' mounting concerns about fake news and brand safety in the digital world.

The return on investment for Spending vs. Sales-Response Curves by Channel multiplatform TV advertising has bested digital. And it is still likely higher than digital ads on average, an Accenture study shows. Digital ads can benefit from higher ROI when augmented with multiplatform TV, based on the study. In the longer term, digital advertising is poised to win -- once the industry addresses marketers' complaints. Better content-classification Source: Accenture systems, the use of third-party measurement companies and greater Google’s Ad Revenue by Industry Sector control for advertisers will eventually ease digital concerns. The Accenture study looked at $12 billion of ad spending across 20 national brands over a period of three years to make its ROI comparisons. Amazon.com may find it tempting to double down on retail advertising, Google's largest ad vertical, after Source: eMarketer, Bloomberg Intelligence YouTube's woes highlighted concerns Note: % of Google’s Net Ad Revenue about digital ads appearing near undesirable content. contributing to the retail unit's profit. digital spending, per eMarketer. In China, Alibaba has done this Amazon's U.S. digital-ad market Amazon ads for the retail vertical successfully, with ad dollars spent on share is 1.8% vs. 41% for Google and may carry less risk on the ad- the platform besting Baidu. 20% for Facebook. measurement and brand-safety fronts. Amazon's ad business is projected The U.S. digital retail and to surge 29% to top $1.8 billion in consumer products ad market may top 2017, according to eMarketer, $25 billion in 2017, or 30% of total

Programmatic ads have exposed brands to fraud, ad viewability problems and reputational damage. The issues were highlighted when major marketers retreated from Google's YouTube amid concerns about ads appearing on offensive videos.

Such threats could hurt the Programmatic Video Ads Exposed to Higher Risks growth of programmatic ads, which delivered 32.1% viewability, as defined by the Media Rating Council. That compares with 64.5% for ads placed directly, based on an Integral Ad Science study. Ad fraud was 9.9% for programmatic vs. 6.1% for directly placed ads. Large ad agencies such as WPP, Omnicom, Publicis and Interpublic are buying programmatic inventory for Source: Integral Ad Science, Media Quality Report, 1H16 clients and increasing their investments to reduce the risk of The ads may come under scrutiny, be unbiased take inventory positions being cut out of the automated-ad especially with the number of for clients. business. intermediaries involved. WPP's programmatic desk Xaxis Google and Facebook account for Digital is the fastest-growing ad had $1.1 billion in 2016 revenue. a majority of programmatic ads. medium, and agencies are increasing Omnicom's Accuen had almost $400 The rise of digital and exposure with central trading desks to million in 2016 revenue, based on programmatic ads has clouded agency buy and resell digital media. Bloomberg Intelligence analysis, which transparency, with an industry group The desks have been criticized accounted for 16% of annual organic suggesting ad agencies are enriching because agencies that are supposed to revenue gains. themselves at clients' expense.

As more digital display ads are Advertisers' estimate is $7.2 billion. purchased through programmatic The fraud occurs when technology, the ease of such buying advertisers pay for fake, non-human increasingly exposes marketers to traffic driven by code (popularly fraudulent online traffic. called bots). The fake traffic cost advertisers Display ads may reach $89 billion $12.5 billion in 2016, according to in 2017, according to Zenith, with m/Six. The Association of National fraud estimated to hit $16 billion.

A longer-term solution to Factors Preventing More Spending on Digital Ads marketers' concerns about brand safety and measurement in digital advertising may involve using artificial intelligence to better classify content and relying more on third-party auditors to vet ad metrics. This should help the digital- advertising industry accelerate growth in the long term, given a more Source: eMarketer, Econsultancy/Note: % of U.S. Senior Marketers transparent process and better ROI can help boost ad spending. Ad agencies and advertisers may their metrics, and audits from the MRC also strengthen measurement may bolster confidence among Facebook and Google already have standards on their end to optimize ROI advertisers. agreed to be audited by the Media across platforms. Large internet Rating Council (MRC), a nonprofit companies have been self-policing industry association.

Global mobile ads may surpass desktop in 2017, Total Global Mobile Ads ($ B) becoming a $104 billion market, according to Zenith Optimedia.

That will be driven by mobile devices, accounting for billion, with Google 75% of global internet use, vs. 40% in 2012. and Facebook Mobile ads increased 94% in 2015, and Zenith generating $32 estimates 36% annual gains in 2015-18, driven by a rise in billion. devices. Projections from Conversely, desktop ads may fall 4% a year as forecasters vary. Source: Magna Global advertisers follow users to mobile. Magna EMarketer expects U.S. mobile ads to jump 20% to $69 estimates that the market will approach $95 billion in 2017. Mobile optimization and innovation have become ever Mobile Share of Web Traffic more important for publishers, as users increasingly access the internet using mobile devices rather than desktops. About two-thirds of the time spent online by U.S. internet users in June was via mobile, up from 51% three years earlier, according to eMarketer. Among those using smartphones, 86% of this time was consumed "in-app" vs. web browsing. Mobile drove 42% of all online traffic in the U.S. in August, and 29% in Europe, according to Noah Advisors- Source: SimilarWeb, Noah Advisors, Bloomberg Intelligence SimilarWeb.

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