Setting the stage for disappointment in online advertising

This note is about the difficulties of forecasting. The investment analysts are generally very optimistic about the future. When coupled with a focus on individual companies, they can end up forecasting that all companies will increase their market share. I will illustrate with the online advertising industry. The chart below highlights nine important companies in the industry. Google is the leader with more than 50% of the market. Facebook, Baidu and Twitter are the promising up-and-coming companies. Microsoft, AOL, and Yahoo are yesterday's companies.


The actual data shows consolidation in recent years (2011 to 2013) and the analysts expect this to continue. The forecast (2014-2018) is the consensus estimate of all analysts covering each company. The stock market expects that companies' results are in line with the consensus estimate. The stock market care mostly about profit, but it is not possible to grow profit in the long term unless revenue keeps increasing. These optimistic forecasts virtually guarantee a crash in at least one of the companies during the next five years.  *)

The most vulnerable companies are Facebook, Baidu, and Twitter. The required increase in the market share for these companies is very large.  Facebook is expected to grow from 7% to 14%. Baidu from 5% to 7%. Twitter from 1% to 3%. In contrast, Google just needs to protect its existing market share. It is not impossible to grow market share and at this point I am only saying that these companies are vulnerable due to very high expectations.

It is interesting to note that the stock market does not expect much from Yahoo, AOL, IAC, and Microsoft in the area of online advertising. Yahoo used to be one of the two leaders in online advertising, but was badly mismanaged by a series of new CEOs. At least in theory, one of these companies might surprise us even if it seems far-fetched today. 

Chinese companies feature in the chart because the Chinese government has created many restrictions for Facebook and Google. The protection of the market (i.e. trade barriers) has created some strong companies, which might also have success abroad. One of them is Tencent, which owns the WeChat application. Another company to watch is the Korean company Naver, which owns the the Line application. The analysts are not expecting these two companies to grow as fast as their American counterparts. 

Figure 1. Estimated market share of major companies in the worldwide online advertising industry. Between 2005 and 2013 actual revenue attributable to online advertising. Between 2014 and 2018 investment analysts' consensus revenue forecast. For all years actual and forecasted market size from Zenith

*) A bit more technical discussion about the data. The raw data contains 13 companies. They had a combined market share of 78% in 2013 and are expected to reach 92% in 2018. It is theoretically possible that all companies will take market share from the "other" category. However that is unlikely given that the "other" category is getting very small. It is also unlikely because in the past a lot of market share gain has come from less successful companies (i.e. AOL, Microsoft, and Yahoo in 2005). Another possibility is that the total market size forecast is too low. Zenith's forecast between 2013 and 2016 assumes yearly growth of 15%. My forecast for 2017-2018 assumes 9% growth. If the high growth rate does not materialise or if growth happens in a different geographic region (i.e. Asia), the companies face an even more difficult situation.