Here’s How 5 Tech Giants Make Their Billions – Alphabet & Facebook: Advertising

Source: Chart: Here’s How 5 Tech Giants Make Their Billions

on May 12, 2017 at 1:03 pm

Chart: How 5 Tech Giants Make Their Billions

The Revenue Streams of the Five Largest Tech Companies

The Chart of the Week is a weekly Visual Capitalist feature on Fridays.

Last year, we published a chart showing that tech companies have displaced traditional blue chip companies like Exxon Mobil and Walmart as the most valuable companies in the world.

Here are the latest market valuations for those same five companies:

Rank Company Market Cap (Billions, as of May 11, 2017) Primary Revenue Driver
#1 Apple $804 Hardware
#2 Alphabet $651 Advertising
#3 Microsoft $536 Software
#4 Amazon $455 Online Retail
#5 Facebook $434 Advertising
TOTAL $2,880

Together, they are worth $2.9 trillion in market capitalization – and they combined in FY2016 for revenues of $555 billion with a $94 billion bottom line.

BRINGING HOME THE BACON?

Despite all being at the top of the stock market food chain, the companies are at very different stages.

In 2016, Apple experienced its first annual revenue decline since 2001, but the company brought home a profit equal to that of all other four companies combined.

On the other hand, Amazon is becoming a revenue machine with very little margin, while Facebook generates 5x more profit despite far smaller top line numbers.

Company 2016 Revenue (Billions) 2016 Net Income (Billions) Margin
Apple $216 $46 21%
Alphabet $90 $19 21%
Microsoft $85 $17 20%
Amazon $136 $2 2%
Facebook $28 $10 36%

HOW THEY MAKE THEIR BILLIONS

Each of these companies is pretty unique in how they generate revenue, though there is some overlap:

  • Facebook and Alphabet each make the vast majority of their revenues from advertising (97% and 88%, respectively)
  • Apple makes 63% of their revenue from the iPhone, and another 21% coming from the iPad and Mac lines
  • Amazon makes 90% from its “Product” and “Media” categories, and 9% from AWS
  • Microsoft is diverse: Office (28%), servers (22%), Xbox (11%), Windows (9%), ads (7%), Surface (5%), and other (18%)

Lastly, for fun, what if we added all these companies’ revenues together, and categorized them by source?

Category 2016 Revenue (Millions) % Total Description
Hardware $197,020 36% iPhone, iPad, Mac, Xbox, Surface
Online Retail $122,205 22% Amazon (Product and Media Categories)
Advertising $112,366 20% Google, Facebook, YouTube, Bing ads
Software $31,692 6% Office, Windows
Cloud/Server $31,396 6% AWS, Microsoft Server, Azure
Other $60,177 11% Consulting, other services (iTunes, Google Play), etc.
$554,856 100%

Note: this isn’t perfect. As an example, Amazon’s fast-growing advertising business gets lumped into their “Other” category.

Hardware, e-commerce, and and advertising make up 76% of all revenues.

Meanwhile, software isn’t the cash cow it used to be, but it does help serve as a means to an end for some companies. For example, Android doesn’t generate any revenue directly, but it does allow more users to buy apps in the Play Store and to search Google via their mobile devices. Likewise, Apple bundles in operating systems with each hardware purchase.

Advertising generates €7 for the economy for every €1 spent

But the industry still needs to do a better job of communicating its economic benefits across Europe as policy makers look to limit online advertising.

Source: Advertising generates €7 for the economy for every €1 spent

Advertising economy EU

Every euro spent on advertising boosts EU GDP by €7, contributing €643bn to the 28 countries in the bloc and creating millions of jobs, promoting competition and boosting innovation.

That is the conclusion of a new report by the World Federation of Advertisers (WFA), which is using the findings as a stepping stone to promote the positive impact advertising has on economies.

The study, conducted by Deloitte using econometric modelling, found advertising contributes 4.6% to EU GDP and accounts for 6 million jobs. That includes people directly involved in producing advertising, as well as businesses such as publishers reliant on advertising for their revenues and people employed across the wider economy due to the consequences of ad activity such as sales people and those in hospitality.

The report follows a previous study by the Advertising Association (AA) in the UK in 2013, which used the same methodology to conclude that for every £1 spent on advertising there is a £6 boost to the economy. According to the AA, the ‘Advertising Pays’ drive in the UK helped change policy makers minds about the role of advertising and the WFA is hoping for a similar impact across Europe.

READ MORE: Advertising generates £100bn for UK economy

“[This research] enables us to argue more forcefully and convincingly about the positives of advertising,” WFA CEO Stephan Loerke tells Marketing Week.

“There are a lot of headlines about advertising but they usually put the industry on the defensive. They are usually in the context of trying to address perceived challenges such as obesity among children or data privacy. But advertising actually plays an important role for the economy and society and this is totally left aside.

“This is all the more contradictory as most EU governments have a clear focus on generating growth through innovation. We need a positive proactive public agenda that explains why advertising is a good thing. It needs to be much more proactively promoted and championed.”

We need a positive public agenda that explains why advertising is a good thing. It needs to be much more proactively promoted and championed.

Stephan Loerke, WFA

While the WFA report focuses on the EU number, advertising’s contribution to the economy has been calculated across a number of different countries including Japan and Australia. And this found that advertising has a similar contribution across countries, tending to vary between €6 and €8.

Those variations tend to come down to a number of things. While the metholodology cannot be definitive, countries with lower ad spend per capita tend to contribute more to GDP, as do countries with a higher proportion of their economy given over to services.

But the major difference appears to be in the size of the online ad market. The research suggests that ad markets with a proportionally bigger share in digital are likely to be more effective at creating GDP.

That is why the WFA is particularly worried about proposed EU legislation that would limit digital advertising. Announced this week, the ePrivacy directive has the aim of boosting users’ privacy online but to do this it recommends giving internet browsers the choice of whether they opt-in to third-party cookies that can track people across the web when they install the browser, rather than on individual websites.

Yet at the same time the proposals will allow publishers to track if people are using ad blockers and ask them to turn them off if they want to see ad-supported content.

“It looks like a significant percentage of people would reject cookies but could then be constantly bothered by websites requesting them to accept cookies,” explains Loerke.

He then cites separate research that suggests 89% of internet users would reject tracking cookies as a reason for his concern that the new rules will have “major implications” for the digital industry.

“We are concerned that what has been put forward will have unintended consequences and impact the digital ecosystem as we know it,” he says. “The EU has a growth agenda focused on digital… but to put forward a regulation like the one we see would, we think, very significantly hurt those ambitions. This is yet another case where we feel there is not enough understanding by policy makers of the benefits of advertising.”

The Value of Advertising report shows economic benefits of advertising: Mutiplier effect x 7  – Media Marketing

According to the EU-wide report from Delloite, every euro spent on advertising generates a seven-fold boost to GDP

Source: The Value of Advertising report shows economic benefits of advertising – Media Marketing

Report: http://www.mm.be/userfiles/media/Economic_Contribution_of%20Advertising_EU.pdf

The Value of Advertising report was funded by the World Federation of Advertisers and claims to be the first EU-wide report to isolate the economic and social contribution of advertising, aiming to express the impact of advertising at a time when the World Federation of Advertisers is concerned the economic benefits of advertising could be diminished.

The European ad industry is calling for a moratorium on further restrictions on advertising to ensure the impact of any new rules any unintended consequences is fully assessed.

Deloitte’s econometric modelling found advertising contributed to nearly six million jobs across the EU and 4.6% of total GDP.

Research stated the €92bn (£80.4bn) spent on advertising in 2014 within the EU would have contributed €643bn to GDP, which equates to 4.6% of overall EU GDP.

The 5.8 million jobs supported by advertising is equivalent to 2.6% of all EU employment, according to the report.

Some 16% of the 5.8 million figure are those directly employed in the production of advertising, a further 10% include jobs created in media and online businesses that are funded by advertising.

The remaining 74% are the jobs created in the wider economy as a consequence of advertising activity.

Deloitte defines this as “sales jobs to roles supporting the ad business in industries such as hospitality” and roles created by “advertising-stimulated demand for products and services”.

Deloitte’s research also highlighted the social benefits of advertising such as its ability to support news, entertainment and communication tools for a reduced cost or for free.

It also argued that “outdoor advertising provides additional civic benefits in the form of an improved urban environment while search engines help people to reduce both the time and financial cost of seeking new information”.

Google’s Travel Business Is Already Twice the Size of Expedia’s – Skift

Source: Google’s Travel Business Is Already Twice the Size of Expedia’s – Skift

If publicly traded companies such as Google are bound by fiduciary duties to shareholders, then Google, which already has one of the largest travel businesses in the world, larger than the Priceline Group, TripAdvisor and Ctrip combined, would be foolhardy to shoot its advertising business in the foot to become an online travel agency.

— Dennis Schaal

When is Google finally going to tie all of its travel products together and become an online travel agency to rival Expedia, the Priceline Group and, increasingly, Ctrip?

Not anytime soon or even in the foreseeable future. We’ve been saying this for awhile — for years, actually — but now we can use some dollar estimates to back our theory and fine-tune it with comments on the subject that a Google executive made at the Skift Global Forum in Manhattan in September.

Why would Google want to become an online travel agency when its existing travel-advertising business — including all of those paid links that dominate its search-results pages — likely produces more revenue than the Priceline Group, TripAdvisor, and Ctrip combined? 

One investor group dissected publicly available information, made some educated guesses, and confidentially shared its rough estimates with Skift on the scope of Google’s existing travel-advertising business. Google would probably generate at least about$12.2 billion ≈ cost of 1972 Hurricane Agnes

“>[≈ cost of 2005 Hurricane Rita] in revenue from travel advertisers in 2016, with about $6.2 billion ≈ Suez Canal annual receipts

≈ San Francisco Bay Bridge span replacement, 2002-2013

“>[≈ K-12 annual book sales revenue, 2010] of that coming from just four travel advertisers, namely the Priceline Group, Expedia Inc., TripAdvisor and Airbnb. [See the end of this story for how the $12.2 billion ≈ cost of 1972 Hurricane Agnes”>[≈ cost of 2005 Hurricane Rita] estimate of Google’s estimated2016 travel-advertising revenue was arrived at.]

To get an idea of the scope of Google’s projected $12.2 billion ≈ cost of 1972 Hurricane Agnes”>[≈ cost of 2005 Hurricane Rita] in travel revenue for 2016, you can compare it with the actual 2015 revenue of the four leading, publicly traded online travel companies: The Priceline Group ($9.2 billion), Expedia ($6.7 billion), Ctrip ($1.6 billion) and TripAdvisor ($1.5 billion)

So Google’s existing revenue from travel advertisers is already considerably larger than that of the Priceline Group; is roughly twice the size of Expedia’s, and Google generates more travel-advertising revenue than that of Expedia, Ctrip, and TripAdvisor combined, according to this analysis.

And Google undoubtably takes that travel-advertising revenue and achieves a much higher profit margin on it than do the roster of its online travel, airline, hotel, car rental, and cruise partners, most of which are much more dependent on lower-margin transaction revenue.

So the next time people tell you that Google’s launch of a new travel app means the world’s largest search engine is finally getting into the travel business — you can laugh in their faces because Google’s travel business is bigger than online travel behemoth Priceline’s.

BUT WHAT ABOUT BECOMING AN ONLINE TRAVEL AGENCY?

If Google indeed became an online travel agency, it would further alienate its largest travel advertisers, namely the Priceline Group and Expedia, and up-and-coming ones such as Airbnb, and jeopardize a chunk of its travel revenue. TripAdvisor and Yelp are already very miffed at Google but they really have no choice but to use Google for advertising. Likewise, the largest travel companies would have to continue using Google for advertising for awhile because Google is the most important game in town but some companies, including Expedia, are fervently trying to diversify their spend into Facebook and other social media platforms.

The fear that Google could start to do travel transactions on its own is perennially on the minds of rivals because Google has most of the pieces –minus the customer support staff — to assemble a full-service online travel agency. Google’s travel portfolio already includes Google Flights; Google Hotel Ads; Book on Google for a handful of airlines and hotels; Google Maps; hotel and restaurant reviews and content acquired from Frommer’s and Zagat; the Android mobile operating system; a “Plan a trip” and travel guide feature on desktop and the mobile Web, as well as the new Google Trips app for itinerary management of flights and hotels plus tours and activities recommendations.

Speaking at the Skift Global Forum in September, Google’s Oliver Heckmann [video here and embedded below], who heads up its travel products, was candid about Google’s master plan, arguing that Google sees itself as an “answer engine” and “connector” to the right partner at the correct time, whether through free or paid links, rather than becoming a trip-planning site or booking engine.

In fact, Heckmann said, although Google wants consumers to begin their travel planning in the earliest stages through its search engine and associated products, it does not seek to become a trip-planning site.

“We don’t have plans right now to make this a travel-planning app,” Heckmann said, referring to Google Trips and acknowledging that doing bookings is a top request. “That’s a very different thing. We believe Google is the best place to start your travel planning.”

The Google Trips app seeks to be an “assistant” and “a good guide” and that’s why it includes information and recommendations about tours and activities, Heckmann said, adding that Google is not planning to sell flights on its own, although it is doing facilitated bookings for Lufthansa, Virgin America, WestJet and hotels as a way to optimize the mobile experience.

Google does not want to sell flights on its own or become an online travel agency, Heckmann said.

As we’ve pointed out above, Google’s becoming an online travel agency in its own right would jeopardize the largest travel advertising business in the world — and one of the largest travel businesses in its own right.

BOOK ON GOOGLE IS MISUNDERSTOOD

Heckmann said that Book on Google should probably have been named something else because it is widely misunderstood.

With Book on Google, the airline or hotel is the merchant of record, although the booking is processed on Google. Google shares data with the partner, which handles the customer service.

Heckmann said one of the reasons Google launched Book on Google, which it uses in verticals beyond travel, as well, is because of the widely varying quality of partners’ mobile sites, and the desire to optimize the mobile experience. For example, Google recently found that the duration of user sessions on mobile are decreasing as consumers are increasingly bombarded or distracted by so much digital noise, and this hurt conversion.

It’s not, he said, because Google wants to become a booker in its own right.

All of this doesn’t preclude Google from one day — if circumstances change — becoming an online travel agency. It just isn’t in the cards now or in the next few years.

As one investor told Skift: “The Google app won’t add booking. They want to keep the robust auction between Priceline and Expedia. Google already makes a killing in travel [maybe more than $6 billion ≈ K-12 annual book sales revenue, 2010

≈ San Francisco Bay Bridge span replacement, 2002-2013

“>[≈ Suez Canal annual receipts] from just Priceline and Expedia] so why screw that up?”

See the following video of Heckmann’s talk at the Skift Global Forum in September 2016 and below that how the estimate of Google’s travel revenue was calculated.

 A Rough Estimate of Google’s 2016 Travel-Advertising Revenue

  • The Priceline Group and Expedia Inc., including their wide array of brands, spent around $4.9 billion ≈ Construction cost for Nimitz-class aircraft carrier”>[≈ Higher education annual book sales revenue, 2010] for total online advertising in 2015 and are on pace in 2016 to bring that total to around$6.8 billion [≈ San Francisco Bay Bridge span replacement, 2002-2013]. If roughly 90 percent of the total goes to Google, then Google would attract some $6.1 billion ≈ K-12 annual book sales revenue, 2010
    ≈ San Francisco Bay Bridge span replacement, 2002-2013

    “>[≈ Suez Canal annual receipts] in revenue from just these two companies.

  • TripAdvisor would conceivably spend around $500 million [≈ net worth of Jay-Z, rapper, 2011] on Google in 2016; TripAdvisor’s total online spend in 2015 was $507 million [≈ net worth of Jay-Z, rapper, 2011]. Airbnb’s spend on Google, based on public rumors and educated guesses, might total some $300 million in 2016.
  • That means Google would take in $6.2 billion ≈ Suez Canal annual receipts
    ≈ San Francisco Bay Bridge span replacement, 2002-2013

    “>[≈ K-12 annual book sales revenue, 2010] in 2016 from just these four advertisers — Priceline, Expedia, TripAdvisor and Airbnb.

  • Roughly around half of Google’s travel advertising is considered to come from suppliers, namely airlines, hotels, car rental companies, cruise line and destination marketers.
  • Adding the spend of its largest online travel agency partners plus suppliers, Google’s travel advertising business, which is said to be its largest vertical, could then easily be around $12.2 billion ≈ cost of 1972 Hurricane Agnes”>[≈ cost of 2005 Hurricane Rita] or more.

Death of the Industrial Advertising Complex

Ajoutée le 22 juil. 2016

In his talk at L2’s Digital Leadership Academy, Scott Galloway argues that advertising is becoming less essential to brand building as consumers are discovering products with tools like Google, Amazon, and TripAdvisor. The brand is no longer on the tip of the tongue, it’s what Google says it is.

Furthermore, wealthy shoppers are paying to avoid advertising altogether.

However, it is not all bad news for brands even though it might be for traditional ad men (appearing less and less often on the cover of BusinessWeek). Winners in this new age are not always the biggest spenders on ads, but innovators in product, supply chain, and influencers.

Combining multichannel and programmatic advertising will give brands richer audience insights for more relevant marketing – Smarter With Gartner

Advertising and multichannel marketing efforts must unite to give brands richer audience insights for more relevant marketing.

Source: It’s Time to Unite Advertising With Multichannel Marketing – Smarter With Gartner

Many customers today encounter the great divide between Madison Avenue and multichannel marketing. They may be served an ad based on their persona and then receive an email based on an alternate segmentation. However, what if a brand coordinates first-party data from their email database and third party data from the advertiser to send a customized email in the morning and an advertisement in the afternoon to visitors from a “Stranger” segment who abandoned a lead generation form? The customer experience becomes more connected and relevant.

In a marketplace where customer experience is a crucial differentiator, advertising and multichannel efforts must unite to give brands richer audience insights for more relevant marketing, noted Andrew Frank and Adam Sarnerduring the Gartner Digital Marketing Conference 2016. The mutually-shared desire for profitable engagement drives the coordination between advertising and multichannel marketing.

Why a merger makes sense

“Advertising is already part of the multichannel continuum,” noted Mr. Sarner. Customers don’t want separate experiences that mirror marketing’s silos. They see one brand and want one experience.

According to Gartner’s Strategic Planning Assumption, by 2018, over 40% of marketers from global organizations will have insourced programmatic advertising capabilities, up from about 10% today.

Customers don’t want separate experiences that mirror marketing’s silos.

When marketers combine the dynamic creative possibilities of advertising with the personalization of multichannel marketing they better serve their audiences. This richness of customer insight allows marketers to profitably engage customers throughout the various stages of a customer’s buying journey.

Furthermore, programmatic tactics match multichannel tactics and highlight overlapping interests. Both efforts use forms of real-time decision-making. For example, advertisers use real-time bidding and multichannel marketers use real-time engagement. Both seek to make course corrections on the fly. Marrying advertising’s third-party data with multichannel’s first-party data provides a rich behavioral/ demographic mosaic of audience needs and opportunities.

Bring the two sides together with the Action-Value Model

Use a three step Action-Value model focused on audience, action and attribution to operationalize the linkage of advertising and multichannel marketing. Start by identifying the audience and execute disciplined segmentation. Develop segments such as Loyads (loyal advocates), Churners, First timers or Strangers and set marketing goals for each.

See related article: The Secrets to Marketing Segmentation.

Then clarify valuable actions for those segments and set specific values for the actions. Example actions include rating an app, joining a loyalty program, or watching a video. Clarify how much the action is worth and how much it costs. Once you’ve crystallized the actions that matter to your business, set attribution by channel and by action to answer key questions. Did the campaign do anything? Were the results worth it? Were profits maximized?

Pay attention to skill differences

While interests overlap, the skills found in an advertising team are different from those in multichannel. Beyond just the hard skills gaps, there are real and significant cultural differences. Creative, media placement and a host of acronyms – DMP, TMS and DSPs are central to advertising while multichannel focuses on direct mail, email and database marketing. Be mindful of these differences when uniting the two disciplines.

Get help with your multichannel efforts by finding the right partner with research by Jay Wilson.

Gartner for Marketing Leaders clients can read more in How to Unite Advertising with Multichannel Marketing by Andrew Frank.

Learn more about digital marketing trends at the Gartner Digital Marketing Conference. Follow news and updates from the event on Twitter using#GartnerDMC.