Kalkis research recently released a provocative article about the end of the online advertising bubble, and how it would profoundly affect Google and most other online advertising companies. Their predictions are extreme:

 “When this happens, the smaller players will be wiped out. Alphabet/Google, who has 90% of its revenue coming from online advertising, will see its business scale back to the levels of 2010-2011, while its share price will crash to the $200-$250 area. Facebook on the other hand, has a better control of who is actually seeing its ads, and will benefit from the turmoil by gaining market share.”

The last part of their prediction is interesting, as Facebook’s monetization strategy is also built upon advertising. In this post we explore how Facebook is different and stands to gain from this kind of market implosion.

There are a handful of core issues for the ad tech industry, let’s examine them issue by issue:

• Click Fraud and Ad Viewability:

Among the biggest problems facing online advertisers is that many ads are clicked by robots or are never seen by humans. These issues have been common knowledge for so long that even the companies selling these ads are happy to admit them. Google reported in 2014 that “56.1% of ads on the internet are not seen by humans”.

Because Facebook’s advertising controls the full stack of both content and advertising, they have a much greater ability to reduce fraud. They are also incentivized by their own longterm interests to ensure that the engagement users pay for on the site is genuine and root out bad actors.

• Complex Ad Tech Ecosystem:

The Chief Martec chart sums up the insanity of the ad tech market better than anything I could write:

Increasing the efficiency of the ad ecosystem at this point is like squeezing water from stone. Ad buyers have difficulty navigating the complex relationships necessary to achieve decent performance, and websites are bloated with ad trackers that reduce performance and frustrate users. One study of the cost to end users of all this sprawl showed that “Boston.com’s mobile website ads averaged 30 seconds to load on a typical 4G connection, mostly because of large video ads. That’s the equivalent of 32 cents of cell data in ads every time the home page is loaded.”

Unfortunately, the cycle continues to get worse: decreasing ad performance leads to additional tech and compexity, which begets worse user experience and therfore more ad blocker installs and abandoned users. This is great news for Facebook, as advertisers and readers alike are spending more time and money on the platform, and this shift in attention has been one of the prime justifications for content to be consumed without leaving the platform at all via Instant Articles.

• Falling Ad Efficiency:

As the Kalkis article points out, the “ROI of online advertising is declining: businesses need to spend more for every additional dollar of sale”. The key point here is that sales do not increase proportionally to increased ad spend, and the ROI of purchasing ads has been falling. With an increase in the number of ad companies, as well as an increase in the volume of ad inventory (most of which is lower quality), we end up with rising supply and falling demand for buying ads, leading to potentially disastrous market conditions for ad platforms

Facebook’s ad rates do not depend directly on the quality of ad units around the web. Instead, they are dependent on the News Feed inventory that Facebook chooses to monetize. They can comfortably increase supply as their user base continues to grow, and have a bright future as many of their users around the world live in emerging markets with quickly growing purchasing power. This translates to higher value per ad and more ads overall for their platform.

• Rise of Ad Blocking:

According to the New York Times, “the use of ad-blocking software grew 41 percent last year, with 198 million active users worldwide”. This threat to the ad industry is exacerbated by the tendency for ad-block users to be the wealthier, more sophisticated users who are the most valuable targets for online ads.

Facebook in its current form is immune to this issue because ad blockers cannot differentiate between in-feed ads and the regular content that makes up Facebook. It will be interesting to see how the ad blockers react to Instant Articles, but it seems unlikely that Facebook’s core News Feed ads will be threatened by blockers. If ad blocking becomes ubiquitous in the USA (and the trends suggest we’ll catch up to Europe), advertisers will have few options beyond Facebook for reaching their target audiences.

There are many reasons to be bullish on Facebook, but their defensibility in the online advertising space seems to be one of the strongest. They are unthreatened by many of the core threats to the ad industry, and actually stand to benefit from most of them. Online advertising may be on the brink of its moment of reckoning, but Facebook’s rise is just beginning.