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Online Advertising: So Big That Machines Are Taking it Over

18 October 2013 in Trading Ideas

You know something is gaining traction when we’re comfortable enough to start taking the human element out of it.

Earlier this week, the Wall Street Journal reported on the phenomenon of computer-automated purchases of online advertising. In this system, marketers use computerized programs to target users based on consumer data and Web-browsing histories.1

More importantly, this type of ad buying is expected to grow 56% this year to $7.4 billion, according to a study by Magna Global, the Journal said.

That would represent 53% of the $14 billion US market for display-related business.

This programmatic buying started as a way for Web publishers to sell lower-value ad inventory, but it is gaining traction as companies get comfortable with the idea of using automated systems in the buying and selling of premium inventory.

It’s now, according to the Journal, one of the hottest trends in advertising, with marketers eager to find efficiencies and eliminate waste by having their ads reach the right consumers.

However, this trend is really just part of a secular move by online marketers into data as a main tool of their business. A study by the Direct Marketing Association recently declared that the data-driven business of online marketing in the US is now worth $62 billion.2

And, as the Journal noted, the offline and online worlds are blurring: Direct mail companies buy demographic information from digital data brokers, while Twitter and Facebook offer user data to television broadcasters.

Onward Online Ads MotifThe boom has also contributed to the growth of the companies that sell online advertising – and to the stocks of those companies. The Onward Online Ads motif, for example, is up 58.0% so far in 2013, and is up 3.7% in the past month.

The S&P 500 has gained 20.5% in 2013 and has increased 0.6% in the past month.

Interestingly, investor perception of the online ad boom may become crystallized with the expected – and much-anticipated — IPO next month of Twitter. The company said on Tuesday that its quarterly loss tripled from a year earlier, further evidence that the company is spending aggressively on research and development along with employee stock and pay, with the supreme goal of creating new products, and retaining and acquiring talent.3

Early Twitter Investors will ultimately hope those products turn into profits. On the other hand, the future growth of online advertising may, at this point, be more certain than trying to determine which companies will succeed in turning ads into bigger and bigger bottom lines.

1Suzanne Vranica, “Automated Ad Buying Surges Online,” WSJ.com, Oct. 13, 2013.

2Elizabeth Dwoskin, “Study: Digital Marketing Industry Worth $62 Billion,” WSJ.com, Oct. 14, 2013.

3Vindu Goel and Michael J. de la Merced, “Twitter Reports Sharp Rise in Revenue,” NYTimes.com, Oct. 15, 2013, http://dealbook.nytimes.com/2013/10/15/twitter-picks-n-y-s-e-for-its-stock-listing/?_r=0.