Google, Facebook and Amazon collect more than half of all ad dollars spent in the U.S.
7 min
When the pandemic upended the economy last year, companies took a hard look at their advertising plans.
Oreos maker Mondelez International Inc. shifted money meant for TV commercials during March Madness basketball and the summer Olympics into digital platforms. A hefty chunk went to Alphabet Inc.’s Google, which offered data on what locked-down snack lovers were searching for.
Athleisure company Vuori Inc. more than tripled its spending on Facebook Inc., spotting a chance to juice sales of its sweatpants to people stuck at home. Office-furniture maker Steelcase Inc. built an operation to sell directly to workers and advertised aggressively on Amazon.com Inc.
The Big Three of digital advertising—Google, Facebook and Amazon—already dominated that sector going into 2020. The pandemic pushed them into command of the entire advertising economy. According to a provisional analysis by ad agency GroupM, the three tech titans for the first time collected the majority of all ad spending in the U.S. last year.
Beneath the shift are changes driven by the pandemic: more time spent on computer screens; more e-commerce; a jump in new-business formation, and a steady improvement in tech giants’ ability to demonstrate a return on ad investment.
Success breeds success for what some call the “triopoly.” The increase in shopping and spending on Google, Facebook and Amazon’s platforms is adding to their already voluminous data on users, giving them even more appeal for advertisers that look to target their messages.
“These companies that are data-science-driven get stronger and faster with a tailwind of usage—and Covid was a hurricane,” said ad-industry veteran Tim Armstrong, a former Google executive and AOL CEO who now leads Flowcode, a direct-to-consumer platform company.
Many of the pandemic-driven changes likely are here to stay, say advertisers and ad forecasters. Still, when the pandemic winds down, it’s far from certain the tech giants will continue to increase their market share gains at this rate. With the vaccine rollout and easing of lockdowns, consumers could spend less time and money online and marketers could diversify their spending.
The growth in online advertising last year came as every other kind of ad spending shrank, with double-digit declines in television, newspapers and billboards, according to GroupM. And those online gains flowed heavily to the tech giants rather than to digital media sites and publishers that sell online ads.
The triopoly increased their share of the U.S. digital-ad market from 80% in 2019 to a range approaching 90% in 2020, GroupM estimates. It’s a surge that comes as the three face scrutiny and litigation from various agencies at home and abroad over their dominance.
Google, in announcing plans to tweak its tools that help publishers and advertisers buy and sell ads, is moving away from targeting ads based on individuals’ browsing activity across the web. But that shift might wind up further strengthening Google’s grip on the online-ad industry, some experts and rivals say, because it could boost the value of the data flowing through Google properties such as Search and YouTube.
Amazon this week said it will begin streaming Thursday Night Football by 2023, giving the company a high-profile franchise to take in ad dollars normally spent on TV broadcasters.
The three giants aren’t collecting just the money spent to advertise in the media but also some of the marketing dollars earmarked for coupons, catalogues and in-store promotions.
“They are not media companies anymore, they are marketing mongrels,” said Rishad Tobaccowala, a senior adviser to ad giant Publicis Groupe SA.
New-business applications in the U.S., which slowly climbed from 200,000 a month to 300,000 over a decade, shot up north of 500,000 in July and averaged more than 400,000 a month for the second half of 2020, according to the U.S. Census data. This proved a boon for the biggest tech platforms, which provide the kind of advertising that is often all a startup can afford. Facebook says it had more than 10 million active advertisers in the third quarter, up from 8 million in January.
Meanwhile, many businesses of all sizes pivoted to e-commerce selling—and turned to digital ads to support that effort.
Before the pandemic, a little more than 10% of retail purchases in the U.S.took place online. That jumped to 16% in last year’s second quarter when lockdowns peaked, according to Census data. Though the rate tapered a bit as the year wore on, the trend strongly benefits the tech behemoths.
“The pandemic zapped us two years into the future on the e-commerce side,” said Nicole Perrin, principal analyst at research firm eMarketer.
Mondelez, the Chicago-based maker of Oreo, Ritz and other snacks, in 2020 geared up to promote some of its brands in the marquee television events of the NCAA college basketball tournament and the Summer Olympic Games in Tokyo. When it became clear neither would be held, Mondelez redeployed the money to digital advertising.
It doubled down on Google ads to capitalize on interest in online recipes among those homebound. It used Facebook-owned Instagram to host a Pictionary-like game in which an artist made images out of the cream in the middle of an Oreo cookie. For the first time, Mondelez spent more on digital ads than on TV commercials last year. Google and Facebook were the biggest beneficiaries.
This year, digital advertising is projected to account for more than half the roughly $1.1 billion Mondelez spends on media world-wide. It was only about 30% as recently as 2017. TV’s share of the company’s ad spending continues to decline.
When Mondelez invests in digital advertising, it gets a 25% better return than with TV ads, the company says. It has found that its Google and Facebook ads do especially well, generating 40% higher returns than an average digital ad. The two now account for roughly 60% to 70% of Mondelez’s digital ad spending, up from less than 50% in 2017, the company says.
The tech giants share data that allows Mondelez to understand its customers better, said the snack maker’s chief marketing officer, Martin Renaud. Google data showed Mondelez, for instance, that people tend to search the internet for healthier snacks in the morning and for more-indulgent treats as the day wears on.
When the pandemic struck, Google provided updated data that helped Mondelez craft relevant ads. The company switched from showing college-age consumers an ad about eating lunch in the library to one that read: “Made it through an online class? Treat yourself.”
Mondelez has been working with Google and Target Corp. to figure out how likely someone is to buy Oreos or Ritz crackers from Target stores after being served ads for them on Google’s YouTube.
“I can’t go to CNN or other platforms and be able to get that intelligence,” said Jonathan Halvorson, Mondelez’s global vice president of consumer experience. Big advertisers like Mondelez still spend a lot on TV commercials, and most consider TV the best way to reach a mass audience, rather than any particular segment of consumers.
As it directs more ad money to the tech giants, Mondelez isn’t working with as many digital publishers in the U.S. In 2017, Mondelez worked with about 150; it now works with fewer than 10.
For direct-to-consumer businesses, the pandemic provided an opportunity like no other.
Activewear company Vuori distributes through stores, but its main focus is selling via catalogues and the web. Facebook is a key part of its strategy. Besides enabling Vuori to monitor the performance of its ads, the platform’s tools let Vuori upload lists of its customers and then use Facebook’s algorithm to find look-alike audiences, testing and pivoting in real-time.
When the pandemic arrived, Vuori CEO Joe Kudla noticed something interesting in the data: The prices of Facebook’s ads were dropping at the same time as people were clicking at higher rates on Vuori ads for items like its $80 sweatpants. That combination sent its return on ad spending through the roof.
Vuori stopped traditional marketing such as catalogues and direct mail and shovelled every dollar it could into Facebook. It doubled its April 2020 media spending from what was budgeted and saw sales quadruple. Facebook’s ad prices have since recovered, and Vuori has diversified its ad spending somewhat, but it has continued to increase its use of Facebook ads.
A surfer and yoga practitioner, Mr Kudla seeks to create products for people with the kind of active lifestyle he and his friends in Encinitas, Calif., have. But for finding customers, he says, Facebook beats his instincts.
“We could identify the age, demo and behaviour, but ultimately the algorithm is much more powerful in terms of identifying people who demonstrate certain shopping behaviours,” Mr Kudla said.
Performance-obsessed small advertisers such as Vuori are the reason Facebook revenue never stopped growing last year, despite the pandemic’s hit to the economy and then a summer boycott by some prominent advertisers over the platform’s handling of hate speech and misinformation.
In the three years leading up to the pandemic, Suzy Batiz, founder of the toilet spray company Poo-Pourri, was focused mainly on building out the network of retail stores that carried what it calls a “before-you-go” spritz of essential oils.
Then Covid-19 hit, and one distributor refused to take a multimillion-dollar order already produced. “That was pretty painful,” Ms Batiz said. “But as one of my mentors would say, crisis precedes transformation.” The company shifted focus from driving customers to stores to driving them to its e-commerce site and others’ shopping sites.
That meant cutting all marketing spending that wasn’t digital, such as payment for placement at Bed Bath & Beyond stores or for promotional events. Ms Batiz redirected the money to the web, especially Facebook. Sales on Poo-Pourri’s website surged 300% in the second quarter versus a year earlier and more than doubled for the year.
“This is our future,” Ms Batiz said. “I don’t think we will ever go back.”
Steelcase, which makes desks and other office furniture, spent roughly $1 million on advertising in 2019, primarily for print and digital ads in business publications to target facility managers, architects, developers and company executives. Most of its revenue came in direct sales to corporations or from its dealer network, which has showrooms around the country. Its business of direct selling to consumers was minuscule.
As states’ stay-home orders spurred an exodus from offices last spring, Steelcase’s sales plunged. The Grand Rapids, Mich., company ramped up its small direct-to-consumer business, increasing its staff for that to 25 people from two.
It stopped advertising in business publications and began buying search and social-media ads. Steelcase radically increased its ad budget last year and spent $5 million to $6 million on digital ads targeting people setting up home offices. About half of that went to Amazon search ads.
“Everyone focused on Amazon, whether you needed toilet paper, spices, a Cuisinart mixer or an office chair,” said Allan Smith, the furniture maker’s vice president of global marketing. “We decided to shift there as well, and it paid off.”
For every dollar Steelcase spent on Amazon ads during the holiday season, it made $30 in sales, the company says. Sales for its business aimed at consumers are up 500%.
Steelcase plans to double its Amazon spending this year. Its research indicates the pandemic has changed work-life for good, predicting that about 72% of businesses are likely to take a hybrid approach of working from both home and office. “The hybrid future is here to stay,” Mr Smith said.
Reprinted by permission of WSJ. Magazine. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: March 19, 2021
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Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.
4 min
Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.
This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.
Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.
Here are three strategies useful for functional families.
It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.
But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.
If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.
To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.
In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.
If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.
Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.
The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.
Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.
However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.
These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.
But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.
Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.
The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.
Sellner doesn’t worry about his children using the funds for another purpose.
“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.
Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.
Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.
Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”
A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.
Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.
Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.
Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.
