In "Winner Take All" Markets, Even "Winning" Can Mean "Losing"
Verizon has what some would consider ambitious goals for its digital advertising business, which can be summarized as becoming the choice for advertisers who do not want to use Facebook or Google.
That is why Verizon is buying Yahoo. Verizon will need much more scale to become a credible alternative to Facebook and Google, which together claim nearly 80 percent of all mobile advertising revenue.
It might not make much sense to argue that Verizon aims to become the number-three provider, for a number of reasons. Tier one providers never claim they are aiming to be “number three” in any big market. Also, what it might eventually mean to be the default choice of advertisers not preferring Google or Facebook is a bit unclear. Right now, it might only take five percent market share to be “number three” in mobile advertising. Verizon would never aim so low.
Would seven percent share be a reasonable expectation? Yes. Most stable markets, over time, tend to have a structure where, whatever the share of the the number-one provider, number two has about half that share, while number three has half the share of the number-two provider.
Were it to complete the purchase of Yahoo, Verizon would have a shot at becoming the number-three provider, but Verizon in all likelihood would have to add even more assets to secure that position.
If, eventually, the leader of the mobile ad market has 40 percent share, one would then expect number two to have about 20 percent share, while number three has 10 percent share. Real-world markets always tend to diverge somewhat from the predicted pattern, but stable markets often take that shape.
But those patterns also suggest why it will be difficult for Verizon to do much better than achieve the number-three market share position. Many “digital” markets are widely considered to be “winner take all” affairs, where leadership can well represent market share much more than 40 percent.
That seems to hold true for e-commerce, search, social media and other emerging markets (lodging apps, ride hailing).
So unless Facebook and Google really mess things up, it will be hard, under the best of conditions, for Verizon to challenge either for leadership in the mobile advertising platform business.