The advertising market, which has driven the growth of global big tech companies such as Google and Meta, is shrinking. The reasons are the prolonged global economic downturn and advertising regulations. Additionally, artificial intelligence (AI), which each company is racing to develop, is also expected to reduce the advertising market.
EU Advertising Regulations Begin... US and Korea Also Propose Bills
On the 25th (local time), the European Union (EU) officially implemented the 'Digital Services Act (DSA)'. This legislation restricts big tech companies from using sensitive personal information to display personalized ads and posts to users. It was created based on the judgment that personalized ads exploit users' personal information for profit without fair compensation. Violations of the DSA can result in fines of up to 6% of annual revenue. Considering Alphabet, Google's parent company, had revenue of 339 trillion KRW last year, fines could reach into the trillion KRW range.
Big tech companies like Google and Meta have grown based on advertising revenue. Advertising accounts for about 80% of their total revenue. Until the outbreak of COVID-19, big tech's advertising revenue recorded double-digit growth annually. However, recently, growth rates have dropped to single digits or even negative growth.
For Google, the proportion of advertising in total revenue was close to 90% in 2015 but fell below 80% last year. The main cause was the economic downturn. Additionally, regulations on personalized advertising, which was the core of the advertising business, are expected to further reduce advertising revenue.
Regulations on personalized advertising are also being discussed in the US and Korea. The US House of Representatives proposed the 'American Data Privacy and Protection Act (ADPPA)' in June last year, which broadly protects personal information. It requires companies to disclose the types, purposes, and storage methods of collected information and grants users the right to delete such information.
In Korea, Rep. Jeong Pil-mo of the Democratic Party proposed the 'Act on the Protection of Digital Service Users'. It requires businesses to obtain user consent when using internet visit records or search histories to provide online personalized services. All these bills make implementing personalized advertising more stringent.
AI, the Driver of Advertising Revenue Rebound... Yet a Hindrance
As advertising regulations began in earnest, big tech companies turned to AI. By applying AI technology to advertising and improving ad reach, the advertising market regained vitality.
Google's advertising revenue decreased consecutively in Q4 last year and Q1 this year. However, in Q2, advertising revenue grew by 3.2% year-over-year. Google emphasized this as a result of integrating AI technology into advertising. Meta, which recorded losses due to advertising revenue hits from Q2 to Q4 last year, also saw significant advertising effects using AI. Meta's Q2 revenue increased by 11% compared to the same period last year, marking the first time since Q4 2021 that revenue grew by more than 10%.
However, there is analysis that AI, which revitalized the sluggish advertising market, may again become a hindrance. This is due to generative AI, which big tech companies like Google and Meta are racing to develop. The core of generative AI is to provide optimal answers to users' questions, shortening the multiple steps previously needed to find desired information through search. Conversely, the better generative AI provides optimal answers, the more numerous ads that were exposed during the traditional search process lose their place.
Google is enhancing its self-developed AI chatbot 'Bard', and Microsoft has released a new version of its search engine 'Bing', applying technology similar to ChatGPT. The more they focus on advancing generative AI, the more their existing revenue models are shaken. Ultimately, they are expected to reduce the proportion of existing business models such as search advertising and expand revenue by developing services utilizing generative AI. In Korea, Naver announced a plan to generate revenue by leveraging its super-large AI 'HyperCLOVA X' for business-to-business (B2B) purposes.
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