Retail Asset Management Is Ripe For Disruption

It is technically feasible to create an investment fund that charges fees based on real returns, not assets under management

Key Question: When will Google’s Digital Advertising Business Reach Saturation?

For each of the last 10 years Google has managed to increase its advertising revenues by an average of 31.8%:

Although over this time digital advertising has been accounted for a steadily falling percentage of the company’s total revenues (98.8% in 2005 and 84.5% in 2013), this is because Google has been developing paid-for revenue streams by selling digital content, paid-for apps and cloud-based services like Google Drive.

Google’s advertising business remains strong and will see continued growth in the coming years, but simple mathematics means that an average growth rate of 31.8% cannot be sustained.

So when will Google’s digital ad business be limited by simple mathematics?

Analysis #1: Look at worldwide advertising expenditure (all ad media)

If Google’s advertising business continued to growth at 31.8% for the next 10 years then this would mean it would be worth USD 800 billion in 2023.

But this is impossible: the value of the total worldwide advertising industry in 2013 was only USD 505 billion (including online advertising, mobile advertising and all other major ad media).

For the last 5 years total worldwide expenditure on advertising (all ad media) has been increasing at about 5% per year. This level of growth is set by macro-level factors that relate to the growth of the overall economy and cannot be influenced to a significant extent by Google.

If we assume that worldwide spending on all advertising will continue to increase at 5% per year through 2023 then this would imply that the total worldwide ad market would be worth USD 838 billion by 2032.

So if Google’s digital ad revenues were USD 800 billion in 2023, but the total ad market was only USD 838 billion, then this would mean that Google’s share of total worldwide ad expenditure would be about 100%, which is impossible because, for example, it would mean that all ad-funded commercial TV networks would either have gone out of business or they would be owned by Google.

This shows that the growth in Google’s digital ad business over the next 10 years will be far less than 31.8% per year.

Analysis #2: Look at worldwide digital advertising expenditure (online + mobile)

If we just focus on digital advertising then 31.8% annual growth looks even less likely.

Let’s first define a sensible value for the long-run size of the digital ad market (online and mobile combined).

For 2013, the split in worldwide ad expenditure by ad media was:

  • TV:  USD 197.9 billion   (40.1%)
  • Digital (online + mobile):  USD 102.4 billion   (20.7%)
  • Newspapers:  USD 83.8 billion   (17.0%)
  • Magazines:  USD 39.1 billion   (7.9%)
  • Radio:  USD 33.9 billion   (6.9%)
  • Outdoor:  USD 34.1 billion   (6.9%)
  • Cinema:  USD 2.6 billion   (0.5%)

To get a feel for how large the total digital ad market could become (which is Google’s addressable market) then we can make some high level assumptions about what percentage of expenditure on the above ad media could migrate to digital:

  • TV:                       Assume that 50% will be lost to digital in the long term
  • Newspapers: Assume that 40% will be lost to digital in the long term
  • Magazines:     Assume that 50% will be lost to digital in the long term
  • Radio:                Assume that 20% will be lost to digital in the long term
  • Outdoor:          Assume that 10% will be lost to digital in the long term
  • Cinema:            Assume that 20% will be lost to digital in the long term

This then allows us to estimate that for the ad market as it was in 2013, USD 162.7 billion is ‘at risk’ – meaning that this level of expenditure could, over time, migrate to digital.

When combined with the actual value of digital expenditure in 2013, which was about USD 102.4 billion, then total value of the addressable digital ad market in 2013 was about USD 167.7 billion + USD  102.4 billion = USD 270.1 billion, which represents 53.7% of total ad expenditure (all media combined).

So this implies that Google’s addressable market in 2023 is not USD 838 billion, but USD 838 x 53.7% = 450 billion.

If we further assume that Google could achieve a theoretical maximum market share of 75% of this (the company’s current share is about 43%) then that would place a ceiling on Google’s digital advertising revenues in 2023 at USD 338 billion:

The purple and green curves in the above chart intersect around 2019 – in just 5 years.

But not only does the purple curve need to be lowered, it has the wrong shape. Instead of a simple year-on-year geometric increase, it should resemble an ‘S’ curve with Google’s rate of ad revenue growth progressively slowing down as the company’s reaches saturation.

If we assume that Google will manage to increase its digital advertising revenues in 2014 by about what the company has managed over the last 3 years – not the last 10 years – then this would imply that digital ad revenues in 2014 will be about USD 66.7 billion, or 21.6% more than in 2013.

If we then adjust the growth in Google’s digital ad business in 2023 so that the company’s growth trajectory is not steeper than the green line, while still displaying a growth trend that is at least 5% per year then the result is:


This analysis shows that Google’s digital advertising business will start saturating around 2021 when annual growth will fall below 10% per year. Beyond this, growth will continue to slow down, eventually stabilising at about 5% per year – which is the average growth experienced by all mature ad media, and the overall advertising market.

At this point, say by 2023, Google will no longer be viewed as a growth stock. Instead, Google will be regarded as a value stock – like Microsoft is today, for example.

In order to prevent this outcome Google must enter a major, new disruptive market soon – meaning over the next 24 or so months.

Next Up: Asset Management

Faced with a maturing core market, which market will Google attack next?

We think that a strong candidate is the global asset management industry, by which we mean private pension plans, savings plans, investment plans and cash deposits that presently reside in bank and building society deposit accounts. 

Steeped in history, this sleepy, plodding industry is known for home visits by suited sales reps, flashy brochures, bamboozling monthly letters printed on expensive paper and archaic charging practices.

Compared with the aggressive, hard-charging pace of modern technology markets, the asset management industry moves at a glacial speed.

We think that the whole industry is ripe for technological disruption: although they might not realise it, asset managers are essentially sitting on a silver platter ready to be stabbed and gobbled down by a suitable predator. Google, for example.

According to the European Fund and Asset Management Association, the worldwide value of assets invested in management funds at the end of 2013 was about USD 30 trillion. Assuming that the average management fee is 1% per year, then this implies that the world’s asset managers are presently drawing fees of USD 300 billion per year.

If Google could take 50% of that (which is what the company has almost managed with the global online advertising business) then this would represent an annual revenue potential of about USD 150 billion a year in annual revenues – a tidy sum, to be sure.

Bearing in mind that management fees are typically based on the value of funds under management – not the returns that the manager achieves with those funds – then there seems to be a clear opportunity for Google to downside the cost structure of the asset management industry.

Taking into account the advertiser-friendly product features that Google introduced for AdWords advertisers back in 2002 (a self-service online interface, a cost-per-click payment model and safeguards that small advertisers could use to control the cost of their advertising programs) then we think that the asset management industry’s remuneration model and modus operandi is ripe for repurposing. We would expect Google to introduce a fee model that was based on results with safeguards that retail investors could use to control their market exposure.

So could Google really do this?

As with AdWords we think that the company could start with retail investors using new software that would allocate funds in real time. The complexity of modern real-time ad exchanges, specifically on the scale that Google currently manages, is far more sophisticated than the ‘technology’ used to invest funds committed by the average retail investor (assuming, that is, you regard a manually operated spreadsheet as a technology...I'm being a bit harsh here, but I think you get the point).

Google, and many others in the tech space, understand how a new product can create a new market or transform an existing one. These companies also understand why you need a very sensitive radar that can detect competitors coming when they are a long way out. And they understand that growth is created by products and services that do things better - that is, by adding more incremental value than their cost of acquisition.

These concepts are completely alien to most of the people running asset management firms - and it is this fact that underlines just how exposed this sector is to an attack from an extremely well armed, battle-hardened competitor coming from outside.

In the future, if a real time investment management platform was enhanced by machine intelligence – which is something that even the top investment managers will probably be slow to adopt (assuming that they had access to it, which they might not) – then Google could offer a better return, for a fraction of the management fee.

With such technology we think that it would be technically possible for Google to offer a level of return performance to ordinary retail investors that the best hedge funds offer to their institutional clients.

It is no surprise that at a recent private dinner at the Financial Times headquarters in London in May 2014, senior executives from some of the world’s biggest asset management groups vocalised that the biggest perceived threat to their industry was the technology sector and, specifically, companies like Facebook and Google which, in the words of one executive could  “completely blow us out of the water.”

And then some.