Social media advertising realities

Two of the biggest players in social media, Facebook and Twitter, generated quite a bit of punditry about their advertising businesses last week, even if they didn’t do much that was particularly newsworthy. As part of its patent lawsuit settlement with Yahoo, Facebook said it would be entering a new ad partnership with Yahoo, though neither company offered details. And Twitter reinforced that it is an ad-based content destination by locking down some API usage while it tweaked its own search and discovery features.

Neither company has really broken open the social-media advertising piggybank. Facebook has a $3 billion ad business, but it’s built off of vast amounts of inventory that direct marketers and Facebook apps vendors use to drive traffic cheaply, if relatively ineffectively. Facebook’s ad business has attracted public scorn way out of proportion to its profitability. In contrast, as a private company, no one really knows how big Twitter’s ad revenue is, and it may be getting outsize praise. Market research firm eMarketer pegs Twitter at $140 million in ad sales in 2011, but don’t forget that eMarketer’s estimates of Facebook before it showed its S-1 were off by hundreds of millions of dollars.

Ads versus “relationships”

General Motors and Sir Martin Sorrell, the CEO of WPP, the number two ad agency holding company, have been critical of Facebook’s advertising effectiveness. But GM is spending $30 million on Facebook pages, and may back off its pledge to end its $10 million in Facebook ad spending. And Sorrell says WPP will double its Facebook ad buys to $400 million this year, though that figure is peanuts compared to WPP’s $2 billion Google budget.

Facebook funded a comScore study that shows a positive correlation between Facebook advertising and purchase behavior. The company seems to be pitching a program to TV cable marketers that would make connections between Facebook users’ Likes, onsite videos, TV ratings and TV spending. Meanwhile, Facebook defenders like Wetpaint CEO Ben Elowitz share a vision on the ultimate promise of social media as a brand marketing platform based on “relationships” rather than impressions or click-throughs.

The reality is currently between those extremes. Brand marketers and agencies I’ve worked with would love to exploit social media into something better than banner ads, or even video messages. I’ve described how Facebook could cash in faster by expanding its ad formats and buying options without risking clutter or user revolt. But brand advertisers are not moving their TV budgets without more proof of Facebook’s ability to increase awareness, consideration and off-line conversion, or deliver audience-buying efficiency.

I expect Facebook data on its users’ interests will ultimately prove valuable for ad and offer targeting on its own inventory and through a potential ad network. But Facebook is applying that data conservatively so far. It will be able to raise its direct marketing pricing a bit by encouraging re-targeting through a so-called exchange. But at least for now, it won’t allow buyers to mingle its proprietary user data with third-party data.

Pinning false hopes on mobile?

At the same time, social media observers are giving Twitter way more credit for cracking open mobile advertising than it deserves. Partly that’s because Facebook has raised so many of its own warning flags about mobile monetization. Facebook sponsored stories – one of its ad formats that actually makes use of the “social” in social networking by showing connections between “friends” and products – will soon show up in users’ mobile feeds. Twitter may claim that over half its ad revenue on some days comes from mobile, but as noted, its ad revenue is pretty small. Google already has a billion-dollar mobile ad business, originating more from search than from display ads. At $100 million, Pandora’s personalized radio streams may be the second biggest source of mobile ad revenue.

Jean-Louis Gassée’s bearishness about mobile advertising, social or otherwise, may be close to the truth. He thinks the mobile medium is particularly unsuited to advertising. That’s an argument one could make about communications-driven social networking, too. Call me a skeptical believer in both. Both web-based and mobile social media will force the invention of new formats for advertising and marketing before they produce really big revenues. They’ll need to exploit targeting via interest graph, tap into viral word-of-mouth and, perhaps hardest of all, achieve scale. They’ll look like sponsorships and coupons before they look like TV advertising.

Question of the week

When will social media advertising pay off?
Relevant Analyst
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David Card

VP Research Gigaom Research

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16 Comments Subscribers to comment

  1. I tried to tackle some of the difficulties with social advertising in my recent blog posting at vpresearch.posterous.com. Giving some thought to mobile as well, maybe later this week.

    Good, thoughtful analysis, as usual

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