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Summary:

Twitter and Facebook are both trying hard to show that they are powerful advertising vehicles, in part to justify their multibillion-dollar market valuations. But while each company has shown some growth, there is still skepticism among advertisers about the ultimate value of social advertising.

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There’s a been a big focus recently on the advertising strategy at both Twitter and Facebook, with two in-depth profiles of Twitter in the Wall Street Journal and BusinessWeek that spent a lot of time talking about the company’s ad model, and increased attention on Facebook for moves aimed at improving ads, particularly on mobile platforms. Both are seeing their share of the ad market grow, but there is still one big question standing between them and the multibillion-dollar valuations they have received from investors — namely, do ads inserted into social activity actually work?

While Facebook is orders of magnitude larger than Twitter, the impetus for both companies to develop a robust advertising business is the same: because investors are looking for a stable — and rapidly growing — revenue stream. For Twitter, it’s about justifying the $8-billion market value it currently has as a result of raising funds from a host of venture investors such as Russia’s Yuri Milner, and for Facebook it’s about justifying the $100-billion market value it is expected to get when it finally goes public later this year. While Twitter has some revenue from licensing its data and Facebook has some from online payments, advertising is still the biggest part of the story.

For Twitter, its foray into advertising came first with Promoted Tweets and was then extended with similar offerings, such as Promoted Trends — and recently, the company started offering companies a “self-serve” ad platform similar to the one that Google has with AdWords. Advertisers only pay for a promoted tweet, which Twitter CEO Dick Costolo calls “the atomic unit of our ad strategy,” if a user interacts with it by clicking on a link or retweeting the message. The company says that these tweets have an engagement rate of 3 to 5 percent, compared with a 0.5-percent click rate on banner ads. A Twitter VP says the ad strategy will soon be shown to be a “juggernaut.”

What is the value of a retweet or a like? Advertisers seem unconvinced

There are some early signs that this approach is paying off for Twitter: eMarketer, for example, says that the company will likely pull in about $260 million in ad revenue in 2012. And yet, there still seem to be a lot of skeptics out there in advertising land — Tom Bedecarre of digital-marketing firm AKQA says he is a fan of Twitter, but that many advertisers are still unsure of what tangible benefit they get from having a promoted tweet. “What’s the value of a ‘like’ on Facebook? What’s the value of a ‘retweet’?” he said. “That’s a challenge for advertisers.

The Wall Street Journal story on Twitter makes a similar point about advertisers and their reluctance to commit a substantial proportion of their ad campaigns to Twitter. While some say they are happy to experiment with promoted tweets and other features, they are skeptical of their ultimate value:

Companies that have bought Twitter ads generally say they are happy with the percentage of people who click on their ads or circulate them to other Twitter users. But marketers also say these ads haven’t proven they can convert people into paying customers.

The ultimate challenge for both Twitter and Facebook was summed up recently by Sir Martin Sorrell, the head of WPP Group — one of the world’s largest advertising and marketing firms. As I noted in a recent GigaOM Pro report on Facebook’s IPO (subscription required), while WPP has experimented with Facebook ad campaigns and features and had some success, Sir Martin said that he still isn’t sure how much value an advertiser or brand is going to get by trying to mix their commercial messages with the kind of social activity that occurs on Facebook (and by extension Twitter):

The point is that Facebook is a social medium, not an advertising one, like search or display. It certainly is one of the most powerful, if not the most powerful branding medium. It is, however, a word of mouth or PR medium. You interrupt social conversations with commercial messages at your peril.

Do you want someone handing you coupons while you chat with a friend?

Promoted tweets have had some success, but even within Twitter there is concern (according to the BusinessWeek piece) about the ad “fatigue” that users might experience if too many ads are injected into their stream. Even if the ads are targeted well — which is why Google and Facebook spend so much time tracking their users — they are still likely to be seen by many users as intrusive. Imagine yourself talking with a friend or looking at photos of a party and having someone in a suit suddenly thrust a coupon into your hand. As a Forrester analyst has described e-commerce efforts on Facebook: “It was like trying to sell stuff to people while they’re hanging out with their friends at the bar.”

Google had unparalleled success by adding keyword-related ads to its business because people who are actively searching for a term are more likely to be interested in buying something related to that term — they are farther down the road of “purchasing intent,” in advertising lingo. But activity on both Twitter and Facebook often has very little to do with purchasing anything, and suddenly trying to hijack a conversation and turn it in that direction can have unpleasant consequences, as retailers like McDonald’s have found when their hashtag campaigns turn into “bashtags.”

And if you don’t want to just inject ads into a stream or onto a Facebook page, then you might have to develop an actual conversation with your users in order to get your message across, and that can be a lot of work — so much so that some advertisers might not see the payoff as being worth it. A General Motors executive told BusinessWeek that Twitter ads during the Super Bowl nearly doubled the company’s followers, but added that maintaining such a campaign was much more resource-intensive, in part because a company tweet “can’t look like it came from some corporate thing” in order to be effective.

As the Wall Street Journal story also notes, if you are an advertiser who wants to connect with your users or customers and promote things, you can just interact with them the way that Twitter users normally do, without having to pay the company anything at all — that’s probably one of the most powerful things about a social medium in the first place. Can Facebook and/or Twitter manage to prove that social advertising isn’t an oxymoron, but a crucial new way of getting your message to potential customers? Billions of dollars in market value are riding on that question.

Thumbnail image courtesy of Flickr user See-ming Lee.

  1. 239djd902jds9012213j Friday, March 2, 2012

    There is good reason to doubt Facebook and Twitter ads. Because basic math says it is a poor investment.

    People may spend tons of time on facebook and twitter, but they are only concerned with themselves or their family. Not winning a free ipod or getting a cheap dinner. If facebook or twiiter start to get between what people are the for (to socialize) then people will leave those services.

    In short, good luck social media. You’re a victim of your own hype.

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  2. My opinion – that the effectiveness of advertising in large social networks is obvious and due to the huge number of users and the possibility of my targeted delivery of promotional products to users

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  3. Girish Mahadevan Saturday, March 3, 2012

    Keywords should not be it. There should be an altogether different approach to advertising. Advertising should be made a part of user’s publishing stream. For instance, if I like humor and I follow a humor community, I’ll be really interested in knowing more about the comedian or may be where he is performing next in the neighborhood, if at all. These ads will work. So as much as possible, we should generate advertisements by targeting the content being published and not the keywords in the content (like Google does).

    Girish
    http://www.gpod.in

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  4. Twitter and Facebook will fail in the social ad space because both have chosen to recycle an aging model rather than innovate in an area that is prime for disruption.

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    1. your name here Saturday, March 3, 2012

      They’ve got to change their paradigm! Think outside the box! These words mean nothing!

      You talk like bot that has only been fed textbooks of a community college marketing program. Don’t be afraid tom have an opinion, buddy. :)

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  5. Arkadiusz Dymalski Saturday, March 3, 2012

    “What is the (marketing) value of ‘retweet’?” That’s pretty funny to observe how technology made us so exigent. In the environment where everything can be monitored and calculated very precisely, we expect more and more of accuracy. While no one requires THAT level of accuracy for
    ‘traditional’ media: billboards, Super Bowl ads etc. The argument that advertising on social media is like “trying to sell stuff to people while they’re hanging out with their friends at the bar” sounds ridiculous in the context of 3.5M$ expenses for “trying to sell stuff to people while they’re hanging out with their friends on the football stadium”.

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  6. Good observations. Atomic units aside, these ads will still be banner / interruptive ads that will have some value, but we are a long from proof of that holy grail that gets beyond sub 1% conversion rates just because a friend linked something.

    In fact as some of the commenter’s here indicated the opposite could occur because of the annoyance factor.

    Build it and they will come has been done with these enormous companies. Build it and they shall buy … the jury awaits.

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  7. Didn’t Seth Godin establish successfully many years ago that permission marketing should virtually replace interruption marketing? So what’s happened to that principle now?

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  8. I’m curious, why hasn’t Facebook made a foray into the AdSense business? With its own network of advertisers and knowledge of user behavior, it can surely develop a viable product that competes with Google’s AdSense to display banner ads on third-party publisher sites. You can even make an argument that because of Facebook’s knowledge of user behavior and the fact that many publisher sites already use Facebook Connect, Facebook’s AdSense offering may be even better than Google AdSense. Of course this would have privacy implications, but isn’t Google AdSense also doing cookie tracking and tapping into user’s past behaviors? Given that Google earned $9.71B last year through AdSense, that’s a huge opportunity for Facebook. Why isn’t Facebook doing this already? Am I missing something obvious?

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    1. Facebook doesn’t have enough inventory to showcase social ads.. and they are not trying to get into the adsense business – atleast not in the typical manner as Google. But they are testing display ads.. advertising their own site and will get into offering that to 3rd party publishers soon.

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  9. “(T)here is still one big question standing between them and the multibillion-dollar valuations they have received from investors — namely, do ads inserted into social activity actually work?”

    Just like everything else having to do with advertising.

    Face it, folks — we’re in an advertising bubble. Advertising revenues in the US, according to the Census Bureau’s Statistical Abstract, peaked in 2007 at $206 billion. Today it’s more like $170 billion, a 17% decline.)

    The situation in advertising in general is not unlike the music labels — online revenues are increasing, but they’re not making up for the losses in older media. A comparison between iTunes and CDs is probably apt. Online is a bigger and bigger piece of a smaller and smaller pie.

    If it doesn’t have a conversion rate higher than 50%, it’s underperforming random chance.

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  10. Joe Ciarallo Sunday, March 4, 2012

    It’s pretty funny I’m reading a story about “will social ads work” and next to the story are some pretty horrible banner ads : )

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  11. As just a common person, not a tech wizard, and regular facebook user, this article is spot-on. Ads are a nuisance. Especially so on social media. Do you realize many people make a point of never buying from companies advertised on fb, just as a matter of principle because their data mining is so invasive? I just activated AdBlock, a Safari extension that eliminates ALL ads on any website. Wonderful!

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  12. Allen Weiss Monday, March 5, 2012

    Since when is clicking on an ad or retweeting something mean “engagement”? Seems to me these are just clicks..nothing more.

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  13. “They”, ALL advertisers can take the pop up ads and their “in-your-face BS and shove them where the sun don’t shine!!! The ads that are waaaaaay too long on TV are the same. I would NEVER buy from azzholes that DEMAND my attention when I’m trying to do something or read something or VIEW something or those commercials that drag out the length of their pile of BS on TV!!! NEVER EVER visit their website or buy anything from them, I’d just like to get my hands on them!!! EVERYbody I talk with about this feels the same way. Slimy, scumbag, money-grubbing, hog advertisers should have checked with the public before they decided to shove thier BS down our throats!!!

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  14. does anyone really believe Facebook has 850 million users? come on! all hype…..

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