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.