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With Twitter and Facebook, Squeezing More Ad Revenue is Key

  +Follow December 10, 2013 3:00PM
Tickers Mentioned:

On Dec. 10 Facebook Inc. (FB) gained 3 percent in early trading on news that video advertisements would be more prominent in users feeds. At the same time, rival social media upstart slipped Twitter Inc. ($TWTR) popped nearly 6 percent by midday (representing a 16-percent uptick over the last two trading days) after unveiling a new advertising product called Tailored Audiences.

With social media investors, any news of more thoroughly integrated advertising supposedly translates into higher revenues. After all, the more successful and well-targeted an ad is, the more Twitter or Facebook can charge for them. When advertising volume is increased as well, so will the revenue.

But at some point the rubber hits the road, and excessive advertising has to turn off users. Or will it?

Targeted Advertising: Bend ‘Em But Don’t Break ‘Em

According to a 2012 report by YouGov and Upstream Systems, one on five Americans claim they would quit a social media service cold turkey if subjected to too much advertising. For Twitter and Facebook, it would seem to be a simple balance sheet problem. If increased revenue from better-targeted and more intrusive advertising offsets the loss in usage, then the ramped-up advertising is a go. However, if the alienation of one in five customers’ does not make up the difference, scale back.

Twitter claims 218 million active users and Facebook 1.2 billion. While Twitter has yet to report earnings, and thus their user-derived revenue it is a little more difficult to parse. But Facebook has been public for a year and a half. Their earnings reports reveal the company is notching a steadily increasing amount of money per set of eyeballs.

Last quarter, Facebook generated approximately $4.19 per American/Canadian user in revenue, a 14 percent uptick from the previous quarter (while overseas markets, are less profitable, the increases in revenue are similar.) That percentage increase is no small change, and a necessity for Facebook to continue growing. Facebook has reached near total saturation as far as acquiring new users go – at 1.2 billion, there’s simply not much more of the population to get onto Facebook for the first time.

Facebook has worked instead to increase revenue per-user, doing so via three methods: one, get existing users to use the service more; two, increase mobile advertising share; and three, better target the ads. The last two involve an increase in the presence of advertising that has so far proven effective in increasing revenue.

The Established Social Media Company Playbook: When You Can't Grow Anymore, Milk the Users You Have

This method works, until too many users have enough and leave the service. Of course, what people say they will do and what people actually do are often diametrically opposed. And that seems to be the case: neither Twitter nor Facebook attributes any sizable dropoff form the increasingly prevalent advertising. Curiously enough, most people actually seem to enjoy it: the same Upstream study that claimed 20 percent of users would flee a site for excessive advertising reveal 69 percent of users enjoy ads, and enjoy them most when they're well-targeted.

Make no mistake, undisputed social media king Facebook is slowing. Facebook’s growth with young users is dissipating, the admission of which caused a sharp drop-off after an otherwise triumphant Q3 earnings report. Facebook has attempted to shore up their loss of youth appeal by acquiring Instagram, and this should work for awhile.

But what will keep Facebook chugging along, and help Twitter sustain their march to all-time highs is not to pare back advertising at all, and to simply better target ads. Which is what both are doing, with Twitter (and its multiple revenue streams) looking especially cutting edge in this regard.

While other smaller social media companies like Snapchat are ratcheting up the user growth to increase valuation, already-established behemoths Twitter and Facebook are taking a different track, and doing what they need to do: not increase the user base, or play into concerns advertising will alienate users. Rather, their goal is to get as much money as possible from the users they have. And for now, it's resonating with investors.

For the time being, the strategy is proving incredibly successful, and there is little reason to do otherwise. Facebook hit $50.41 a share on Dec. 10, continuing a week-long uptick. On the same day Twitter touched its all-time high, hitting $52.10 a share, or double its IPO price.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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Results for FB
Hasdra Ximena
29 Jan 15 22:29:06
RT @GoogleFacts: Facebook now makes about $1 per month per user. $FB http://t.co/0ogHDG7dz3
Who wants to know?
29 Jan 15 22:27:32
RT @SteadyTrader: $FB complete non-event now after earnings. Great job to those that sold options premium http://t.co/GXQlxPUY9K
29 Jan 15 22:24:28
$FB Pointing to higher! Gapper Candidate and Breakout to watch over $78.47 http://t.co/rc61mbsfVj
29 Jan 15 22:24:10
Eye of the tiger, baby! $GOOG $PCLN $TWTR $FB $AAPL $EBAY $GM $DUST $BABA http://t.co/JUFJoVNc4s http://t.co/Okg4KKJf2w
Langan Stocks
29 Jan 15 22:24:08
$FXY Reviews Updated Friday, January 30, 2015 01:03:31 AM $FB $EWG $EWY $UCO http://t.co/20uxgaieyy
29 Jan 15 22:16:34
RT @mitchheiner: Here are the regions of the world where Facebook $FB earns the most advertising revenue: http://t.co/10bBseyht1 http://t.c…
Marc A
29 Jan 15 22:16:34
$SPY im wildly bullish 4 tmrw I calculate a 1.3% day or better, looking for strong stocks to get stronger $AAPL $FB http://t.co/R3KEQpNn8B
Bill Ronzi
29 Jan 15 22:12:22
@jimcramer $FB could do great things with $TWTR
29 Jan 15 22:12:14
http://t.co/Ucb8ElwZfO @Super_Trades student on track to $1 million profit 1st year trading! $ADXS $RTRX $ONVO $ECIG $FB $TWTR $LIVE
29 Jan 15 22:10:15
$FB 4Q net income $701m http://t.co/o7onIsmDKG
29 Jan 15 22:09:44
RBC's Mark Mahaney Considers Facebook To Have 'One of The Best Growth Dynamics,' Despite Price Target Cut $FB http://t.co/tGXVJ0mEHb
29 Jan 15 22:05:07
Follow me into live stock chat! $GOOG $PCLN $TWTR $FB $AAPL $EBAY $GM $DUST $BABA http://t.co/l9JkTCL0PV http://t.co/jheCSpDllS
29 Jan 15 22:02:07
Join me on tsū, is sharing social revenues with all of us. http://t.co/xycMWeldhM $LNKD $AAPL $GOOGL $GOOG $FB $YHOO http://t.co/uSDpMs2miz
US Banking News
29 Jan 15 21:47:36
Facebook Price Target Cut to $90.00 $FB http://t.co/h6Nfc7wRiE
29 Jan 15 21:46:06
Helpful video for stock options beginners!! http://t.co/SrNPxLWpJR $GOOG $AAPL $GOOGL $AMZN $FB $FEYE $FXCM http://t.co/MkFvW5Ms5W
29 Jan 15 21:46:02
$FB: Facebook Inc (NASDAQ:FB) Beats All Estimates: Stock Surges: http://t.co/Exe3AiGN3E
29 Jan 15 21:38:15
$FSLR Filings Updated Friday, January 30, 2015 00:07:39 AM $AMGN $KO $CELG $FB http://t.co/L2DfsvYxYM
Chayton Falke
29 Jan 15 21:35:07
#Nasdaq100 #recent #market #exit #4: Covered $FB short for a 0.17% #gain in 29 days. #FB #forex #trading #stocks
Brian Gaudenti
29 Jan 15 21:34:45
Darn, first $AAPL and the next day $FB with awesome earning reports. Maybe in a bizarre parallel universe Twitter... http://t.co/VeGnMwKn9d
$FB Stock Watch
29 Jan 15 21:32:07
What Deutsche Bank Thinks Of Facebook Inc. (FB) Stock http://t.co/96MTPiEvJ5 $FB
$FB Stock Watch
29 Jan 15 21:32:07
Why Goldman Sachs (GS) Predicts An 18% Increase In Facebook Inc. (FB) Stock http://t.co/Av2M7jqIez $FB
$FB Stock Watch
29 Jan 15 21:32:07
Facebook Inc (FB) Target Price Lowered At RBC Capital http://t.co/kbNN7fLQZM $FB
29 Jan 15 21:32:06
What will the $DOW do tomorrow? http://t.co/RGFWb0Cbdl $GOOG $AAPL $FB $EBAY #options #stocks #daytrading http://t.co/xJytcfECFy
$FB Stock Watch
29 Jan 15 21:32:06
The Bottom Line: Facebook Inc (FB) Stock Is A Buy For 2015 http://t.co/RsnkHvZjLL $FB
$FB Stock Watch
29 Jan 15 21:32:06
FACEBOOK INC (FB) Earnings Report: Q4 2014 Conference Call Transcript http://t.co/OlXdCQPvOP $FB
$FB Stock Watch
29 Jan 15 21:32:05
Facebook Inc. Earnings: Profiting From Mobile Growth http://t.co/qtu3eprZgR $FB
$FB Stock Watch
29 Jan 15 21:32:05
Facebook, Inc. Earnings: Exceeding Great Expectations http://t.co/qZbx67SF0z $FB
$FB Stock Watch
29 Jan 15 21:32:05
Facebook Inc Class A (FB) Is Today's Post-Market Loser Stock http://t.co/qYToBtfgJW $FB
$FB Stock Watch
29 Jan 15 21:32:04
Facebook Inc (FB) Earnings Preview: Big Things Expected http://t.co/6l7Zv1oY5u $FB
29 Jan 15 21:29:49
The Closing Bell is out! http://t.co/Rjl5ycrJHn $EURUSD $GBPUSD $USDJPY $AUDUSD $SPY $TWTR $GPRO $YHOO $LNKD $FB $AAPL $BRD $CAT $WLT $LNKD
hft info
29 Jan 15 21:28:04
RT @TradingGuru: RT $AMZN Algos triggered BUY in SIGMA-X, CROSSFINDER, ATS, LX @ 19:51 P/T 370 #Quant $GOOG $BABA $FB $NFLX $BIDU $GPRO $TS…
Bob Grumbine
29 Jan 15 21:25:21
.@FortWorth_SEC @SEC_News e.g. $FB's felony violation of ITADA is distributing confidential personal info used as passwords by financials
29 Jan 15 21:21:02
$FB $GOOGL: El Super Bowl Is NFL's Global Salesman for Growth Outside U.S.: http://t.co/XfOUQKxa7C
29 Jan 15 21:19:15
RT @WSJ: Facebook is banned in China, but the company is setting up a "small team" in Taiwan. http://t.co/Y7eizSQ7Ch $FB
29 Jan 15 21:18:35
How much are you worth to Facebook? It got $9 in rev per U.S./Canadian user in Q4. Europe $3.45, Asia $1.27. Global avg. $2.81. $FB
29 Jan 15 21:16:03
$FB: Facebook Inc (NASDAQ:FB) Had Splendid Year 2014 For App ...: http://t.co/1k72sSFioD
29 Jan 15 21:08:44
RT @HuffingtonPost: $FB is now bigger than the largest country on Earth http://t.co/fs4yorPGOT http://t.co/KAUno3vm0Y mind the GAAP...
29 Jan 15 21:07:58
@Jamtrades no need to pump $FB. Just go read the earnings transcript along with the presentation. They speak for themselves. -BULLISH
Official Penny Stock
29 Jan 15 21:04:53
RT @timothysykes: You know you have a great strategy when your biggest haters trade off the same patterns/rules http://t.co/fRCEmrzZa9 LEAR…
29 Jan 15 21:04:03
RT @JeaYu21: $SPY coiled off the 198.62 area fib, $FB been sellfading off the 76.72 fib
29 Jan 15 21:01:54
Join me on tsū, is sharing social revenues with all of us. http://t.co/xycMWeldhM $LNKD $AAPL $GOOGL $GOOG $FB $YHOO http://t.co/wnOAzlAPRr
Metody Fuentes
29 Jan 15 20:54:16
$GPRO sold at open,,,thought about going long again, but now looking at $TWTR and $FB ,,, any thoughts
Swing Trade Warrior
29 Jan 15 20:54:01
Follow SwingTradeWarrior on #instagram & #twitter @swingwarrior & #facebook http://t.co/oUm1uxtWLW #follow #retweet $FB $TWTR #ig #instagood
Vaughan Lovegrove
29 Jan 15 20:53:15
RT @counternotions: The way of the market: $AAPL crushes: $AMZN: ↑ $GOOG falters: $AMZN: ↑ $FB beats: $AMZN: ↑ $AMZN loses: $AMZN: ↑
29 Jan 15 20:52:42
Analysts Actions on $GOOGL RBC Cuts from $725 > $650, Canaccord cuts from $700 > $650, Nomura raises from $600 > $625 $GOOG $FB $BIDU $TWTR
Alysia Sarkisian
29 Jan 15 20:52:08
RT @TheStreet: $FB is more serious about spending than profits. "We plan to invest aggressively." http://t.co/CmgZrLIA4T
29 Jan 15 20:51:20
RT TheStreet: $FB is more serious about spending than profits. "We plan to invest aggressively." http://t.co/nCBcRfqUu1
29 Jan 15 20:50:57
RT @teacuppiglets: Want alerts before the promoters alert them? Join our free $FB group https://t.co/WIFUvTYA6U $ecig
Kifer Gregoire
29 Jan 15 20:50:37
1/30 Watchlist: $SHAK $MCD $FB $RDUS $REXX $KBH
Don Gulfo
29 Jan 15 20:49:57
RT @MadMoneyOnCNBC: Why @jimcramer loves $FB - thanks to @MarkZuckerbergF a.k.a. "King Midas in a Hoodie" http://t.co/OtU96k19e3 http://t.c…
  +Follow December 10, 2013 3:00PM



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