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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
Solo traders
24 Oct 14 17:52:09
$FB - PGA Fires Its President http://t.co/XI9l2ksoAs
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24 Oct 14 17:52:06
$FB - PGA Fires Its President http://t.co/xvfd8LB0iD
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$FB - PGA Fires Its President http://t.co/Vd11vF6J5Z
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24 Oct 14 17:50:40
RT @IBDinvestors: Did the Twitter 'buy' button make $TWTR a buy? Earnings due Monday http://t.co/i9NgNX0Vag $FB $GOOGL
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@perlapell good advice but they use neither $fb nor $twtr anymore. Try ask.fm, yik yak, Insta and snapchat.
فانوس مساهم
24 Oct 14 17:42:01
RT @usamkt1: $FB $TWTR يوم الاثنين لازم يكون عندك مواقع فيهم والله اعلم كلهم إيجابية. كول اوبشن #اوبشن #خدمات #دورة #السوق_الامريكي #توصي…
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PGA Fires Its President http://t.co/xQfyk7HB2L $FB $EPSO $MLMAD $MAN $HIS
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RT @IBDinvestors: Did the Twitter 'buy' button make $TWTR a buy? Earnings due Monday http://t.co/i9NgNX0Vag $FB $GOOGL
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24 Oct 14 17:36:35
RT @IBDinvestors: Did the Twitter 'buy' button make $TWTR a buy? Earnings due Monday http://t.co/i9NgNX0Vag $FB $GOOGL
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RT @FluentInFinance: #Yahoo is now the 3rd largest mobile advertising company in the world https://t.co/FnowofxR20 $YHOO $GOOG $FB $MSFT ht…
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24 Oct 14 17:34:01
http://t.co/aZaECYOHqt $FB #FB Are undesirable accounts destroying facebook's image?
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RT @IBDinvestors: Did the Twitter 'buy' button make $TWTR a buy? Earnings due Monday http://t.co/i9NgNX0Vag $FB $GOOGL
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RT @IBDinvestors: Did the Twitter 'buy' button make $TWTR a buy? Earnings due Monday http://t.co/i9NgNX0Vag $FB $GOOGL
Marco Di Dionisio
24 Oct 14 17:30:17
$FB (no posn) seems to have stole some momo from $TWTR! Notice how short lived the breaks of its MA's have been http://t.co/bEmSHdRrhc
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Did the Twitter 'buy' button make $TWTR a buy? Earnings due Monday http://t.co/i9NgNX0Vag $FB $GOOGL
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24 Oct 14 17:18:14
@CNNMoney the $FB on site inventory listings exploded this quarter. They will beat once again.
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24 Oct 14 17:11:04
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24 Oct 14 17:09:18
overal good day, traded a bit 2 much tho. $AAL $ALK $APT $ESI $ETE $FB $FEYE $HDSN $ISIS $ISR $MACK $RGLS $SODA $TWTR http://t.co/2prN15vF91
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24 Oct 14 17:01:04
My Take On The Wolf Of Wall Street http://t.co/hS6d9quCBw the guy is a piece of shit, learn $FB $TWTR $LNKD gotta $STUDY
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24 Oct 14 16:51:07
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$FB tried 2 short but got stopped out after the big spike http://t.co/p9eyHY8FH5
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24 Oct 14 16:36:37
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24 Oct 14 16:13:41
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24 Oct 14 16:12:45
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ryan herrmann
24 Oct 14 16:12:31
RT @OptionsAction: Dan's trade to hedge against your Facebook shares: Against long, put on 70/90 collar for free. Buy 70-put, sell 90-call.…
24 Oct 14 16:09:41
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RT @LaMonicaBuzz: Eclectic mix of stocks at all-time highs today: $AAPL $FB $MMM $CVS $CSX $UNP $LOW $HD $CELG $AMGN $TRV $PANW $KR $GD $LB…
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24 Oct 14 16:04:30
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Options Action
24 Oct 14 16:03:24
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24 Oct 14 16:01:58
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S&P100 #Stocks Trend $GILD $LLY $EXC $MMM $PG $BMY $AEP $UNP $GD $MDT $ABBV $TXN $HON $QCOM $WAG $FDX $FB $MO @ http://t.co/n4QZIDxy7w
24 Oct 14 16:00:03
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http://t.co/5qzSIjoPtA <--- Amazing subscriber to Super_Trades - check out his profit chart!!! $VSR $NQ $YY $FB #stocks #trading
Day Traders Group
24 Oct 14 15:50:39
Stochastic Bullish Crossovers http://t.co/pJ3i3ziqou $KANG $TICC $FMI $YUM $MAR $VZ $HLT $FB $TWTR $MU $PCLN $DD $QQQ $EBAY & More
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24 Oct 14 15:45:18
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24 Oct 14 15:40:11
@OptionsAction for more detail & rationale on why to hold on to but tactically hedge your $FB shares: http://t.co/sSVCmuKJVp
24 Oct 14 15:37:39
@Weeklyoptions currently we are up 100% on this $fb play. Ask for free trial at sasi.admn@gmail.com
24 Oct 14 15:37:26
http://t.co/WwRfVvXWbM <<-- Free Webinar Learn How To Survive This Crazy Market $CLRO $CLRB $AAMAF $AVGO $LAD $FB $GPRO
Stock Moo
24 Oct 14 15:36:49
$fb: I'm so thankful to have my children every day http://t.co/N7PAhd4AHh
  +Follow December 10, 2013 3:00PM



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