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With Twitter and Facebook, Squeezing More Ad Revenue is Key

  +Follow December 10, 2013 3:00PM
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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
Trax
19 Dec 14 07:08:58
RT @JustinPulitzer: $FB close to filling the gap! :)
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19 Dec 14 07:08:51
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Gregory Bent
19 Dec 14 07:08:33
If $FB ' s Instagram is worth $35B $TWTR worth more than $23B ?
Steve Schaefer
19 Dec 14 07:08:11
Citi says Instagram is worth $35 billion, WhatsApp $18B and Facebook $266B, or $91 a share http://t.co/DrP2MLThup $FB $TWTR
Shaina Walden
19 Dec 14 07:07:34
Could be breaktout time on $AJG $NWL $GD $FB Check out http://t.co/lAeY5ZhRhH
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19 Dec 14 07:07:33
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Mind Stalking
19 Dec 14 07:07:11
RT @traderstewie: $FB = $80 do-able
traderstewie
19 Dec 14 07:06:32
$FB = $80 do-able
Andrew Rocco
19 Dec 14 07:06:31
RT @quint_robert: @traderstewie @AndrewRocco1 $FB had a pocket pivot yesterday
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Justin Pulitzer
19 Dec 14 07:06:27
$FB close to filling the gap! :)
Chng 莊
19 Dec 14 07:06:25
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Robert Quint
19 Dec 14 07:05:48
@traderstewie @AndrewRocco1 $FB had a pocket pivot yesterday
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19 Dec 14 07:05:37
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19 Dec 14 07:05:22
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19 Dec 14 07:03:50
#Stocks you migh want to Sell $TCB $SRE $TECD $FB Must have http://t.co/R4CC5KgpkJ
PtheGr8
19 Dec 14 07:03:29
$FB 60min chart as guideline : http://t.co/2x02ysucfe
Arnulfo Bearden
19 Dec 14 07:03:24
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PsychSignal
19 Dec 14 07:03:09
333.0% increased bullish conversations in $FB in the past 1 hour.
Wisedom
19 Dec 14 07:03:07
Lovely move from $LNKD, $FB also moving very nicely!
The Stock Professor
19 Dec 14 07:02:37
$FB $TWTR $AAPL $IBM Italy's Newron soars on EU green light for Parkinson's drug http://t.co/LdVsHtHJyb
Chris Boyd
19 Dec 14 07:02:28
$FB close to filling that gap from last earnings
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19 Dec 14 07:02:13
RT @s_s_o0: $ADBE $LULU $AAPL $GOOGL $FB $TWTR $YHOO $BBRY #option #اوبشن فرصه عقد انتحاري اللي قفل نص $LNKD 237.50 Call Op:18 cent بكر…
Dee Kona
19 Dec 14 07:01:47
$FB GOIN over 80 with new evaluation of Insta worth 35 Billion wow
Alpha Maven Alerts
19 Dec 14 07:01:45
$FB, Active, +3.55, 1H, 10:00 AM EST, 19 Dec, #NASDAQ $NDX $SPY
Jacky
19 Dec 14 07:01:33
jan 2015 $fb 70 strikes look pretty good right now
Bobby Wilbert
19 Dec 14 07:01:22
$FB ZUCKERBERG'S GREATEST STEAL: #Instagram Now Worth $35 Billion, According To Citi (FB) http://t.co/zDMNPt8pYh #finance #feedly
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19 Dec 14 07:01:16
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19 Dec 14 07:01:14
$FB prints 80 today.
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19 Dec 14 07:01:04
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Stockatron
19 Dec 14 07:01:03
sold $fb calls for a tiny profit, not really seeing the volume for a breakthrough.
Shena Fagan
19 Dec 14 07:01:02
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HedgeBound
19 Dec 14 07:00:57
RT @OptionsTrader31: $FB That Citi reckons that Instagram is worth $35b - 50% more than $TWTR - is as amazing for FB ($1B purchase!) as it …
Fabcara
19 Dec 14 07:00:45
RT @RedDogT3: Only sitting in $aapl $fb $bac long. And $baba calls. I will buy $baba stock back if it starts acting better absorbing …
Trax
19 Dec 14 07:00:45
$FB continuing bullish run - on low volume. Heavy sellers appear to have taken themselves out and now buying is moving it higher.
aaplalert
19 Dec 14 07:00:18
Trade -- $FB : Enter Long at 79.48, Date = 12/19/2014, Time = 10:0:14:0
Becky Hiu
19 Dec 14 07:00:04
$FB HOD
Scott Redler
19 Dec 14 06:59:54
Only sitting in $aapl $fb $bac long. And $baba calls. I will buy $baba stock back if it starts acting better absorbing lock up
Earl Peterkin
19 Dec 14 06:58:58
RT @MotifInvesting: Wait a second, Instagram's worth WHAT now? $FB #motif http://t.co/VImNvYGgpt
fazo
19 Dec 14 06:58:57
S&PP goes negative and i be hitting the trifecta -- $FB #OIL and the $SPXU -- not to mention $AMBS -- let all these hold for the beauty
TwentyOne
19 Dec 14 06:57:40
Internet content continues to see rotation and some RS with $LNKD $FB $BIDU $XOXO etc all acting well
Becky Hiu
19 Dec 14 06:57:33
$FB $TWTR strong
Winborn Traders
19 Dec 14 06:57:25
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Andy Cinquino
19 Dec 14 06:57:23
I'll be watching $FB action in the ticker all day. Like to see how this moves into the EOY.
Jack
19 Dec 14 06:55:53
$FB cleared the downtrend line. http://t.co/TuKBErKhWE
Trax
19 Dec 14 06:55:38
RT @JustinPulitzer: $FB bought Instagram for $1B & it's now being valued at $35B. Whoa!!
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19 Dec 14 06:54:00
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19 Dec 14 06:53:52
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  +Follow December 10, 2013 3:00PM
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