Advertisers See Culpability in Social Media

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Although Internet companies have long distanced themselves from blame for customer created content, a new push is emerging for better controls. And advertisers are giving the movement some teeth. Social media has to listen.

Free speech

One of the greatest things about the United States is the right to freedom of speech. However, that freedom comes at a price, which is that you have to allow people with opposing views to say what they want, too. That includes content that you might find objectionable. Your right, in that case, is to not listen.

From its beginning, the Internet has been a hotbed of controversial speech issues. As services were created to allow consumers to create their own online content, the issue got even bigger. And while some content can be easily walled off, others can be harder to identify.

Taking a stand

“After failing to get the social network to remove pages glorifying violence against women, feminist activists waged a digital media campaign that highlighted marketers whose ads were found alongside those pages. Nissan and several smaller advertisers temporarily removed their ads from the site.” Those words, taken from The International Herald Tribune and The New York Times, are a shot across the bow of social media companies.

Facebook (NASDAQ: FB), the largest social media company, was the target of this campaign and the one that felt the heat. This could be a very big issue for the company as it looks for ways to monetize its vast customer base. In fact, advertising accounted for nearly 85% of Facebook's revenue in the first quarter.

That comes after a renewed effort to tap advertisers since the service doesn't charge customers. Public for a little over a year, Facebook has been buying advertising-focused companies and launching new advertising services. The effort is working, with ad revenue up over 40% in the quarter, year-over-year.

The problem

The problem isn't inherently the content, however, its the way in which advertising is displayed. Computers automatically place ads on customer pages as visitors look at them. No humans are involved, so it is hard to tell what ads are going next to what content. Although improved technology can probably help minimize the problem, it will never solve it completely.

The issue will impact more than just Facebook, however. The Times article quotes researcher eMarketer as saying that social media advertising will make up over 12% of digital ad spending by 2015. Although this issue won't stop the trend, it could make life very difficult for some key players.

Buying into a problem

For example, Yahoo!'s (NASDAQ: YHOO) recent purchase of Tumblr in a billion dollar deal is expected to increase the company's audience by 50% to more than a billion monthly visitors and to grow traffic by approximately 20%. Tumblr is a media (photos and videos) driven blog service.

While the move should greatly expand Yahoo!'s ability to sell advertising, it also increases its exposure to the risk of alienating advertisers if it can't effectively identify objectionable content. So, the purchase was a good move, but it comes with some baggage that may be bigger than expected. And, Tumblr, which isn't a part of Yahoo! yet, is only just starting to put advertising on its site, so its systems may not be as robust as those with more experience.

Both Yahoo! and Facebook actually have notable upside potential for those seeking turnaround opportunities. Yahoo! has seen its top line fall in recent years, but, as the Tumblr deal shows, it is taking more aggressive steps to change with the times under new CEO Marissa Mayer. The market is just starting to take notice. Facebook, meanwhile, has been trading below its IPO price since day one, but still has massive potential -- if it can monetize its customers better.

Avoiding the problem

Interestingly, the one social media company most immune to the issue is LinkedIn (NYSE: LNKD). Only 23% of the company's top line came from advertising in the first quarter; subscriptions and job search tools accounted for 20% and 57%, respectively. Moreover, LinkedIn's focus on the business world insulates it from objectionable content in many ways, too.

Those looking for a safe haven from this brewing storm should like LinkedIn, but the stock is way ahead of itself. With a trailing price to earnings ratio of around 500, all but the most aggressive investors should book profits. If there's a notable pullback, however, LinkedIn would be worth a second look.

A sleeper issue

Objectionable user generated content is one of those problems that is hard to deal with and can cause serious harm. While it's a sleeper issue, investors need to watch it. Should the issue catch hold of the public's eye, Facebook and Yahoo!, among others, could come under increasing pressure from advertisers both publicly and on the top line.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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