Social Media Firms Fight for Advertisers

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

Social media is a rather new industry. Yet already the giants in the sector – Facebook (NASDAQ: FB), Twitter and LinkedIn (NYSE: LNKD) – are in a tussle for market share among advertisers. How successful these companies are in attracting advertisers will largely determine their longevity as viable businesses and whether the firms are investment worthy. 

One example of the growing gulf between these social media firms is Twitter recently ending its users' ability to have their Tweets channeled to a connected LinkedIn account. LinkedIn quickly answered by now allowing its users to “follow” certain celebrities and public figures. 

Facebook Versus Twitter

Facebook suffered a major blow in this expanding turf war when General Motors (NYSE: GM) in May said that the $10 million in ads it spent on Facebook did not deliver the returns expected. Some investors shrugged that off, saying that GM is just a stodgy, old company and does not understand the dynamics of social media.  

But GM does get it. The company has been advertising on Twitter for two years and it is very pleased with the results. Chevrolet's director of digital and customer relations media, Andrew Dinsdale, told the Financial Times that Chevy has response rates to Twitter ads of between 1% and 3%. Dinsdale said “that's several orders of magnitude higher than traditional online display advertising.” 

For its part, Facebook says that on average 70% of brand marketers see a return of at least three times their investment. It points to some of the success stories of companies advertising on its site and gaining additional sales. Such as Electronic Arts (NASDAQ: EA), which Facebook claims saw $12.1 million in additional sales thanks to Facebook ads. 

But that's hardly a game-changer when EA posted GAAP net revenue of $4.1 billion in fiscal 2012. One would think that with over 1 billion active users, Facebook ads would produce more than that. 

Norm Johnston of Mindshare Worldwide, part of the giant ad agency WPP, agrees. He compared Facebook and Twitter, telling the Financial Times “we're finding Twitter better at generating social spikes, PR and buzz.” Keep in mind that Twitter has only 140 million active users, compared to Facebook's one billion. 

However, it does cost more to advertise on Twitter (higher cost per click) and it also costs more to gain followers there than it does to get a 'like' on Facebook. Despite this, it would not be surprising to see Twitter close the enormous gap between it and Facebook on advertising revenue – $288 million this year versus $4.23 billion. Especially since Twitter seems to be doing a better job on mobile advertising than Facebook is doing. It generates more revenue from mobile ads than it does from desktop PC ads. 

Future Outlook

What should those interested in the sector look for in the years ahead? Most likely each of these companies will continue to expand the features they offer, so that eventually they may become mirror images of each other with very similar features. The key to success, therefore, will be how well these firms can attract advertisers to the site and keep the advertisers happy. 

As of right now, LinkedIn and Twitter seem to be doing it right while Facebook's performance is lagging. Thus the poor stock performance of Facebook as compared to LinkedIn. That lagging will continue until Facebook gets its act together, particularly on the mobile side.

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tdalmoe has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Electronic Arts, Facebook, General Motors Company, 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.If you have questions about this post or the Fool’s blog network, click here for information.

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