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Social media need for ad revenues spurs new offerings for companies

By: DOLAN MEDIA NEWSWIRES//August 23, 2012

Social media need for ad revenues spurs new offerings for companies

By: DOLAN MEDIA NEWSWIRES//August 23, 2012

If you’re a Facebook junkie, if you have a black belt in tweeting or if you are the mayor of your favorite coffee shop on Foursquare, you might not like the news from a leading technology consultant: More advertising is coming to all your favorite social media platforms, including mobile devices, and it will be showing up in places you haven’t seen it before.

And businesses might dislike the avalanche of advertising as much as you do, because they know much of it risks repelling rather than attracting customers.

A new report from Gartner, a Stamford, Conn.-based information technology research company, underscores that advertising is crucial to the survival of the hottest interactive Internet sensations. Investors’ insistence that social media companies increase their profits has spurred those companies to develop new advertising concepts for businesses to try.

The objective for social media companies is to get advertisers as addicted to social media as its fans are. Owners of sites like Facebook have promised investors that their immense base of users will result in big profits.

The predicted 2012 revenue growth for social media companies is 43.1 percent, more than half of which will come from advertising, according to the Gartner report.

The report forecasts that social media will generate revenue of $16.9 billion in 2012, compared with $11.8 billion in 2011. Some $8.8 billion will come from ads, with the rest from social gaming and subscriptions.

In a news release announcing the predictions, the firm said, “Marketers are allocating a higher percentage of their advertising budget to social networking sites. This is mainly driven by the fact that these sites offer a large pool of engaged users who spend considerable time on these sites – this increases the potential click-through rates.”

Unlike more established media, the leading social media outlets are still working out the bugs in their advertising business models.

Along the way, they have stirred up criticism and protests from users, who object to commercializing what, to many, is merely a way to talk to their friends or make snarky comments about politics, show business and technology. One of the things they snark about most: their personal information being used for purposes of targeting advertising.

Marketers that decide to try social media are in for a period of experimentation, innovation, surprise and controversy. The issue for marketers is: Will this period of transition create opportunities that are worth paying for?

Gartner’s study underscores the stakes both for social media and for the advertising industry in finding ad methods that customers will accept and that deliver results.

About 1 billion people worldwide are hooked up to social media, and the assumption of social media executives has been that such a large audience will inevitably produce profits.

But with a total of only 2.2 billion people on the Internet worldwide, and with more sites joining the competition, the growth rate of the leading social media companies has slowed. So a social media company’s challenge is to increase how much each customer contributes to its profits.

The search for greater ad revenue comes as tens of millions of users migrate to at least part-time residence on mobile devices, where the page design, user habits and advertising opportunities are different from the personal computers on which social media originated.

Clearly, investors were disappointed in how the leading social media site has performed. After Facebook’s July 26 financial report, its first as a public company, the stock dropped 14 percent, and it is now selling for about half of its IPO price. Investors’ fears both before and after Facebook’s IPO this spring were based on hardening assessments of the real potential for growth in its advertising revenue. The concerns crystalized when, just before the offering, Facebook lost a $10 million General Motors ad campaign. GM predicted a poor sales return on the investment.

Investors noted that the rapid growth in mobile users seemed to have caught Facebook by surprise, without a plan to make money from it. Now Facebook and other social media companies have gotten the message, and are working up new ad products to entice marketers to try advertising on mobile media:

• On Facebook, companies now can buy “Sponsored Stories,” which are slipped into users’ news feeds. A Sponsored Story is a brief message from a paying sponsor, most often an announcement of a discount or a new product. Ad Parlor, an agency specializing in Facebook advertising campaigns, is telling its clients and prospects that it is getting dramatically higher click-through rates – up to 1,500 percent higher – for mobile-device ads than for Facebook web ads. The most successful types of ads, by far, were for entertainment brands, the firm said.

Foursquare is working with 20 advertisers and a division of global ad conglomerate Omnicom on Promoted Updates, which will appear in its 20 million users’ feeds. A Promoted Update will look just like a regular update from a friend, but will include a label to show it is an ad. Ads on Foursquare sometimes use premiums and discounts to get users out on the town.

• Twitter, which has run Promoted Tweets from advertisers for about two years, recently announced it would allow advertisers to target their Promoted Tweets to narrower slices of the Twitter user base. For instance, an airline might have a route from New York to London, and seek to buy ad space targeting only Twitter users in New York. Previously, such an option wasn’t available.

Some marketers worry that they continue to encounter resistance to advertising from site users who resent the intrusion of commercialism and the sense that they’ve been targeted based on data users didn’t intend to give out for commercial use.

Bruce Kasonoff, an “innovation consultant” and author, recently posted “Why Facebook Was Stupid to Go Public” on Technorati, saying Facebook has “enormous access to immense amounts of personal data,” but because of pressure from stockholders, “has to care more about advertisers than individuals” who use the site.

“If you don’t believe me, wait a few months. Watch for all sorts of new initiatives that creep people out,” he wrote.

If that happens, people will take to Facebook, Twitter and other social media to talk about how “creeped out” they are, and their eyeballs will be available for advertisers. Even campaigns that are shunned by more than 99 percent of the one billion users of social media could still reach 10 million people. The sheer size of the social media marketplace makes its own case.

– John Stodder is the roving Web editor for The Dolan Media Co.


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