Facebook Inc’s investors and other proponents of the social network like to say that it captures one of the greatest concentrations of human attention on the planet and thus offers a boundless opportunity for advertisers.
But Facebook Chief Financial Officer David Ebersman on Wednesday cast doubt on those assertions by suggesting that there may be a limit on how many ads Facebook can show users before they get turned off.
Ebersman’s warning carries far-reaching implications for not only Facebook but also other social media companies including Twitter Inc, which is in the middle of a roadshow to promote its initial public offering to investors.
Twitter has yet to turn a profit but it is pitching an advertising business model similar to Facebook’s.
“It’s important for investors to realize that there is a limitation on the mobile ad revenue that can be generated. The sky isn’t the limit when it comes to that,” said Jeff Sica, the founder of Sica Wealth Management. “That’s the issue with Facebook. That will be the issue with Twitter.”
Seven-year old Twitter faces an additional challenge: its active user base, now at 230 million, has expanded much more slowly compared to Facebook, due in part to its struggle to retain newcomers. A recent Reuters-Ipsos poll found 36 per cent of Twitter users do not use the online messaging service.
“You don’t know how many people sign up and don’t use it, how many abandoned accounts they have,” said Adam Grossman, an analyst at Middleton & Co who attended a roadshow lunch presentation by Twitter executives in Boston on Thursday.
Twitter has set a price range of $17 to $21 per share for its IPO, which aims to raise up to $1.6 billion. The price range values Twitter at up to $11 billion, less than the $15 billion that some analysts had expected.
One investor who attended the Thursday luncheon said Twitter’s ubiquitous brand name will draw some investors.
“It’s a company that has changed the world so I wouldn’t bet against it,” said the investor, who did not want to be identified. “But they also haven’t created a business model which has proven that they can continue to grow at 100 per cent a year and be profitable.”
Twitter is trying to expand its ad business in other ways. This week it closed a $350 million deal to acquire MoPub, an ad network that serves ads within mobile apps.
“The consumer eyeballs, and the amount of ads they can absorb without being irritated, is finite,” said Rich Wong, a venture capitalist at Accel Partners, who invested in MoPub and AdMob, a mobile ad network that Google Inc acquired for $750 million.
With MoPub, Twitter will be able to serve ads in other apps to grow revenue without cluttering its own users’ Twitter streams, Wong said. “By leasing real estate, you can expand by orders of magnitude the eyeballs you can get to,” he said.
It remains to be seen whether MoPub can unearth new revenue for Twitter. But some industry experts liken the deal to Google’s $3.1 billion acquisition of DoubleClick in 2008, which helped the search giant improve its ability to place targeted ads on Web pages across the Internet, not just google.com.
In the case of MoPub, Twitter will serve ads within third-party mobile apps, such as games, rather than websites.
In late September, Facebook also resumed work on its own mobile ad network after it appeared to put the project on hold earlier in the year, according to several tech blogs.
The renewed effort to seek other sources of revenue could be explained by Facebook’s reluctance to show more than one ad per 20 stories in a user’s news feed. Ebersman told analysts on Wednesday that the 5 per cent ad ratio would not increase by much in the future.
That surprised some analysts and investors who had expected a higher rate.
“Five percent is relatively low,” said Brian Blau, a Gartner analyst. “I’m surprised that it’s only five per cent. I was anticipating more, to really push the boundaries.”
According to its investor prospectus, Twitter now makes a little over $0.65 per user compared to Facebook’s $1.72. Analysts believe Twitter has room to grow in getting more revenue per user because Chief Executive Dick Costolo has been cautious so far about injecting more ads into Twitter streams.
Twitter’s format and the nature of its fast-scrolling content also differs from Facebook, which means Twitter users may be more tolerant of ads, said Gartner’s Blau.
But if Twitter’s ability to show more ads becomes limited, then it would have to seek higher ad prices by promising marketers the ability to target users with greater accuracy.
In the past year, Twitter has expanded its targeting features to show ads to users who live in certain metropolitan areas, or show interest in certain topics.
But even when displaying the highly personalized ads prized by marketers, social media companies have had to weigh the value of the ad versus their “creepiness factor,” which could scare away fickle users.