Who’s Really the King of Mobile Advertising?
At the end of last week, Twitter announced that it had submitted an S-1 to the Securities and Exchange Commission, confirming long-standing speculation that the social media platform would file for an initial public offering sometime this year. Because Twitter currently earns less than $1 billion in revenue, it was able to file confidentially, meaning that it does not have to reveal the details of its prospectus until shortly before the IPO date. As it stands, no details have been given on the time frame of the offering, or on the company’s underlying financials.
But just because Twitter hasn’t pulled back the curtain yet doesn’t mean that the conversation surrounding the IPO is uninformed. Interested investors have a battery of publicly available data and estimates at their disposal, as well as lessons learned from the Facebook (NASDAQ:FB) IPO. It seems clear that much like Facebook, Twitter’s business model will be built on a platform designed to serve advertisers.
This model as applied to social media is relatively new, but by this point has been thoroughly explored and investors generally know what to look for. Twitter’s valuation will depend not just on how many users it has and how active they are, but on how well it can deliver advertisements to those users, and on how well it can manage its relationships with those advertisers.
Before digging into what we know about Twitter, it’s worth pointing out that this story really begins with traditional Internet advertising giants like Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO). According to eMarketer, in 2012, Google earned $2.26 billion in display ad revenue, up from $1.67 billion in 2011. Yahoo earned $1.35 billion, down slightly from $1.36 billion in 2011. Combined, the two pulled in about 24 percent of total display ad revenue for the year. Facebook pulled in $2.18 billion in the same year.
Although Google and Yahoo (which is killing it right now) primarily built their advertising businesses around search, social media platforms like Facebook and Twitter still have to fight for the same general pool of advertising dollars. Total ad spend has been on the rise recently — up 3.5 percent on the year in the second quarter — but the competition for those dollars is increasingly fierce as different platforms race toward more sophisticated targeting. After all, advertisers will flock to whoever can deliver the highest return on each advertising dollar spent.
Based on eMarketer estimates, advertisers are expected to increase business with Google, Facebook, and Twitter. Growth in display ad revenue at these three companies is expected to far outpace growth at other leaders of the space such as Microsoft (NASDAQ:MSFT), AOL (NYSE:AOL), and Yahoo.
Right now, one of the hottest battle grounds is mobile. Facebook has perhaps had the most success recently increasing the effectiveness of its mobile advertising mechanism — mobile advertising revenue as a share of total advertising revenue has increased from effectively zero to 41 percent in just one year — and the magnitude of its achievement is hard to understate.
The great fear that Facebook has helped put to rest is that social media platforms — or even search, for that matter — would be unable to successfully monetize mobile use of the service because of constraints on mobile devices, such as screen size.
Advertisers have generally been unwilling to pay as much for mobile impressions because mobile ads have generally not been as effective as desktop ads, and mobile users have generally frowned on advertisements occupying the limited screen real estate available to them (but these logistics haven’t stopped Facebook from aggressively growing revenues).
But innovative advertising products have helped solve this problem (including video ads from Facebook), and Twitter is well aware that if it is to be a competitive player in the space it is going to have to figure out how to monetize mobile for itself. To that end, the company acquired MoPub, which specializes in helping customers buy mobile ads quickly. Twitter’s promoted tweet mechanism also appears to translate well to mobile use.
As far as the stats are concerned, here’s what we know about Twitter. According to marketing agency Saxum, Twitter boasts 554 million registered users and 115 million active users. The platform supports more than 2.1 billion search queries and hosts 58 million tweets every day.
The sheer digital “noise” the platform makes — imagine 115 million birds in some massive, Yggdrasil-esque tree, chirping furiously at one another all day, every day — is outstanding. According to Alexa, Twitter.com is the 11th most-visited website in the world.
If Twitter’s place in the pantheon of social media platforms hasn’t put the company on your radar — pretty much any brand that interacts with the consumer market uses Twitter — then its budding monetization mechanism should. EMarketer predicts the service will generate $582.8 million in global ad revenue in 2013, nearly $1 billion in 2014, and $1.3 billion in 2015. This is up from $139.5 million in 2011 and $288.3 million in 2012. Twitter is currently valued at approximately $10 billion.
eMarketer calculates that in 2012, Twitter derived 52 percent of its ad revenue from mobile, higher than Facebook and Google. In 2013, mobile is expected to account for 55 percent of ad revenue, compared to 42.4 percent for Facebook and 19.1 percent for Google’s search (just 3.8 percent for display).
By 2015, when Twitter is expected to earn more than $1 billion in ad revenue, 62 percent is expected to come from mobile. At the same time, Facebook’s mobile share of ad revenue is expected to be 55.3 percent.
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