Twitter vs. Facebook: The ad wars heat up

(MoneyWatch) Not too long ago, Facebook (FB) hired comScore to show how effective its ads are for advertisers. Not surprisingly, the study did just that.

More recently, Twitter (TWTR) has taken similar steps. It hired a consultant to undertake a national survey and perform analysis. It found that that Twitter's advertising platform might hold more promise than Facebook's. And just the other day, Twitter touted another study and the claim that "7 out of 10 of our users will rely on Twitter to enhance their Black Friday and Cyber Monday experiences." 

Why the dueling studies? The reason is simple: revenue. Both these companies are now public and the same goes for every other social network, like SnapChat, that eventually wants to go public: They need to make money. 

The major way they generate revenue has been ad sales, but those dollars are getting harder to come by as rates for online advertising decline. To show the robust revenue growth investors demand, ad rates need to go up. That happens in one of two ways: either get advertisers to perceive of your offering as more effective than the other options, or eliminate the competition, reducing the choices advertisers have.

The face-off

In one sense, comparing Facebook and Twitter is difficult because they operate on vastly different scales. However, since Twitter went public, it's now possible to compare the two leaders on financial information reported to regulators. The numbers demonstrate the issues they and other social networks face:

  • In the third quarter of 2013, Twitter saw about $169 million in revenue, of which $153 million was ad sales and the rest, data licensing.
  • In the same period, Facebook had revenue of $2 billion, of which $1.8 billion was from advertising. In other words, Facebook's overall revenue and ad revenue were almost a dozen times those of Twitter.
  • In September, Facebook claimed 1.2 billion monthly active users and 874 million mobile users (there is significant crossover between the two categories; 254 million use only a mobile device). Compare that to 230 million total users for Twitter, with 70 percent of them, or 161 million, connecting to the service through a mobile device at least part of the time.
  • In the third quarter, Facebook saw global average revenue per user of $1.72. That would mean average ad revenue per user of $1.53. Twitter doesn't provide an equivalent number. However, if you assume that traffic has  increased over the three months of the quarter, then the lowest the third quarter average could be for ad revenue per user on Twitter is 67 cents.

In terms of scale and ad revenue, Facebook is far ahead of Twitter. It's clear why Twitter is in a race to prove to marketers that its ads are more effective than Facebook's. Marketers will spend their budgets on the most effective media.

To put this in perspective, it's worth noting that Facebook makes a tiny amount of ad money per user compared to rival Google (GOOG). Even ailing Yahoo (YHOO) has seen advertising revenue multiple times that size. Twitter is in far worse shape. Other social networks such as FourSquare and SnapChat, aren't currently even close.

Pounding pressure of falling ad prices

Let's provide even more perspective: The problem for social networking companies is the same as for all online media companies -- ad rates decline while competition increases. As long as there is virtually limitless potential ad inventory, there will be significant downward pressure on the rates advertisers will pay. 

If marketers view the different online options as roughly equivalent, the simple laws of supply and demand will put pressure on advertising-based business models. Google is no exception. It has turned its ad auction system into a gold mine, yet it still grapples with downward pressure on prices. 

Other social network companies have yet to gain that level of popularity. They need to convince advertisers that their ads are more effective. That explains why Twitter and Facebook are sponsoring studies intended to promote themselves as more effective marketing vehicles.

The other tactic, largely open only to Facebook given its greater financial strength, is to buy other quickly growing social networks. That would give the company more control over the supply side of the equation. Not only did Facebook buy Instagram, but it reportedly tried to buy Snapchat for $3 billion.

On a smaller scale, Twitter has taken similar steps. It hasn't been able to buy one of its large rivals, but it has concentrated on acquiring popular third-party tools for using Twitter. By doing so, the company gets more control over the quantity and display of ads.

Both Facebook and Twitter will continue their battles to attract advertisers and buy or eliminate competitors. Expect other social networks to try to do the same. The question for investors is, given the stiff competition, whether any of the companies can increase revenues at the rate Wall Street expects.

  • Erik Sherman On Twitter»

    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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