Twitter’s ad biz struggles under pressure on video ad pricing

Even Twitter sounds bummed about its latest quarterly earnings report.

“We’re seeing a continuation of the trends discussed last quarter with less overall advertiser demand than expected,” the company said in its shareholder letter reporting earnings for the second quarter of 2016.

Those trends were not good in the first quarter of 2016 and stayed not good in the second. In both quarters Twitter’s total revenue grew — up 20 percent year over year to $602.0 million in Q2 — but fell short of analysts’ estimates. In both quarters, Twitter’s monthly audience grew, but only by three percent, although the three million people Twitter added in Q2, to total 313 million users, did exceed the two million that analysts had expected. And in both quarters, Twitter admitted that it attracted less demand from advertisers than anticipated.

To be clear, Twitter’s advertising business is still growing. In the second quarter, its ad revenue increased by 18 percent year over year to hit $534.5 million, with mobile accounting for 89 percent of that revenue. But its growth has decelerated pretty steeply, from 129 percent in Q2 2014 to 63 percent in Q2 2015 to 18 percent in Q2 2016.

But it’s the way Twitter’s ad business is growing that appears to be a red flag. In reorienting its business around autoplay video ads, Twitter has watered down the value of its ads to make them more attractive to advertisers seeking volume.

Historically, for Twitter to make money from its ads, people have had to actively engage with them, such as by clicking on the links they contain, following the advertiser’s Twitter account or retweeting the promoted tweet. But over the past couple of years, Twitter has pivoted its ad business around video ads, especially the autoplay kind that it added in June 2015.

The autoplay video ads, in particular, make it easier for Twitter to record engagements and get paid. Unlike a regular promoted tweet that requires someone to do something for Twitter to make money, an autoplay promoted video requires that someone not do something, at least not for a few seconds.

The higher likelihood that someone would engage with an ad if it’s an autoplay video ad appears to have helped Twitter’s video ad format become not only its fastest-growing ad format but the one that generates the most money.

That’s not as impressive as it sounds. Instead of these video ads bringing in a bunch of new money to Twitter, they’re largely shifting where the money that is already coming into Twitter is going.

“We’ve had a couple quarters now where they’ve moved from traditional promoted tweets into our video ad products,” said Twitter COO Adam Bain on the company’s earnings calls on Tuesday. He added that “there’s incremental budgets that we currently aren’t exposed to.”

But it’s not only that advertisers aren’t that willing to spend new money on Twitter’s video ads. They aren’t willing to spend as much money per ad. That goes back to how easy it is for Twitter to charge for these ads. Easy means cheap. Advertisers aren’t willing to pay as much for inaction as they are for action.

As a result, while the number of ad engagements Twitter recorded in Q2 ballooned by 226 percent year over year, the average amount of money Twitter recorder per engagement dropped by 64 percent year over year. Cited as responsible for both trends: Twitter’s autoplay video ads.

And yet advertisers are nickel-and-diming Twitter over its video ads even more. Twitter has had to lower its standard for what counts as a view when it comes to these autoplay video ads in order to remain competitive.

Last year, the company made a big deal out of its decision to only charge brands when their autoplay video ads played 100 percent in view for at least three seconds, in contrast to Facebook, which typically charges once a video ad comes into view. But in May, Twitter quietly added an option for advertisers to pay once an autoplay video ad has been at least 50 percent in view for at least two seconds and made that the default viewability option for video ads bought through its Ads API.

“That was done to make our product more competitive with our industry peers that are driving lower prices at greater scale,” said Twitter CFO Anthony Noto during Tuesday’s earnings call. In a letter to shareholders published on Tuesday, Twitter cited its comparatively high ad rates as one of two challenges its ad business is facing, along with increased competition.

By lowering its viewability threshold, Twitter is lowering even further the price advertisers would have to pay for its video ads. Advertisers simply aren’t going to spend as much for less time and attention paid to their ads. Of course, Twitter’s hope is that if those ads are cheap enough, advertisers will buy more of them — or that Twitter will be able to prove empirically that even a brief view is worth more than advertisers currently value it at, as Facebook has through its comprehensive measurement capabilities.

That ability to prove its ads’ value is also central to Twitter’s push for direct-response dollars, a hedge against the lower-than-expected demand it’s been receiving its core brand advertisers. Unlike brand advertisers that are cool with cheap scale, direct-response advertisers want the ads that get people to do things like visit a website, and they’re willing to pay higher prices for those actions. These are the types of advertisers dominate digital, having put tons of money toward Google to get people to click on search ads and to Facebook to get people to install their apps. And if Twitter can bring more of these advertisers into the fold — offsetting its reliance on brand advertisers — maybe the added competition for its inventory can help drive up its prices, maybe even for its autoplay video ads.

To get those direct-response advertisers to redirect some of their money toward Twitter, though, Twitter needs to do a better job of not only getting their ads in front of the right people but proving that it did in fact do so. But we won’t know if Twitter will be able to do so effectively enough for at least another three months — if even then.

“An example of our efforts is our partnership with Google and the integration with their DoubleClick Campaign Manager (DCM) to help advertisers better understand the impact of Twitter ads across both desktop and mobile. We plan to show advertisers desktop conversions in Q3, with the inclusion of mobile conversions in the future,” Twitter said in the shareholder letter.

About The Author

Tim Peterson
Tim Peterson, Third Door Media's Social Media Reporter, has been covering the digital marketing industry since 2011. He has reported for Advertising Age, Adweek and Direct Marketing News. A born-and-raised Angeleno who graduated from New York University, he currently lives in Los Angeles. He has broken stories on Snapchat's ad plans, Hulu founding CEO Jason Kilar's attempt to take on YouTube and the assemblage of Amazon's ad-tech stack; analyzed YouTube's programming strategy, Facebook's ad-tech ambitions and ad blocking's rise; and documented digital video's biggest annual event VidCon, BuzzFeed's branded video production process and Snapchat Discover's ad load six months after launch. He has also developed tools to monitor brands' early adoption of live-streaming apps, compare Yahoo's and Google's search designs and examine the NFL's YouTube and Facebook video strategies.