Exploit a Little Facebook and Twitter Arbitrage

They're Selling Today's Inventory Over Tomorrow's Value

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Mike O'Toole
Mike O'Toole
Facebook announced recently that it turned cash-flow positive ahead of schedule. The milestones keep coming for the mother-of-all social networks: it reached 300 million members last month and any day will surpass the population of the United States. And it isn't just quantity: time spent per member on the network doubled over the past year. Money follows audiences, so it was inevitable Facebook would start to make money.

Meanwhile Twitter announced it raised another $100 million in funding (pegging its value at $1 billion, against next-to-nothing revenue). What will they use the money for? In part, to develop "advertising and premium services targeted at businesses."

There are big returns in store for marketers who help figure out what this kind of advertising looks like, especially while the networks struggle to nail down their revenue models. Today there's a big gap between value of a channel and what the channel is charging advertisers -- in the case of Twitter that would be $0. Smart marketers will take advantage of it.

Ironically, social networks, which are revolutionizing the way we communicate, create and build relationships, have been overwhelmingly conventional in their ad models. They have relied largely on display advertising to monetize traffic.

This reliance on conventional ads helps explain the big mismatch between actual and potential ad revenue. According to Comscore, social networks deliver 20% of all ad impressions but account for only 3% of the ad dollars spent online. Not that the ad revenue is anything to sneeze at. Nielsen just released its social networking ad spend survey, and spending is up 119% in 2009, a year when ad spending overall has suffered double-digit declines.

Also in the Nielsen survey? Today 17% of all time spent online is on social networks. The spoils will belong to the networks -- and the marketers -- who figure out how to reward and extend that engagement with utility for users.

Here are some players who are pointing the ways to a new model:

  • George Krautzel, Founder and President of Toolbox.com, a company I've collaborated with, says that the promise of communities isn't in transactions, it's in building deeper relationships with your audience. ITToolbox.com's major customers include IBM, SAP, and Oracle, and their paid presence includes wide-ranging content sponsorships, dialogue with customers within the community, not to mention a few display ads. In other words, their participation is largely facilitating the knowledge sharing that members want. Their presence, as research shows, is instructive, not intrusive.
  • The burger chain TGI Friday's ran a wildly successful promotion on Facebook, nearing 1 million fans who friended a character called Woody (each fan got a coupon for a free burger). As far as I can tell, Facebook doesn't earn a nickel for its role hosting this page, essentially giving away for free its brand value in attracting visitors, its built-in community, its hosting of the Fan page. TGI Friday's is spending millions on the burger promotion, for what I assume will be a nice return from new/existing customers. Wouldn't they be willing to pay something to Facebook for their trouble?
  • Meanwhile, Dell credits at least $3 million in incremental revenue to Twitter Feeds like @DellOutlet. In any other marketing campaign, Dell would be giving a percentage of that revenue to the channel.

TGI Friday's, Dell, and other smart brands are practicing a little marketing arbitrage. They are exploiting the difference in the value of a channel and how that channel is priced. The good news is that Twitter and Facebook have a lot of patient money behind them, and they are more than happy to let companies capture that value, because in return they are learning what works and what doesn't.

The social networks are selling -- or giving away -- today's inventory over tomorrow's value. In that mismatch, there is great opportunity for arbitrage for smart marketers. I'd love to hear any examples of other companies that are deploying innovative programs, and helping show the way for meaningful, business-producing participation in social networks. Let me know in the comments or on twitter.

*This post was inspired by a discussion on This Week in Social Media, the internet radio program produced by PJA Advertising and Small Plate Radio.

Mike O'Toole is president and partner of PJA Advertising + Marketing. He launched and hosts "This Week in Social Media" and collaborates on a bi-annual research project with Toolbox.com on social media usage in the IT purchase process.
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