The Key To Unlocking Value For Social Media Companies [Facebook Inc, Twitter Inc, GrubHub Inc, Weibo Corp (ADR)]

Originally, Facebook started with space ads. Then, it added self-promoting individuals’ or a company’s Facebook page. But things were still sluggish.

However, around the start of 2013, Facebook developed a new advertising format. They’re technically referred to as native social ads – ads that are seamlessly integrated into the social media’s platform. BIA/Kelsey projects social media native revenue as the fastest-growing social media advertising method at a 38.6% CAGR by 2018.

“Facebook has integrated in-stream ads to the user experience. Response rates are high and advertisers will always chase the least expensive ad with the best response. It works because it’s new and cheap,” said Holmes.

In-stream ads can be videos. For instance, a commercial will appear before the user may watch an Internet video. The in-stream video ad will typically last 15-30 seconds.

On a social media site like Facebook, which has real-time update feeds, in-stream ads can be inserted into a streaming feed. So, for example, the user scrolls through the News Feed to see what friends and family are up to, and in-stream ads are peppered into the Feed.

By far the largest social network, FB’s Q2 2014 ad revenue reached $2.27 billion – an 82% increase from the same quarter last year. Revenue for the full year 2013 was $7.87 billion, a 55% gain year over year.

“For the first time in 2013, Facebook let advertisers access FBX, an ad exchange where you can customize your own ads,” explained Holmes. “Now we can glean information and better target our audience. We can also advertise on mobile now.”

The ad model is helping Facebook monetize its massive 1.28 billion monthly active users who increasingly access the site via mobile devices. Facebook revealed it has more than 1 million advertisers in total as of the start of 2014.

And to top it all off, Facebook continuously improves its method to provide performance-based analytics that are invaluable to advertisers.

Watching Facebook’s advertising Cinderella story shows us a great deal about how advertising makes money for social media companies.

One company that hasn’t yet found a way to make money on its user base is Twitter – but it’s working on it.

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