NEW YORK (TheStreet) -- The Wall Street Journal reported this morning that Facebook (FB - Get Report) is about to launch auto-play video ads. To call this news may be stretching it a bit. The dawn of the video-ad era on the social media site has been heralded many times and frequently delayed.
Those delays are understandable. The prospect of embedded advertising videos that start themselves without a click from the user is both exciting and worrying for Facebook. The revenue potential is exciting. According to a recent report, Facebook has about 665,000,000 active users around the globe, representing about one out of nine people on Earth. That kind of reach should command big bucks. The worrying factor is that such ads may be considered intrusive, and that is what has led to the delays.
I have no doubt that these ads will be intrusive. When I go to catch up on the minutiae of my friends' and family's lives, I don't particularly want to be told of the merits of Aquafresh, with an accompanying look inside somebody's mouth. If I consider the prospect, however, I don't think it will stop me going to the site. I am, after all, used to scrolling through a bunch of irrelevant stuff to peek into the lives of acquaintances, and if the soundtrack is annoying, I can turn down the volume.
For these reasons, I don't believe that this news could herald the end of Facebook. If most people react like me, there won't be any significant backlash to video advertising. The trendy, transient nature of social media per se is far more of a threat to Facebook's future than the slightly annoying presence of a few targeted video ads on the page.
As long as Facebook doesn't go the way of MySpace and get overtaken by a more fashionable competitor, its proven ability to increase revenue and profit convinces me that even at a forward price-to-earnings ratio in three digits, Facebook is not hugely overvalued. I should say that I am already long the stock at decent levels from earlier this year, but nothing I see here convinces me to sell yet.
The contemplation of these video ads, however, does make me more convinced than ever that Twitter will face a problem as it tries to emulate Facebook and make a profit. The idea of tying ads on Twitter to ads on TV obviously has massive appeal for advertisers. There is an increasing tendency to have more than one active screen while watching a show, and simultaneous advertising on Twitter makes it hard to avoid the message when the TV show switches to a commercial.
This plan to synchronize with TV advertising is a large reason why some are excited about the prospects of Twitter, as evidenced by the stock's performance in the last couple of weeks.
There is obviously a valuation question here. Unlike Facebook, Twitter has never made a profit. Amid all the hype about future revenue, this simple fact can easily get overlooked, but it matters. Of course, both Facebook and Google before it have shown that once a company figures out a way to monetize a free product, even aggressive estimates of future growth can be beaten, but Twitter is different.
The growth of Twitter has been based on immediacy. There is a reason tweets are limited in length. I hate to sound like an old man, but attention spans are getting shorter. Snapchat epitomizes this trend. In that format, a story can be absorbed in a glance, without all the trouble of reading even 140 characters, and then trashed immediately.
This presents an obvious problem for Twitter. No matter how grand its plans for integrated, targeted ads, I just don't see Twitter users having a high tolerance level for them. There will probably be no shortage of alternatives, given that the history of Twitter demonstrates that a huge payday can be generated by popularity, regardless of profitability.
Facebook's announcement that it is moving to video ads is a positive for that company. Facebook has a history with most of its users and has developed a pretty good understanding of their tolerance for "commercial interruption." Twitter, however, has not, and the very nature of the appeal of tweets suggests that tolerance will be pretty low. If advertising demands more than a few seconds of users' time, these users are likely to look for another platform. Right now, Twitter is being valued on the basis of popularity alone, and if that begins to wane, sentiment will change quickly.
--by Martin Tillier.