LinkedIn, Twitter and Others Are Getting Killed by Facebook in Online Ads

NEW YORK (TheStreet) -- When it comes to advertising on social media, LinkedIn (LNKD), Twitter (TWTR) and other platforms are being left in the dust by Facebook (FB). And their stocks are paying the price.

LinkedIn became the latest golden child to be battered by Wall Street after it offered a tepid earnings report and lowered full-year guidance on Thursday. Shares plunged as much as 27% in after-hours trading and were down more than 20% at about 12:45 p.m. EDT Friday.

Several analysts stepped up to defend the stock, which has helped it remain above the $200 level.

So what hurt LinkedIn and caused the management team to pull down its guidance? Three reasons were pointed out on the call:

  • Costs associated with the purchase and integration of Lynda.com;
  • Foreign exchange headwinds anticipated (although those trends seem to be reversing in the last few weeks); and
  • Weakness in display advertising.

It's that last point which is particularly interesting. What's driving this weakness?

It appears to be the continuing trend away from display advertising toward programmatic buying, in which ads are placed by computer on a variety of Web sites based on number of factors, including price. Programmatic advertising ends up being cheaper for the buyer, which means less revenue for digital platforms.

Here are some comments from the LinkedIn call Thursday night:

"With respect to Display we began to see a steeper deterioration in the first quarter. This reverses Display's relative strength throughout 2014 with growth declining approximately 10% year-over-year. We were particularly impacted in Europe, where the ongoing shift of programmatic advertising caused a drop in demand for our traditional Display products. Going forward, Display will remain an important component of our product suite, albeit with lessening impact on the business. Q1 was the first quarter where traditional onsite ads comprised less than 50% of marketing solutions, a trend we expect will continue as we ramp our product suite."

LinkedIn is not the only company being affected by this trend. The following is from the Yahoo! (YHOO) earnings call last week:

"We continue to see steep year-over-year declines in premium and programmatic PC advertising. This has accelerated in Q4 and Q1, where we've seen more than $100 million of decline in each quarter. Our premium advertising declined 40% year-over-year, mostly due to a decline in sales booked directly to our properties. Audience declined 19% year-over-year due to lower prices paid per ad through programmatic pricing. We continue to do everything we can to stabilize and slow this decline ..."

And later on in the Yahoo! call:

"The one place where we're really seeing pricing pressure is in our programmatic sector where we see a lot of advertiser demand both for native and programmatic advertising and that programmatic ad marketplace is very efficient in terms of targeting and placing ads in favor of the advertisers, which we think is great, it delivers good value but it has put increased pricing pressure on our programmatic ads and implicitly the premium ads are moving into the programmatic sector."

And in the most recent AOL (AOL) call, in February, managers discussed how they had to lay off a large number of their traditional sales staff because of the rapid move to programmatic buying:

"We took action in Q1 to more closely align our overall organization, particularly our sales force with the rapid movement to programmatic buying."

Yelp (YELP) also saw it stock obliterated this week and discussed the move to programmatic:

"Brand advertising revenue was $6.6 million, down 11% year-over-year. We have experienced industry headwinds related to the shift to programmatic advertising and the industry's desire to have advertising products that are disruptive to the consumer experience."

Yet, interestingly, Facebook made no mention of programmatic in its earnings call a week and a half ago. Its stock is only down 6.5% since its earnings release. That's a tame decline compared with some of the other stocks.

On the call, COO Sheryl Sandberg cited strength among big brands in their quarter rather than a shift toward programmatic:

"We had a particularly good quarter in brands, I think driven by two things. The first is that we really have a great platform to do creative storytelling on mobile and I think we have that in a way that no one else does. Our mobile ad product is so integrated into the user experience and provides real creative flexibility that people have a way to reach people on mobile and that's becoming increasingly important in telling the stories that drive their business.

"The second thing is video. Video is exploding on Facebook, as Mark talked about, and that gives us an opportunity to do a lot of work with marketers on video. This is the first time the technology and media vertical was one of our top four verticals. And that's largely because of the use of mobile. And so that's been really a great story for us.

"In terms of penetration, we work with almost all the large marketers almost everywhere in the world. But even for the largest, the largest clients we have, we are a very small part of their budget. I don't think we have any large clients, if you look at 25% in the U.S. of consumer media time is on mobile and then 20% of mobile time goes to Facebook and Instagram that would be 5% of U.S. consumer media time.

"With our largest clients, even our large ones, we're not close to 5% of their spend. And so I think we have a considerable opportunity to grow, and we also expect those underlying numbers time on mobile to continue to grow."

Why would Facebook be seeing strength from premium brands while all these other companies including LinkedIn see ad dollars moving to programmatic?

The difference would appear to be size of the audience. With its audience of nearly 1.5 billion users, Facebook offers much more reach to advertisers. They're still willing to spend money elsewhere, but they won't pay up for it. If there are cheaper options available to them when they use programmatic, there's no reason for them not to use them. They see no added return on their investment from giving the Yahoo!'s of the world more ad dollars vs. programmatically via a computer.

With Facebook, these advertisers are obviously getting a return on their investment. So, it's not just a case of a bigger audience but also targeting. Yahoo! has almost 1 billion users, but Yahoo! knows virtually nothing about them.

Facebook would also seem to know more about how many of its users see an ad on Facebook and then convert later into a purchase. That obviously increases its credibility with advertisers and makes them more likely to open their purse strings.

In the case of LinkedIn, it knows a lot about its users -- unlike Yahoo -- but it has only 97 million monthly active users. That would appear to be insufficient for it to fight the programmatic forces affecting its display-ad revenue stream.

This article is commentary by an independent contributor. At the time of publication, the author held shares of YHOO.

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