Yahoo! and Twitter Results Show Difficulties of Online Advertising Business

Despite the buzz, hot tech companies are posting disappointing earnings. A difficult and constantly shifting online advertising market is to blame.

Whether its jokes about Ted Cruz’s ‘TEDtalk’ lighting up Twitter, or the shutdown drama driving eyeballs to political newssites, Washington events have been a boon to internet traffic. But cash doesn’t always follow the eyeballs. And disclosures this week of less-than-glorious financial results at Yahoo! and Twitter show that the ad business that’s supposed to fund our digital media obsession may not be quite so robust.

Yahoo! reported that traffic was up to its sites in the third quarter, thanks to revamped sites, the launch of new products, and the acquisition of Tumblr. But ad sales—its main source of revenue—were actually down from the year before. The company’s stock has soared in recent months, thanks to a newfound stability and energy in the executive suite (thanks, Marisa Mayer), and to the market’s growing appreciation for the company’s China assets, as we documented a couple weeks back. But revenues haven’t really grown. That failure led to a recent headline in USAToday “For Mayer, a simple question: When will Yahoo grow?” On Tuesday’ The New York Times report on Yahoo!’s earnings opened up with the soul-crushing phrase: “The honeymoon is over.” With display advertising, Yahoo!’s bread and butter, falling 7 percent from the previous year’s quarter, revenue fell .5 percent overall.

The other big tech news of the day involved more disclosures from Twitter, which is preparing for its eagerly anticipated IPO. While the mini blogging social network saw quarterly revenue double, it reported bigger losses in the 2013 third quarter than analysts assumed. Its loss for the third quarter, $64.6 million, was up from $21.6 million the same quarter a year ago.

What’s ailing both yesterday’s internet (Yahoo!) and tomorrow’s (Twitter)?

Plummeting digital advertising rates, and an environment of near-infinite page creation.

Higher traffic and lower revenues means either that the price at which Yahoo! is selling big display ads is falling, or that it has less success selling them than it had in the past. And it should be noted that the company manages the rare internet feat of turning a profit on content. But It has increasingly lost market share to Facebook and Google, going from 8.6 percent of the display ad market last year, to an expected 7.7 percent this year. Meanwhile, the price per ad that Yahoo! can charge has gone down 7 percent. Like every other internet company, Yahoo! is shifting aggressively to mobile. But that brings its own problems. Google and Facebook are better situated to leverage multiple platforms (like maps for Google) which increases the amount advertisers want to spend.

There’s another problem with mobile. Advertisers aren’t convinced it works as a medium, and the small ads on small screens tend to command small prices.

Twitter gets an estimated 70 percent of its revenue from mobile ads. And while it is selling a lot more ads, the Wall Street Journal reported that the price of mobile ads it sold fell 75 percent year over year.

The Wall Street Journal declared earlier this week that “Mobile Advertising Begins to Take Off,” the emphasis should be on the word ‘begins.’ Despite the copious amounts of time consumers spend on their mobile devices, ad dollars aren’t yet streaming to mobile devices proportionally. That’s the way it always is with new media—for years, cable never got its fair share of ad revenue as marketers continued to rely on broadcast. For years, online advertising never got its fair share of ad revenue as marketers continued to rely on cable. And so on. Ads on mobile devices are often burdensome and advertisers fear that users are less likely to click out when they’re on their phone. And publishers themselves have not designed company websites for the smaller screens.

As a result, tech companies with the capabilities have gotten creative.

Google saw the coming shift (as well as the difficulties) to mobile. Its prescient move to develop the Android operating system is reaping benefits, as it dominates the smartphone market. It also purchased mobile ad platform AdMob in 2009.

Twitter, for its part, recently acquired MoPub, which will allow the company to sell ads on other sites based on data from its users. Google made this move years ago. It developed Adsense all the way back in 2003, which also sells display ads on third party webs.

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Facebook has decided that the best way to increase revenue is to be creepier. It has now created a “custom audiences” tool that allows marketers to use data on users activity outside of Facebook to target advertising on Facebook. Google saw its price per ad drop 6 percent in the last quarter (its mobile ads are already worth 35 percent less than a desktop ad). It is hoping its search-advertising change to the “enhanced campaigns” model which leverages multiple platforms (mobile, maps, etc) for a more targeted advertising will pay off.

The news flow illustrates a stark reminder. Facebook, Google, Yahoo!, Twitter have created large companies, huge communities, and products and services beloved by hundreds of millions of people around the globe. As brands, they are extremely solid. But at the end of the day, despite all the talk of innovation, they all rely on the tough and unforgiving advertising market.