The successful AMC show, "Mad Men," about the world of advertising on Madison Avenue is both entertaining and educational. Set in New York in the 1960s, the show is about marketing and power and reaching the pinnacle of success at all costs. Don Draper, one of the show's main characters, is extremely creative as well as persuasive which helps him to land major advertising accounts with Lucky Strike Cigarettes, Campbell Soups, Sunkist, and more. But do those forms of advertising used then still work today?
Don Draper and the other Mad Men spent countless hours in preparation to land an advertising account. A great deal of hard work went into understanding the psyche of consumers in order to devise convincing ads that swayed the public to particular products. The ads of that era worked. Millions of dollars were spent on print ads, billboards, radio spots and television commercials and the advertisers capitalized on their efforts.
Today it is different with social media leading the charge in marketing and advertising. Of course, there are a handful of social media platforms in which to invest, but I see Twitter as the new king and the one to buy now with a long-term holding perspective.
The Internet Age of Advertising
Today, technology is making some traditional advertising methods almost obsolete. According to the Interactive Advertising Bureau, the growth of mobile ads has outpaced that of online ad spending, and online ad spending surpassed print ads years ago. The progression of new technology trumping standard, traditional ads seems to be the trend and the excitement surrounding Twitter's (TWTR) recent IPO is proof.
According to a recent Duke University Fuqua School of Business CMO study, spending on social media advertising is expected to soar to $11 billion in the U.S. alone by 2017, a 130% increase from the $4.7 billion expected this year. Twitter, valued at roughly $13 billion, makes money through advertising. With 230 million users, the company is expected to bring in $600 million in sales this year. The company is yet another example of an internet-based start-up that has cracked a new market. Just as Amazon.com (AMZN) has done with books, videos, shoes, car parts, and so much more; eBay (EBAY) has done with everything; and Craigslist has done for garage sales, the impact these companies have on the way consumers shop is huge.
But Twitter is a little different. The company generates promotional spots without even trying. A celebrity spotlight on television will reveal how his or her tweets (Ashton Kutcher currently has 15 million followers), affects their social status. Bullying wouldn't have been known outside the locker room if it were not for tweets. Good tweets advise us of updates on natural disasters and controversies remain fresh through the art of tweeting. But with the number of users, Twitter should be raking in even more with its available paid advertising spots. In contrast, the company is doing better than Facebook in that regard, but it is not necessarily the ads that are selling products and services, but it is people talking (tweeting) about those products and services.
The invasive culture of 140-character messages is very powerful. Other recent successful internet IPOs such as LinkedIn (LNKD), Pandora (P), and Facebook (FB) cannot provide the same interactive conversations as Twitter. Pandora offers zero communication tools, but does provide ads on its site as well as interrupting audio ads between songs.
Traditional vs. New
The traditional advertising of billboards and print ads seem to be going the way of barns painted with Mail Pouch Chewing Tobacco signs. They did work and probably should still play a minor part in a company's advertising campaign, but it depends on the product or service being offered. The latest report on the digital ad industry suggests what remains of the traditional business of selling advertising will soon be relegated to a bygone era. Online ad sales rose 18% in the first half of 2013, to $20 billion, after rising 15% last year.
Google (GOOG) Ads makes up almost a quarter of the company's revenues, which is projected to be $60 billion this year. Digital advertising is on the rise because the smart players can see its potential. This is unfortunate for those companies still selling traditional media advertising today. One of the main advantages of digital advertising is that compared to radio and TV commercials, billboards and newspaper ads, is that it allows ad buyers to precisely measure, make adjustments, and optimize their ad campaigns to target their preferred audiences.
It is Twitter's tweets, the art of texting, and video ads designed for mobile phones and handheld computer tablets that has caused mobile ad sales to skyrocket 145% in the first half of this year, to $3 billion. In fact, according to the IAB report, mobile advertising now makes up 15% of total digital ad spending, which means the business is now large enough to keep moving the needle on the gage of online ad growth past traditional advertising methods.
A very quick snapshot view of the top three social media platforms strengthens my reasons why Twitter will reign supreme.
Facebook lets users "like" a business or promotion, but there is no clear science on how much business a "like" brings to advertisers. Facebook is implementing a "Follow" button that is supposed to cut into Twitter's business, but so far Twitter is the only game where users can show their support or disdain for a product in a quick, simple text. It is this tweeting and re-tweeting in addition to advertisers running ads against keywords or hashtags, (words that users can search for), that is killing the advertising strategy of Mad Men.
Mobile ads now comprise 41% of Facebook's revenue. The company's second-quarter financial report revealed that the social network's year-over-year revenue growth accelerated to 53% due to mobile ad sales. The company is trading at a P/E ratio of 120.13 and a forward P/E ratio of 42.40. Facebook currently has a book value of $5.37 per share. The company $1.8 billion in advertising revenue and with a user base of over 1.11 billion, the company generated approximately $1.62 per user simply by selling ads.
Pandora
Pandora provides Internet radio services in the United States. The company recently reported adjusted EPS of 6 cents, meeting consensus, and revenue of $181.6 million beat by $6.8 million, but shares are dropping as the company guides for fourth quarter revenue of $185 million-$190 million and EPS of $0.02, versus a consensus of $187.3 million in revenue and EPS of $0.04. The company's ad revenue growth slowed to 36 percent in the third quarter from 44 percent in the second quarter, as ad revenue per thousand listening hours rose to $40.11 from $38.87 in the second quarter, and $32.40 a year ago. The stock is currently trading at $29.23.
LinkedIn generates revenue from talent solutions, marketing solutions and premium subscriptions. The company's third quarter results revealed that revenue exceeded estimates increasing 56% year-over-year to $393 million and non-GAAP earnings per share jumped 77% year-over-year to $0.39. It also showed that the company's cash flow, $133 million year-to-date, is equal to 12% of total revenue. However, the company is spending a lot of money on internal investment. The costs for Product development jumped 46% year-over-year to $106 million, while sales and marketing spend climbed 60% year-over-year to $133 million. The money is a good investment and the LinkedIn's business model is still seen as attractive to investors. But a social media company with ease of entry (the stock is pricey at its current cost of $220.25), it is not. Twitter makes more sense for a investment on the ground floor to ride all the way to the top.
The New Age with Twitter
In addition to the company's successful IPO (thus far), Twitter has recently signed distribution deals with both NBC and the National Football League for their content, some of which will be exclusive. This gives advertisers an option: buy a $1 million TV ad or a video ad to Twitter's 200+ million users which will be re-tweeted and tweeted about. And let's not forget that if the user has a TiVo box they might just skip the TV commercial when they come back from the bathroom.
The Mad Men strategy isn't completely dead though. The total U.S. ad spending, including online ads is expected to rise 3.6% this year to $171 billion, according to eMarketer. But Google, Twitter, Facebook, and LinkedIn attract millions of users that can't help but view ads every time they log on. Of course, the same could be said about daily commuters viewing a billboard. But, other than not being able to track unique visits, another disadvantage of the billboard and print ads is that those usually don't get repeated through social media channels such as Twitter and Facebook.
Another disadvantage of the Mad Men strategy compared to this "new age," is that the Mad Men designed an ad to whet the appetite of the consumer in hopes that he or she will purchase at another time. With the Web and mobile devices, we can purchase the product or service as soon as we are aware of it without leaving the house. This type of instant decision making process attracts those advertisers with something to sell right now. Traditional advertising still works for long-term, repeatedly purchased products like Tide, Coors, Frosted Flakes, and the like. But specials that won't last like airline tickets, specialized electronics, perfumes, etc. seem to benefit the most from digital ads.
Twitter not only brings digital ads to the eyes of millions, it provides that magical platform for people to talk about funny ads and bad ads as well as the pros and cons of a particular product or service. The company's model cannot help but increase in popularity while increasing revenue. It is one of the surest "sure things" that we've had in a long time.
Conclusion
Mad Men won't have to come up with new ways to trick consumers into buying things because it just doesn't work with the sophistication of today's buyers. It is the social media-internet-mobile advertising that is proving successful today. That is why the Twitter IPO is sure to be a success and why asset management firms are gobbling up shares. The platform of Twitter is not complicated, it just works. It is people telling other people what is good and what sucks. The Mad Men of the 60s wouldn't be able to compete using traditional methods. Twitter is still in the post-IPO quiet period so there isn't a huge track record of where the stock has been and where it is headed. However, most analysts agree that the stock is in for a meteoric ride. The stock is currently trading right at $41.00 which I believe is a bargain and worth getting into now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More...)
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