2013-10-09

 

There's a huge shift underway, with social media ad budgets being reallocated to native ads. BIA/Kelsey projected that social media advertising would balloon into an $11 billion market in 2017, with native advertising representing 42% of that ad spend. However, BIA/Kelsey and other sources now believe native will account for an even larger share of spend.

In-stream native ads look, feel, and function seamlessly across mobile and PC, which is precisely what brands want, as they seek to build cross-device campaigns. Mobile ad spend was up 83% last year, to $8.9 billion globally

Facebook ads in the News Feed achieve 49-times higher click-through rates and a 54% lower cost-per-click than traditional placements in the right-rail sidebar, according to an AdRoll analysis of ad impressions traded through FBX, Facebook's ad exchange.

We believe image- and video-sharing networks such as Pinterest, Vine, and Snapchat will soon be offering the most effective types of native ads. Photos are the most shared type of content on the Web; 43% of global Internet users have shared a photo in the past month, says Ipsos.

Executive Summary

As more social media companies try to find ways to monetize their massive audiences, native advertising remains the preferred revenue model.

Depending on who you talk to, native advertising has many definitions. In the context of social media, we define native advertising as:

Ads that are seamlessly integrated into a user's feed and appear to be organic content.

The move toward native reinforces mobile's increasingly central role in social media advertising. On mobile's smaller screens, the stream is the experience.

With native advertising, brands can pay to place relevant content in front of millions of consumers, without dramatically affecting the user experience. Users understand that in order to enjoy free social media services, they are going to need to see some ads, and native is the most elegant and natural of all online ad formats.

Twitter was the first major social media company to experiment with native ads in its feed. The company now offers a suite of three different in-stream native ad products.

Facebook and LinkedIn are both moving full-steam ahead with a native ad strategy. And Pinterest is currently piloting native ads on its platform.

Management behind newer companies such as Instagram and Snapchat have recently communicated their intent to pursue a native ad model as well.

To be fair, native advertising is not a new concept. However, the subset of native advertising known as "in-stream advertising" is a relatively new concept popularized by social media. Another subset of native advertising, known as "branded content," has been around for years on blogs and news websites that feature sponsored content, sometimes in the form of a paid-for news article.

Download a PDF copy of the report »

Download a PowerPoint of the charts »

Download the charts and data in Excel »

Mobile Is Driving Native Advertising

People now spend more time consuming social media on mobile devices than they do on PCs, according to Nielsen.

What's more, U.S. users now spend more time engaging with social media apps than they do with social media on the Web.

We live in a multiscreen world, where our Internet browsing transcends single devices. If the user's browsing experience is spread across devices, then so too should advertising be.

Mobile ad spend was up 83% last year, to $8.9 billion globally. This is the direction where social media advertising is going.

Facebook now has 219 million mobile-only monthly active users, a 15.9% increase from the previous quarter, according to second quarter results announced July 24. Mobile advertising now represents 41% or $656 million of Facebook's total quarterly ad revenues.

For comparison, Facebook brought in 30% of its total ad revenue (or $375 million) from mobile ads in the previous quarter.

Forecasts For Native Advertising

More than $4.6 billion was spent on social media advertising in the U.S. in 2012, and 35% of that was spent on native advertising. BIA/Kelsey forecasts social media advertising to balloon into an $11 billion market in 2017, with native advertising representing 42% of that ad spend.

However, after speaking with market participants who work with brands in allocating their social media ad spend, we are slightly more bullish than BIA/Kelsey in forecasting the social media native ad market.

At the time, BIA/Kelsey's forecast did not take into consideration the consolidation of Facebook's ad products, which now focus more than ever on native advertising. Additionally, Instagram and Pinterest have both announced publicly that they are preparing to sell native ads on each of their respective platforms. Snapchat's CEO Evan Spiegel said that his team is thinking a lot more about how to monetize its platform, and native ads would be a logical option.

We asked Jed Williams, a vice president at BIA/Kelsey and author of the forecast, if he is more bullish on the outlook for native ad spending, given what we now know.

Here's what he said: "I am more bullish. Our forecast is a rough guideline of where we see the market going, and it includes a lot of different factors. If I was to re-forecast the native ad market today, would we project it growing larger at a faster rate? Certainly."

Other native ad market participants also seem bullish.

"In the future, all advertising on social media will be native in-stream ads. The right rail and banners will disappear altogether," said Jan Rezab, CEO of Socialbakers, a social media analytics company that works with Fortune 100 brands.

Native Advertising On Each Social Network

TWITTER

Twitter was the first major social media company to launch an in-stream native ad product. In April 2010, the site launched Promoted Tweets by way of a blog post bylined by the company's co-founder CEO Biz Stone.

He cast social ads as a type of advertisement that would not damage the user experience.

" … we've resisted introducing a traditional Web advertising model because we wanted to optimize for value, before profit," said Stone.

Little did anyone know, Promoted Tweets would kick off a new trend in social media advertising that would influence how companies larger than Twitter, particularly Facebook and LinkedIn, monetize their businesses.

Promoted Tweets have changed very little since first being rolled out. They are organic content (regular tweets) that businesses and organizations can promote to a wider array of users. Promoted Tweets are clearly labeled with a "promoted" tag so that users know they were paid for, and retain all the functionality of a regular tweet including allowing users to reply, retweet, and favorite.

Within six months after launching Promoted Tweets, Twitter rolled out two more native ad products:

Promoted Trends, which users or brands purchase to list a trending keyword that may be associated with their company or initiative, which appears at the top of the "Trends" list.

Promoted Accounts, which users or brands purchase to list their account at the top of the "Who To Follow" list.

Promoted Accounts and Promoted Tweets rank about the same in popularity among ad clients, followed by Promoted Trends, according to IMS, a digital agency helping Twitter expand its Latin American ad business.

How Brands Are Approaching Ad Campaigns On Twitter

Twitter's ad business is still small in comparison to Facebook's.

One of Twitter's challenges is to differentiate itself from its larger rival and convince advertisers that it brings special attributes to the table.

We spoke with Lisa Weinstein, president of global digital, data, and analytics at Starcom MediaVest Group (SMG) to find out which social platforms her clients are most intrigued by.

"Our clients are very interested in Facebook and YouTube," said Weinstein. "Facebook is out there talking to a lot of clients, and Facebook is the go-to platform for a lot of clients. The ambitious brands are on Twitter, because they are intrigued by Twitter from a TV advertising perspective. CPG clients are super-interested in Pinterest.

"This is a rare case where brands are ahead of the product," she adds. Although Pinterest only started with limited testing of its Promoted Pins in Oct. 2013, "brands have wanted to do something on Pinterest for a long time."

For background, SMG buys ads for major brands including Procter & Gamble, Wal-Mart, Microsoft, and Coca-Cola.

SMG is also a strategic partner for Twitter. In April, the two companies forged an ad deal worth hundreds of millions of dollars over multiple years. As part of the agreement, SMG can leverage Twitter users' data for research purposes.

Twitter user data is interesting for many reasons, but a big one is the relationship between Twitter and TV.

Twitter is one of the driving forces behind the second-screen movement — the act of someone browsing on a mobile device while he or she watches TV simultaneously. The implication of such activity is that viewers are turning their attention away from their TV during commercial breaks to interact with other viewers on social media. Thus, TV advertisers are looking for ways to put their ad placements in front of viewers again — and Twitter is positioning its ad platform as the answer.

Weinstein says that there is a big transition currently underway in ad budget allocation. "Don't think of TV and Internet as separate budgets ... The reason we are telling brands to think this way, is because it's how consumers think. A consumer doesn't care if he or she watched a video on their TV or if it was online, they care about the content. I think Twitter is the strongest in the social media second-screen space."

FACEBOOK

Facebook rolled out Sponsored Stories, an in-stream ad product that promotes a brand's Facebook posts, in early 2011.

The idea was that advertisers could buy ads so that users would see when a friend of theirs liked or commented on one of their brand posts, (e.g., "John Smith Likes Business Insider.")

The ad product has been so successful that the company has streamlined its suite of ad products so that these placements become a part of virtually all ad units, rather than stand-alone products.

Previously, advertisers often had to choose Sponsored Story features in addition to specific ad units.

But now, the Page Post Like Sponsored Story, Page Post Comment Sponsored Story, and Page Post Ad products are combined into what are essentially two main ad formats: a generic ad about your page, or a promoted page post with more specific content. Either ad unit can feature social layers, such as the fact that "Joe Smith and 3 Others Like This," etc.

News Feed ads now appear more consistent in look and feel.

This emphasis on a promoted page or post ad as a catch-all, in-stream unit makes sense. After all, the News Feed is where people spend most of their time on Facebook, and a clutter of ad formats would only confuse advertisers — and users.

Facebook also allows advertisers to buy native in-stream ads via Facebook Exchange (FBX) — its retargeting ad exchange.

Launched in mid-2012, Facebook Exchange allows advertisers to target PC-based (but not mobile) Facebook users based on their browsing history elsewhere on the Web. It's a powerful tool for reaching relevant audiences, and paired with in-stream native ads discussed above, it's even more effective.

According to a report from AdRoll, FBX ads in the News Feed achieve 49-times higher click-through rates and a 54% lower cost-per-click than traditional placements in the right-rail sidebar.

FBX will soon support mobile native ad placements. That's a smart move on Facebook's part, if it doesn't want to lose the mobile retargeting market to Twitter.

Twitter's Sept. 2013 acquisition of mobile ad exchange MoPub likely means that it is close to rolling out a mobile-native retargeting platform similar to FBX.

Facebook's overall ad business is benefiting from its native-centric strategy. The company generated $1.6 billion in total ad revenue in the second quarter of 2013.

Facebook's increasingly mobile user base is also making native ads on the platform more attractive to advertisers. The company now has 219 million mobile-only monthly active users, a 15.9% increase from the previous quarter, according to second-quarter results announced July 24.

Mobile ad revenue (including mobile app install ads) now represents 41% or $656 million of Facebook's total quarterly ad revenues. For comparison, Facebook brought in 30% of its total ad revenue (or $375 million) from mobile ads in the previous quarter.

LINKEDIN

LinkedIn launched Sponsored Updates, its first native ad unit, in July of this year. Sponsored Updates appear to be no different from organic content, other than a subtle "sponsored" label. Users can share or "Like" the ad, as well as comment on it, or start to follow the advertised company. They can also hide the ad if they want to, by hovering their cursor over the ad unit.

As of the second quarter of this year, 33% of LinkedIn's unique visitors come through its mobile apps, and that proportion is expected to continue to rise, according to company CEO Jeff Weiner.

Macquarie, an investment bank, views LinkedIn "as one of only a handful of consumer Internet companies best-positioned for the expected growth in 'native' ads."

Macquarie estimates that LinkedIn could generate approximately $18 million in mobile native ad revenue in 2014 and total native ad revenue of $46 million. The investment bank estimates that those figures could hit $55 million and $132 million respectively in 2015.

PINTEREST

Pinterest is the newest social media company to pursue native advertising as its primary monetization model.

Pinterest CEO Ben Silbermann announced in September that the company would begin testing Promoted Pins, a type of in-stream sponsored content.

During the testing phase, which began October 9, Promoted Pins will appear only in search results and category feeds. An example of a Promoted Pin is shown in the image below. The ad looks just like an organically created pin, other than a subtle label identifying it as a Promoted Pin, and an information button that tells the user who paid for the ad. 

When Facebook and Twitter released their own types of promoted content, they too limited the ad product to search results, at first.

"Any time you are monetizing a certain [feature] that was previously not monetized you have to be careful," noted Jan Rezab, CEO of social media analytics company Socialbakers. "It's smart on their part not to risk damaging the user experience. ... That said, I do believe users more generally are coming to the realization that to enjoy free online services, such as Pinterest, they might have to see some advertising once in a while — it's a trade-off."

Weinstein of SMG agrees: "I really respect what Pinterest is doing. It's basically organic search and the highest relevancy for users. It will likely evolve, as Facebook and Twitter both did, but as a starter I think it's smart."

Silbermann said that Promoted Pins will be "tasteful" and will "always let you know if someone paid for what you see, or where you see it."

Pinterest has attracted significant interest from retailers and the fashion industry. Such brands are intrigued by the opportunity to share photos of merchandise on a large-scale platform built around sharing — and there is definitely a lot of sharing happening on Pinterest. In fact, Pinterest is close to overtaking email as the third-most popular sharing channel behind Facebook and Twitter.

For our research on social commerce, we studied Pinterest in great detail. It's a fantastic tool for discovering new products, but just how important is this process in terms of generating actual sales?

Bernard Luthi is chief operating officer and chief marketing officer at Rakuten, a Japan-based e-commerce company that led a $100 million investment round in Pinterest in 2012, and we asked him for his take.

Luthi's comments are worth quoting at length:

"I think the typical consumer in the U.S. has been conditioned to shop differently online than they do offline. Think about it: On a Saturday afternoon you go to the mall, and you window shop, and you stop to grab a coffee and/or maybe lunch; you are simply browsing through stores and looking at products in a leisurely manner. Now, when you look back at when e-commerce first took off, it was nothing like that offline shopping experience. It was focused on making the quickest sale possible, and the consumers were partly to blame for that. Internet users in the U.S. were conditioned to search for a product first, find the product at the lowest price and with the fastest shipping, and boom, you're done. Even Buy.com at one point had the tagline 'get in, get out.' That really sums up consumers' mentality around shopping online.

"I think the challenge in the U.S. is that there is this mentality. You have to break that by introducing an enjoyable shopping experience; maybe it's not exactly mimicking the experience offline, but it needs to be an experience nonetheless. We see in Japan how consumers prefer a more holistic online shopping experience. It's for that reason that Rakuten has matured into being a platform for merchants who sell their merchandise directly to consumers on a large scale. People try to group us in with Amazon, but I think a more accurate comparison is that we are a blend of Amazon, eBay, and Etsy. We invested in Pinterest because we see them going after product discovery, and clearly they are breaking the mold in the U.S. in terms of how consumers shop online.

"I think what Pinterest has created transcends culture and nationality. From my perspective, what they've been able to accomplish, and what they created, will play out in markets around the world."

However, some industry professionals view Pinterest's market opportunity as being more narrow.

"I think Pinterest is taking a very regional and vertical approach," says Jan Rezab. In parts of Europe and Latin America, Pinterest is hardly a factor. "But the U.S. is a huge market for Pinterest," he says. "Also, lots of Asian companies are asking us about Pinterest from an analytics perspective."

The Native Photo Ad Opportunity

We suspect that of all the social media companies with native ad products, Pinterest's will be among the most successful, in part because the sharing of images is what the Pinterest experience is all about.

Photos are the most shared type of content on the Web; 43% of global Internet users have shared a photo in the past month, according to Ipsos.

On Facebook, photo-based promoted posts outperform text or link-based ads in terms of clicks.

We believe Pinterest will benefit from its image-centric culture as it rolls out Promoted Pins for a couple of reasons: Users are already accustomed to sharing images, and unlike Facebook — where photo-sharing revolves around family, friends, or funny pics — pinners already tend to share photos of products and objects. Also, retailers and brands are already a well-known part of the Pinterest landscape, and many host popular pinboards.

Other Companies That Stand To Benefit From Native Advertising

INSTAGRAM

Just last week, Instagram confirmed what many had suspected: that it will begin rolling out in-stream native ads.

Heading up the monetization effort is Facebook's Director Of Business Operations Emily White.

Initially, ads will be limited to U.S. users, the company said in a blog post, and people can hide an ad they don't like.

Instagram's user base is now at a reported 150 million monthly actives. At its current growth rate of adding 250,000 new users each day, it's very likely that Instagram could surpass Twitter (219 MAUs) in the foreseeable future.

As is the case with Pinterest, retailers seem to be showing the most interest in advertising on Instagram. Julie Channing, head of digital for Levi Strauss & Co., said she and Instagram's team "now meet more regularly" and that Instagram is a "high-priority platform" for them.

SNAPCHAT

In early September, Snapchat CEO Evan Spiegel said that he hoped his company will generate revenue before its next round of venture funding.

Native ads would be an interesting path for Snapchat to take, because the app doesn't have a content feed like the other companies in our report. Instead, users send photos and videos directly to their friends — similar to a text message — who then have less than 10 seconds to enjoy the piece of content before it disappears.

But Snapchat has now changed its strategy, and native advertising seems to be the reason. Spiegel said at TechCrunch Disrupt this year that "the way we think about monetization has changed substantially."

So what is Snapchat's monetization strategy?

Earlier this month, Snapchat launched "Stories," which allow friends to send collections of images and video that can be viewed over a 24-hour period before disappearing.

James Borrow, CEO of social media marketing and analytics company SHIFT, told us that he thought longer-lasting content would be at the heart of Snapchat's advertising strategy.

We spoke to Borrow before Snapchat introduced "Stories," but it's clear now that he wasn't too far off the mark. "Stories" will provide a canvas for brands to broadcast sophisticated narratives to their followers on Snapchat.

"So, let's say you and your friends are going to Las Vegas to have some fun, and a travel company sends you an itinerary that lasts for three days until it disappears," Borrow said. "That's an example of an interesting use case."

THE BOTTOM LINE

There's a huge shift underway, with social media ad budgets being reallocated to native ads. BIA/Kelsey projected that social media advertising would balloon into an $11 billion market in 2017, with native advertising representing 42% of that ad spend. However, BIA/Kelsey and other sources now believe native will account for an even larger share of spend.

In-stream native ads look, feel, and function seamlessly across mobile and PC, which is precisely what brands want, as they seek to build cross-device campaigns. Mobile ad spend was up 83% last year, to $8.9 billion globally

Facebook ads in the News Feed achieve 49-times higher click-through rates and a 54% lower cost-per-click than traditional placements in the right-rail sidebar, according to an AdRoll analysis of ad impressions traded through FBX, Facebook's ad exchange.

We believe image- and video-sharing networks such as Pinterest, Vine, and Snapchat will soon be offering the most effective types of native ads. Photos are the most shared type of content on the Web; 43% of global Internet users have shared a photo in the past month, says Ipsos.

Join the conversation about this story »

    

Show more