Advertisers and Social Media: The Endless Struggle

Facebook is under considerable scrutiny from angry companies that use its platform to advertise to its users. What has them upset is Facebook’s two-year long deliberate embellishment of the reported length their users spend watching ads. By not counting video views of less than three seconds, Facebook’s metric overestimated how long users watched ads on the site. This allowed Facebook to charge firms more to advertise on its platform than it otherwise could have en route to generating $5.2 billion in ad revenue in the first quarter of 2016.

Companies are understandably upset because the length viewers watch ads on Facebook not only determines how much companies are willing to pay for the ads but also how they structure the ads to make sure important content is seen by consumers before they stop watching. Social media and internet ads are very important for corporations trying to reach worldwide audiences, especially younger generations who continue to watch less traditional TV as technology changes, opting more for internet and mobile streaming options. Therefore, the private sector spends a lot of time and effort making considerations on where to advertise and how much to spend.

Facebook’s recent infraction highlights the difficulty advertisers have in making these two considerations. It’s hard enough to make correct advertising decisions in the presence of practically unmeasurable user tendencies like whether or not they actually pay attention to the ad that’s playing. Add to this the trepidation that comes with not knowing whether sites like Facebook are being intentionally misleading regarding data like average viewing time and companies face an obvious problem in deciding where to advertise.

One reason Facebook has long been considered one of the best platforms on which to advertise is that it has more users than any other site. High site traffic is the main reason other popular platforms including YouTube, Pinterest and LinkedIn are preferred by advertisers. But number of users is not the only factor that matters. Advertisers also consider details like which site is best for sponsored ads (ads where a popular social media figure advertisers a product) versus which sites are better for traditional ads. Or factors like what the disposition of users on each site is. Suffice it to say that a whole lot goes into firms determining how to distribute their advertising budget.

But this is only half the story, the other half being the advetisment decisions social media and internet sites make. They have to toe a very fine line between too few ads which leads to low revenue and too many ads which gets in the way of content and eventually leads to fewer users. Of course one way to solve this problem is to use an inflated metric like Facebook but for companies trying to remain above board the key is to try and determine advertiser and user preferences. In fact, it’s actually a mere profit maximization problem because sites must figure out the number of ads that create the revenue maximizing mix of price and quantity.

The reason this problem is difficult is a site like Twitter must simultaneously consider how the number of ads affects both the willingness for companies to pay for ad time and consumers’ decisions about how to spend their time online and on social media. For example, the more ads Pinterest has on its site the less each individual ad is worth because companies know that their ad will be only one of many on Pinterest. Additionally, the more ads Pinterest has the fewer users will use Pinterest because ads damage content. So in its profit maximization problem Pinterest has two sets of consumers to consider along with price when determining the quantity of ads: advertisers and users. Conversely, in a standard profit max problem the firm needs to only consider one set of consumers which makes the simplified problem considerably easier.

Striking a good balance can be tricky, particularly because it is impossible for companies like Facebook to form a demand curve that plots users’ willingness to spend time on a site versus the amount of ads on the site. The simple reason why is that there are no prices. Users only pay for ads with their time which is next to impossible to quantify with a precise monetary value. Because of this, social media and internet sites can never truly know what the user demand for their sites is. The absence of prices is ultimately the hardest hurdle to jump for both advertisers and sites alike. Because it’s very unlikely users are made to pay for access to social media and other internet sites anytime soon, the struggle between companies that advertise and companies that users visit seems destined to continue. An endless struggle filled with frustration and, inevitably, more cases of a Facebook-like gaming of the system.

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