FACEBOOK’s investors and other proponents of the social network like to say that it captures one of the greatest concentrations of human attention on the planet and thus offers a boundless opportunity for advertisers.
But Facebook chief financial officer David Ebersman this week cast doubt on those assertions by suggesting that there may be a limit on how many ads Facebook can show users before they get turned off.
Mr Ebersman’s warning carries far-reaching implications for not only Facebook but also other social media companies including Twitter, which is in the middle of a roadshow to promote its initial public offering to investors.
Twitter has yet to turn a profit but it is pitching an advertising business model similar to Facebook’s.
“It’s important for investors to realise that there is a limitation on the mobile ad revenue that can be generated. The sky isn’t the limit when it comes to that,” said Jeff Sica, the founder of Sica Wealth Management. “That’s the issue with Facebook. That will be the issue with Twitter.”
Seven-year old Twitter faces an additional challenge: its active user base, now at 230m, has expanded much more slowly compared to Facebook, due in part to its struggle to retain newcomers. A recent Reuters-Ipsos poll found 36 per cent of Twitter users do not use the online messaging service.
“You don’t know how many people sign up and don’t use it, how many abandoned accounts they have,” said Adam Grossman, an analyst at Middleton & Co who attended a roadshow lunch presentation by Twitter executives in Boston this week.
Twitter has set a price range of $17 to $21 per share for its IPO, which aims to raise up to $1.6bn. The price range values Twitter at up to $11bn, less than the $15bn that some analysts had expected.
One investor who attended the Boston briefing said Twitter’s ubiquitous brand name will draw some investors.
“It’s a company that has changed the world so I wouldn’t bet against it,” said the investor, who did not want to be identified.
“But they also haven’t created a business model which has proven that they can continue to grow at 100 per cent a year and be profitable.”
Twitter is trying to expand its ad business in other ways. This week it closed a $350m deal to acquire MoPub, an ad network that serves ads within mobile apps.
“The consumer eyeballs, and the amount of ads they can absorb without being irritated, is finite,” said Rich Wong, a venture capitalist at Accel Partners, who invested in MoPub and AdMob, a mobile advertising network.