How Dumb Money Will Lead to Twitter Ad Anarchy

GroupM Next report looks at dynamics of online ad auctions

Twitter's self-serve ads platform, which started rolling out a last month, is expected to give the company a much-needed revenue boost from thousands of expected new advertisers. But a new report predicts that Twitter's revenue windfall could come with a potentially dramatic price hike for brands.

Bolstered by new revenue from its self-serve product, Twitter's could pull in more than $300 million or even $400 million this year in ad revenue, according to a white paper on the dynamics of digital auctions from GroupM Next. That would easily top eMarketer's prediction of $259.9 million in Twitter ad spending in 2012.

However, all those new dollars from small and mid-sized business may come with a price to be paid by big brands. By the time Twitter finishes fully integrating its new product, the cost for brands advertising on Twitter could increase by as much as 137 percent, says the report.

That’s because the influx of new bidders to the auctions that determine pricing for ads on Twitter could drive up what GroupM calls market “anarchy,” or the “chaos of bidding inaccuracy.” Essentially, as more players enter Twitter’s still nascent auction environment without knowing what to bid, the chances that they’ll bid too much and raise the costs per follower and cost per engages increases, GroupM argues.

“I would equate it to a first-time home buyer who chooses to do it on their own versus work with an agent,” said Chris Copeland, CEO of GroupM Next, GroupM’s new innovation division. “If you don’t know the comps from around you, if you don’t know the questions to ask or the information to gather, you’re likely to pay a premium.”

In February, Twitter announced a partnership with American Express to bring 10,000 small businesses on to the platform with a self-serve ads product, and last month, the company started integrating the new advertisers. It’s possible that as new businesses join the platform, they'll bid on more local and specific terms that are not as competitive with terms sought after by bigger, national brands. But Copeland said GroupM’s models account for that—and still predict that the competition level for the average auction could triple because, initially, the new advertisers may not have the insights to effectively determine which terms they should bid on.

“We think that when you bring 10,000 new, slightly less educated buyers into any market, suddenly, what value they place on a buy is different,” Copeland said. “We have a lot of advertisers still struggling to figure out the value of a retweet, or a follower on Twitter. If our brands are struggling with it, I know the majority of those 10,000 are struggling with it.”

As advertisers start to learn the dynamics of the auction and the value of the inventory, however, the inevitable “anarchy” will settle and the costs will go back down.

Copeland and his team couldn’t yet make a determination on timing, but he said that after the initial 137 percent spike, costs will likely drop to about 50 percent to 70 percent above current prices. Assuming Twitter opens its platform again—beyond the initial 10,000 small- and medium-sized businesses—costs will bubble up again, Copeland said, and will likely hover around double the current costs for a while.

The point of the paper, however, wasn’t to warn brands about rising prices on Twitter, but about the larger importance of having a data strategy as online auctions become more complex and ubiquitous. While anarchy may have more of an impact on auctions such as those on Twitter, in which there is just one winner, it also exists on all kinds of digital advertising platforms, including Google and Facebook.

“When you start looking at different types of auctions and thinking about the fact that Facebook and Twitter now run on auctions, the fact that more and more display ads run on auctions, the fact that dashboard TV and Google TV run on auctions, suddenly you go, 'Wait a minute,'” said Copeland, adding that his team has been studying the issue for about six months. “It’s really important for us to understand what can and cannot be controlled by a brand when they go into an auction setting.”

In looking at market anarchy, GroupM started with Google, the largest auction market on the Web. As with any auction of its complexity, bidders started out not understanding all the variables impacting their outcomes. But, over time, GroupM maintains, as the auction has matured, advertisers have become smarter with their bids.

As evidence, the group points to the decrease in Google's cost per clicks. In the fourth quarter of last year, the company reported an 8 percent decline year over year.  Again, last quarter, the company said CPCs fell 12 percent year over year. While GroupM acknowledged that the fall could be attributed to exchange rates and new formats, the company says another issue could be the advertisers' growing intelligence about how the auction works and a decline in anarchy.

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