Social media shares are not “liking” their stock price this morning, with both Facebook and Twitter under pressure, the former on a WSJ report that the company has been inflating the amount of time users spend watching video ads by 60-80%, the latter on an RCB downgrade to “underperform” with a $14 price target.
As the WSJ first reported, in what may be just the first cockroach surrounding the massively overhyped advertising platform “potential” of Facebook, which for years has been accused of abusing ad clickfarms to inflte its ad metrics, big ad buyers and marketers are upset with Facebook after learning the tech giant vastly overestimated average viewing time for video ads on its platform for two years.
Several weeks ago, Facebook disclosed in a post on its “Advertiser Help Center” that its metric for the average time users spent watching videos was artificially inflated because it was only factoring in video views of more than three seconds. For the past two years Facebook only counted video views of more than three seconds when calculating its “Average Duration of Video Viewed” metric. Video views of under three seconds were not factored in, thereby inflating the average. Facebook’s new metric, “Average Watch Time”, will reflect video views of any duration.
WSJ adds that ad buying agency Publicis Media was told by Facebook that the earlier counting method likely overestimated average time spent watching videos by between 60% and 80%. Publicis was responsible for purchasing roughly $77 billion in ads on behalf of marketers around the world in 2015, according to estimates from research firm RECMA. GroupM, the ad buying unit of WPP Plc, also was notified of the discrepancy by Facebook, another person familiar with the matter said.
“We recently discovered an error in the way we calculate one of our video metrics,” Facebook said in a statement. “This error has been fixed, it did not impact billing, and we have notified our partners both through our product dashboards and via sales and publisher outreach. We also renamed the metric to make it clearer what we measure. This metric is one of many our partners use to assess their video campaigns.”
According to WSJ, “the news is an embarrassment for Facebook, which has been touting the rapid growth of video consumption across its platform in recent years.” Furthermore, due to the miscalculated data, marketers may have misjudged the performance of video advertising they have purchased from Facebook over the past two years. It also may have impacted their decisions about how much to spend on Facebook video versus other video ad sellers such as Google’s YouTube, Twitter, and even TV networks.
While the “error” is indeed embarrassing, follow up attention will focus on whether it was in fact intentional: after all Facebook stood to gain massively, while both advertisers and honest competitors were harmed. It is therefore feasible that Facebook will see significant litigation following the matter, from both former clients and peers.
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As for Twitter, the reason the stock is down in the pre-market is more mundane: RBC analyst Mark Mahaney said he is downgrading Twitter to “Underperform” with a $14 price target, as a result of “concerning advertiser survey data”.
He justified the downgrade by saying that “this change is based on our belief that Twitter’s value proposition to advertisers could be waning, based on our recent advertiser survey data. We note that we still believe Twitter is a unique asset with a strong value proposition to core users.”
It is ironic that this took place just as a far more serious decline in the “value proposition to advertisers” emerged for Facebook. One almost wonders if Facebook does not spend some of its “marketing” cash by “incentivizing” sellside analysts to write hit pieces at specific key stock inflection times, like today for example when anyone selling FB may have been buying TWTR, something today’s RBC downgrade has made far less likely.
This is what else Mahaney said:
Our broad concerns remain: 1) It’s not clear when/if product/UI changes can stabilize or reaccelerate User & Usage. 2) Channel checks and our last 4 surveys (and particularly our most recent referenced above) don’t provide convincing evidence that a substantial number of advertisers will commit meaningful $s to TWTR. Twitter believes it can command premium ad pricing, but its dramatic ad revenue deceleration doesn’t support that. We have believed that Twitter’s lack of real-time commercial intent (a la Google) and detailed, authentic profiles (a la FB) will eventually limit growth. That said, we could become more positive on Twitter if it shows meaningful traction with advertisers. Note our $14 PT is based on 3x P/S on ’17E Sales and 10x EV/EBITDA on ’17E EBITDA.
While we would ignore the RBC hit piece on Twitter, the combination of these two reports suggests that not all is well with ad spending, and this otherwise relentless cashflow engine, which propelled social media and tech companies such as GOOG and FB to historic highs, may be finally starting to sputter.