Twitter’s Gambit to Revolutionize Advertising

Twitter’s Gambit to Revolutionize Advertising

The social media giant, which will go public this week, could remake the way TV ads sell us products.

ANDY KESSLER

Nov. 3, 2013 6:41 p.m. ET

If all goes according to plan, Twitter is expected to price its initial public offering this week and could start trading Thursday on the New York Stock Exchange. NYX +1.00% Brace yourself for #yougottabekiddingme and #bubble hashtags. It’s been hard to escape the hype. From Ashton Kutcher’s 15 million followers, to the tweeted photos in 2009 of the miraculous landing of US Airways LCC +2.14% Flight 1549 in the Hudson River, Twitter’s 140-character messages are now entrenched in the culture. It’s a classic Silicon Valley story—trial and error and drama among the founders since its July 2006 launch—until the company took off in 2009 by taking advantage of billions of mobile devices. The company is now valued at somewhere around $13 billion. But is it a business?Like Google GOOG -0.34% and Facebook,FB -0.91% Twitter has attracted hundreds of millions of users and makes money by selling ads to stick in front of their eyeballs. Twitter should book $600 million in sales this year, which is underwhelming since the site has 230 million users. Active user growth has been flattening: After growing 10% quarter after quarter all last year, user growth is up 6% in the latest quarter. Still, those are impressive figures.

Twitter’s $65 million loss in the last three months means it is gearing up for a lot bigger business. Will it come?

Traditional media is about building brands—whitening toothpaste, club cab pickup trucks, spicy nachos, you name it. You see the ad on TV and are expected to buy the product later and elsewhere. The Web changed that: Mobile means you can do the transaction right now, sitting on your couch.

A few Super Bowls ago, an 18-year-old from Germany watched the game at our house. He disappeared for a while, then turned up at the end of halftime eating a giant bag of Spicy Sweet Chili Doritos. We asked him where he went, and he told us: “I saw a commercial for Doritos and they sounded really good. So I drove to 7-Eleven and got a bag.” After we stopped laughing, someone noted, “I think I now understand why they spend $2 million on Super Bowl ads.” TV can rarely pull off this “urge to splurge” transition, but the Internet is built for it.

The Web’s giants each have different models for getting us to buy. Amazon has built a $75 billion business on fulfilling all our wishes, from books to shoes to movies, but you often know what you want before going to the site. With Google, you can search around and compare products. Google’s ad auction system generates $60 billion in sales by getting vendors to pony up a nice chunk of their margin to be displayed near your search results.

On Facebook, which has a billion users, you see ads based on what your friends have “Liked,” or at least that’s the idea. Advertisers are still grappling over whether clicking the Like button has anything to do with buying intentions.

Meantime, experimentation continues. Facebook recently implemented what they hope will be a Twitter killer, a Follow button that allows users to subscribe to the public Facebook postings of others.

Where is Twitter’s place in this online advertising ecosystem? Retweeting—sharing someone else’s tweets—is similar to Facebook’s Like button. Plus, advertisers can run ads against keywords or hashtags, words or phrases that users can search for.

But Twitter has something more than Facebook. Twitter, more than any other social media site, enables a conversation among groups of users. Often these conversations are short, lasting a few minutes before flaming out. Longer ones can last days. The bottom line for companies, as any marketer will tell you, is word-of-mouth is the best way to sell almost anything.

That’s one reason why Twitter recently hired Vivian Schiller from NBC News to run its news and journalism partnerships. The idea is to leverage the second-screen phenomenon—the fact that according to Nielsen, nearly half of viewers between the ages of 25-34 tweet or use Facebook while watching television.

But that’s just a start. The types of advertisers that will be attracted to Twitter will be those interested in its real-time capabilities and the ability to close the deal. I doubt it will be Doritos or Bud Light, but big-ticket products and services that require a discussion before purchase, like a gas furnace or car insurance. Or maybe it will be products that expire and need to be sold in a short time frame: hotel rooms, movie tickets and last year’s flat-screen TVs.

This marks a new era for advertisers. The days are over of Mad Men figuring out how to cajole or trick us into buying products through mushy psychological profiling of demographic groups. The new model is going to mean including buyers and sellers in more transparent conversations about a product’s pros and cons.

The implications of this go way beyond Twitter’s IPO. Broadcast media shaped what products we buy because of the ease of reaching the millions of us watching the “Today” show, soap operas or the nightly news. Now, in an age of Twitter, Facebook, Pinterest and the next batch, expect to see products expertly shaped to target smaller and smaller groups. Craft beers, local banks, Nikes the color of your high-school team? #Bringiton.

Mr. Kessler, a former hedge-fund manager, is the author, most recently, of “Eat People” (Portfolio, 2011).