In what could be one of the most brilliant PR moves made by an up-and-coming company, or perhaps one of the most foolish, Eat24 last week boldly called out Facebook (NASDAQ:FB) on a change to its bread-and-butter revenue source -- ads.
This is important because, clearly it's not something Facebook wants so blatantly publicized. The company is in the midst of skyrocketing ad sales, as well as a rising stock price. Secondly, it shows the increasing frustration some businesses have with advertising online.
Grumblings from businesses over advertising policies are nothing new. However, the fact that Eat24's were so widely publicized makes the issue worth looking into.
Let's take a look at the issues at the root of advertisers' frustrations with Facebook and Google (NASDAQ:GOOG), which is the largest in terms of ad revenue. Then, we'll also examine how competitors like AOL (NYSE:AOL) are using ad platforms that are increasing revenue, posing more competition for peers.
Unlike countless other Facebook dramas involving subscribers that have played out publicly, this one involves advertisers. Advertisers have been grumbling about the social network's changed news feed algorithm since it was rolled out last summer. Not many knew about the complaints and concerns, but thanks to Eat24, Facebook's changes have made nationwide headlines.
Eat24 is a web-based food delivery service. Founded in 2008, it has become known for its quirkily worded emails to customers and its lighthearted media efforts.
While still satirical, Eat24 execs pulled no punches expressing their outrage over Facebook's algorithm change. In a blog post last month, management published a letter entitled, "A Breakup Letter to Facebook from Eat24." It touched on what many Facebook advertisers are feeling, stating, "It really seems like you've lost your way and have become nothing more than an ad platform."
As promised, Eat24 canceled its advertising with Facebook. However, it remains with other social media sites including Twitter, Pinterest, and Google's YouTube. The change specifically applies to how posts show up in news feeds. To its credit, Facebook did explain its move.
News of the letter went viral nearly immediately, propelling the privately held Eat24 into the limelight.
Raking in ad revenue
Ironically, Eat24's rant came just before figures were released that detail Facebook's performance in the ad space. According to the stats, whatever changes the company has made to increase ad revenue seem to be working.
In 2012, eMarketer found Facebook accounted for just 5.4% of the global mobile advertising market. That figure jumped to 17.5% last year, and eMarketer predicts it will rise again this year to 21.7%.
The jump is reflected in the company's most recent quarterly report, which was record-breaking. Facebook reported fourth-quarter 2013 ad revenue of $2.34 billion, with 53% coming from mobile advertising. That was a 23% increase over the fourth quarter of 2012.
Google knows Facebook's pain
That impressive ad growth is contributing to Facebook's steady encroachment on Google's market share. While it still dominates the mobile advertising market worldwide, holding almost 50% last year, eMarketer sees Google' falling to 46.8% this year.
Like Facebook, Google must be careful not to run off advertisers with policies that might alienate them. One of the company's most recent changes involved AdWords Enhanced Campaigns. Rolled out last year, the product was supposed to help businesses more easily display ads on mobile devices. However, it angered some businesses that used Google's older legacy campaigns.
One reason was due to the new product being pricier. However, with the higher price comes a simplified process. For example, an observer pointed out that sophisticated users of AdWords may not want Google to make decisions for them on issues such as ad placement.
Regardless, like Facebook, Google's efforts seem to be paying off. Last month, a Wedge Partners' analyst said enhanced campaigns could help Google return its per-click ad rates to growth in 2015. The analyst noted that when the switch was first made, Google's quarterly cost-per-click ad rates fell as advertisers balked at paying more for mobile ads than they did for desktop ads.
More room at the top
Advertisers have plenty of online companies from which to choose; even AOL is showing signs of life. Recognizing the impact of programmatic and video advertising is helping AOL boost its ad revenue share. According to eMarketer, AOL's net domestic digital display ad revenue will increase 15.5% this year and will maintain double-digit growth in both 2015 and 2016.
Last year, AOL closed on its Adap.tv deal, touted as "the only complete global programmatic video product." The product contributed to an increase of 23% in the company's global ad revenue during the fourth quarter of 2013 .
Don't discount any of these companies as solid investments because they stand to make so much from their ad models. The tinkering and changes they are wiling to make show they are adaptable, which is key to longevity. Efforts like AOL's video ad changes will continue to grow as another, more useful way to increase revenue. These companies depend heavily on ad revenue and walk a non-enviable, delicate line. The worst mistake they can make would be to alienate business owners and operators. Eat24 may be the most popular company to abandon ship, but others could definitely follow.
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Tedra DeSue has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google (C shares). The Motley Fool owns shares of Facebook and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.