Are Facebook and Twitter Missing Out on An Advertising Goldmine?

Internet celebrities are nothing new. Neither are so-called Internet marketers. What happens when you combine the two? You get a new category of pitchman using the likes of Twitter (NYSE: TWTR  ) and Facebook (NASDAQ: FB  ) to get rich without paying either network a dime for the privilege.

The value of almost-hidden sponsored ads
Here's how it works: A brand advertiser connects with an agency which then hires a marketer to produce a short that features said brand. Like this, from social media agency Niche and client Nash Grier, whose feeds reach an estimated 17.5 million. Think of them as the infomercials of the social media age. Only in this case, the money goes not to the channels (e.g., Twitter and Facebook) but to Grier and his peers. Agencies such as Niche also get a cut. The company raised $550,000 in seed funding in November, TechCrunch reports.

According to a weekend report in The New York Times, Niche does business with 3,000 social media accounts and places brand promotions for more than 70 clients, including big names such as The Home Depot and General Electric.

Should Facebook and Twitter investors applaud or jeer?
Reading the details of the Times story, I couldn't help wondering if Facebook and Twitter have missed an opportunity. Wouldn't it just be better if they levied a 30% tax on sponsored posts in the same way that Apple (NASDAQ: AAPL  ) takes $0.30 of every dollar of App Store sales?

Actually, no.

Niche is hardly the first to facilitate paid for social media endorsements. A similar service called Adly has been around since 2009. The only difference is that, today, Vine and Instagram make it possible to develop short, engaging video pitches. Text looks boring by comparison.

More broadly, it's fair to say that the presence of outside marketing efforts hasn't hurt either of the Big Two social networks. To the contrary, Facebook' average revenue per user, or ARPU, improved 57% year-over-year in 2013. Twitter's ARPU zoomed 80% over the same period, according to the latest Internet Trends report from venture capitalist Mary Meeker.

Instagram and Vine should add to those totals. Indeed, Vine was 2013's fast-growing app, up 403% according to data from Global Web Index. Facebook could cash in on similar growth at Instagram by allowing users to insert  pop-ups into video shorts, effectively mimicking how Google (NASDAQ: GOOGL  ) (NASDAQ: GOOG  ) places ads on blogs via Adsense. The resulting revenue boost could prove meaningful -- especially if the company can earn anything like the $7.24 in ARPU Meeker says Facebook gets now. Twitter, which earns $3.55 on the same basis, could take a similar approach with Vine.

So even if Niche is taking business that might otherwise go to Facebook, Twitter, and their peers, these are still fast-growing businesses that are attracting and enabling commerce. That makes them more than social networks or tech stocks. Rather, they've become indispensable platforms. As an investor, we can't ask for much more than that.

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