Television was the undisputed king of ad spend for decades, but digital outlets -- on the strength of mobile -- have recently registered tremendous growth at the expense of other outlets.
The Interactive Advertising Bureau, by way of Ad Age, details the tremendous growth of the domestic digital advertising market. According to the IAB, digital ad-spend increased 19% on a year-over-year basis during the first half of 2015 to $27.5 billion, the highest mark in the history of the nearly 20-year-old survey.
Social-media juggernauts Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB) have benefited by this increased digital ad spend, increasing their top lines by 67% and 40%, respectively, compared to the same period last year. However, there's another opportunity for Twitter and Facebook to add to gains: limit fraud on their platforms.
Digital ad spend is rife with fraud
Nearly $18.5 billion of digital marketing is lost to fraud each year, according to a report from Distil Networks and the IAB.
Using an annual run rate of $55 billion (as first-half digital ad spend was $27.5 billion), this means that roughly $1 out of every $3 of digital marketing spend is induced by fraud through a combination of fake clicks, fake users, and other non-human traffic. And while I personally think $55 billion is a little low, as second-half ad-spend tends to be higher than first half, $18.5 billion is a significant sum of wasted money.
The situation is so bad that 37% of advertisers say they would pay an 11% premium or more for certified, real traffic. This is an opportunity for Facebook, but a tremendous opportunity for Twitter to increase its cost per ad with minimal investment.
Facebook already has a strong fake-user policing operation; Twitter doesn't
Facebook has already developed tools to detect fake users. By requiring users to input their legal names, its policy of only one account per user, and using off-line human connections to develop its friendship connections, goes a long way toward establishing that a user is indeed a human. Although it would be hard to improve upon this significantly, Facebook may be able to monetize it more effectively in light of Distil's new survey.
Twitter, on the other hand, doesn't have these controls. Essentially, anybody with an email address can sign up for an account, using an anonymous name, or "handle," with many users having multiple accounts. The downside to Twitter's indiscriminate rules for opening an account have centered on trolls and harassment, but it also hurts the monetization on a per-user basis as advertisers have to deal with spam and bots among real users.
How about emphasizing true identities, Twitter?
While Twitter probably shouldn't change its terms of service with respect to account eligibility, especially given that it's having problems growing its user base, the company could take small steps to encourage users to use their real identities to open accounts. Some of these could be more promotion and followers after a person proves their identity.
For example, because Twitter already uses a blue verification badge for certain users, it could easily adopt another color, say, green, for accounts Twitter verifies as real humans using their real names. Not only would this lead to a stickier user base, it would encourage future users to use their real identities to open accounts, and make advertisers more likely to pay more for its ads to verified accounts.
In an advertising world where a reported 33% of all ad-spend is wasted, a low-effort attempt to provide real potential consumers should be value accretive.
Jamal Carnette has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. 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.