Social media groups struggle to take on net's giants for more ads

For the second tier of social media companies, this has been a painful week.

LinkedIn, Twitter and Yelp, the online review company, each lost as much as a quarter of the value of their stock market capitalisation in recent days after reporting that their respective advertising businesses were growing more slowly than investors had expected.

It is the latest sign of a split emerging between the strongest companies in the sector - Facebook and Google - and those that trail in their wake. These two companies are capturing the lion's share of digital advertising dollars and analysts predict their dominance is only set to increase.

The Interactive Advertising Bureau, a trade body, reported last week that digital advertising in the US increased 16 per cent to a record $49.5bn in 2014. Facebook and Google captured more than $30bn, or 60 per cent of the total, according to estimates by Brian Wieser, equity analyst at Pivotal Research. If Google and Facebook are stripped out, the rest of the sector has, on a net basis, stopped growing, he said.

"Advertisers are finding that Google and Facebook can be a one-stop shop," says Mr Wieser.

"There's an opportunity for niche players to exist, but the problem is that every niche player is going to hit a wall at some point - that wall being Google and Facebook."

The rest, meanwhile, are trying to seize different leftovers. Twitter's attempt to grab the direct-response portion - ads that, like search, are designed to prompt a purchase or at least a click - faltered as it tries to find a format advertisers like.

Even Snapchat, which has quickly become a darling of the agency world thanks to its Discover content platform, is still experimenting to find the right way to sell advertising inside its chat app, after its chief operating officer quit in March.

LinkedIn, which is not as reliant on ads for its revenues as its social-media peers because of its recruitment business, nonetheless found that regular display advertising - the kind used by bigger brands to build awareness - was facing "material headwinds", especially in Europe.

Those headwinds may yet blow through the rest of the industry but two main things set Google and Facebook apart from their rivals.

First, they have vast audiences, with each reaching more than 1bn internet users each month.

Second, they are able to help advertisers target their users with great precision thanks to the vast amount of data they hold - including people's age, location and online behaviour.

"The breadth and depth of what advertisers can do on Google and Facebook is unsurpassable by anyone else," says Mr Wieser.

Twitter, whose shares fell as much as 26 per cent on Tuesday after it missed revenue expectations and lowered its guidance, is still attempting to develop its proposition for advertisers. With 302m users, many brands regard the platform as a smaller and less sophisticated version of Facebook.

LinkedIn, which also downgraded its guidance for the year, warned of a "secular shift away" from traditional display advertising formats.

Adam Smith, futures director at GroupM, the media-buying arm of WPP, the world's biggest advertising group by sales, says advertisers are losing enthusiasm for static ads formats - which LinkedIn, Twitter and Yelp have traditionally relied on - and are gaining an appetite for video.

Both Facebook and Google, which owns the video site YouTube, have positioned themselves well for the shift to video. Mr Smith says they "seem to understand the needs" of brand advertisers that are accustomed to advertising on television - the largest part of the advertising market. For example, Google last year created "YouTube Preferred", a product to allow brands to position their ads next to the most popular content on the video service.

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Twitter is trying to build up its video capabilities. It acquired live-streaming app Periscope in January and has been testing ads that automatically start playing.

LinkedIn, meanwhile, is making big changes to its salesforce in the hopes of improving its marketing revenues.

But investors, who have driven up digital advertising stocks to high earnings multiples in recent months, are in no mood to wait around. In just a few days, Twitter and LinkedIn's stocks have lost most of their gains in the year to date.

Analysts at UBS note that while a one-day stock price fall of 20 per cent "at first glance . . . appears harsh", it may not be surprising given how high LinkedIn's had risen.

Even Canaccord Genuity, which remains positive on LinkedIn's stock, admits its "expensive valuation leaves no room for speed bumps".

While LinkedIn has consistently beaten expectations since it went public, wild fluctuations in Wall Street sentiment are more familiar to Twitter.

Analysts at Baird say the shares are "clearly back in the penalty box" over both growth prospects and the credibility of chief executive Dick Costolo, but notes that Wall Street "became overly enthusiastic" after its previous results in January. "It's a marathon not a sprint!" Baird warned.

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