A STATE OF THE INDUSTRY: The Truth About Facebook, Twitter, And Tumblr’s Ad Businesses by Nicholas Carlson

Nobody has a better perspective on the business of social media than Michael Lazerow.Back in 2007 the former journalist started Buddy Media, a company that helps brands advertise on Facebook, Twitter, and wherever else people are having conversations online.

Today, Buddy Media is up to 200 employees and 600 brands. For the 2011 Digital 100 list, we estimated that Buddy Media is on pace to double its revenues this year, reaching an estimated $20 million. An August funding round valued the company at about $500 million.

Last week, we got on the phone with Lazerow and picked his brain for a state of the industry. He told us that nobody uses Google+, Facebook is in a league of it’s own, Twitter is experimenting, and Tumblr “is the next great Internet business.”

If you spend or receive digital advertising dollars – or someday plan to – you better read on:

Business Insider: How big is

the company at this point?

Michael Lazerow: Way over 200, maybe 210.  We’re hiring people every week.  We’ve grown the client base over 600 brands, and agencies.

BI: Huge. How’d that happen?

ML: We realized two years ago we are a software as a service company.  We switched successfully to monthly or annual licensing model.   People know social media is big, but they don’t necessarily know what to do with it.

@wcntv

On the product side, we took a leadership position in Facebook, and as Facebook grew, we grew along with it.  Now we’re very active on Twitter, e-mail, and websites.  We’ve gone very deep on analytics, as people try to figure out what it means for their business. We have great brand relationships, and relationships with agencies.

BI: Do you see Facebook’s gro

wth continuing at a steady rate?

ML: I think they’ll grow as fast as they want to grow on the advertising side.  They haven’t launched a ton of products, but what they have launched has been incredibly successful.  They’ve been really careful not to launch stuff that gets in the way of user experience.  What they launch is going to be massive, and if it’s not, they’ll either kill it or re-launch it.  It needs to be worth billions in revenue.

BI: Does Facebook have enough people on the ad side?

ML:  I’ve seen them go from 200 employees to 3,000 and grow the ad sales and strategic account group, from 0 to at least over 100, globally.  When you have a company that everyone in the world wants to talk to, it’s hard to staff that.  It takes time to hire, and that’s what they’ve done for the last two years. The benefits from that investment will come in the next 5 years.

BI: Facebook is eating Yahoo’s lunch, taking away brand advertising market share.  Why is that happening?

ML:  When you add a social context to advertising, it becomes much more memorable.  When I see 5 of my friends are doing something, it sticks more than a banner ad.  We’ve had 10x response rates when you can get more than 5 friends in an ad.

BI: You’ve mentioned the Buddy Media platform has expanded onto Twitter.  How does Twitter work for brands?

ML: The ad products are much more experimental for our clients on Twitter.  There’s a belief that if you can buy positive word of mouth through Twitter, that’s valuable.  Our data shows that it’s really promising.  We can now show our clients how their customers are sharing content on different social media platforms.  Twitter is third in revenue per share, behind Facebook and e-mail advertising.

BI: Do you think that Twitter’s current ad products are products that will get the company to billion dollar plus revenues?

ML: They need to figure out how to get the right ad to the right person.  They won’t be global ads, it will be pocketed audiences, based on words.  How they tweak those algorithm will determine whether this is a $100 million a year business, or a $10 billion a year business.

If I see an ad about something I’m interested in, and I engage with it, that’s a very valuable business.  If the ad is so far out of left field, that it seems like an ad, then the ad product is going to fail.  That’s the only thing they need to figure out: how do we make advertising seem like content and be as valuable as content.  If there’s content telling me how to get backstage at the Phish concert, I’m clicking on that.How would you evolve these products?

BI: What do you make of Tumblr’s suddenly huge popularity?

ML: Tumblr is a massive business.  They’re the ultimate story in scaling without a lot of money or people.  They’ve built the #2 social media site behind Facebook, according to Neilsen.

Tens of millions of people are running their online identity through Tumblr.

If you look at where young people, and young women are, Tumblr dominates.  Pretty much every high school kid is decorating their Tumblr.

Monetization follows engagement, so I assume they’ll do well.  We have a lot of clients who invest heavily in their Tumblr site.  It’s an easy way to get the message out there.

It’s still early.  Tumblr really blew up late last year.  It’s giving Twitter a run for it’s money.  With 600 million minutes per month spent on the site, this is the next great Internet business waiting to happen, I think.

BI: It feels like they can watch Facebook, and do what works.  Does that sound accurate?

ML:They’re both following and leading.  The Facebook timeline product, letting you highlight things on your timeline, and add apps, is a nod to Tumblr.  That’s what Tumblr is.  The whole idea of Tumblr is really a digital scrapbook for people, and so people have reacted to that.

BI: Do you think Tumblr can reach the type of scale Facebook has reached?

ML: No.  They’re playing in a different league.  It’s like pre-school football versus the NFL.  They’re executing at such a different level of innovation.

BI: What about Google+?

ML: It’s early.  I don’t know anyone who uses it regularly, and since I’m in a hyper connected social media world, that doesn’t lead me to have very positive feelings about their long term viability.  The more competition the better though.  For Buddy Media, the business, I love that Google is investing in this.

If they can stay around for long enough, maybe it works, but it’s very hard to replicate the social graph of Facebook, or the interest graph of Twitter, or the expression graph of Tumblr.  It’s much easier to copy design elements.

But it’s early.

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