Native Advertising Could Spell Trouble for Foursquare With Brands

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It’s predictions season in the media, and some pundits are billing the rise of native advertising — custom formats like sponsored stories and promoted tweets that blend an advertiser’s message into the fabric of a platform — as something we’re likely to see in the coming year. Brands and media buyers greeted Facebook‘s and Twitter’s new native ad units with a warm reception. But one question for 2013 is whether the economics of native advertising can work for Foursquare’s 25 million plus users as well as it did with Facebook’s billion, which announced in June that it was going to start running native advertising on its service.

Given that Foursquare’s user base isn’t going to get as big as Facebook’s or Twitter’s (which is not necessarily a bad thing) and considering the pressure to justify its valuation, putting too much faith in a native ad model could potentially spell trouble for the company.

Balancing Efficiency and Effectiveness
It’s no coincidence that the growth of native advertising and the monetization of Twitter and Facebook have come hand in hand. Over the past 12 months, the properties have demonstrated just why the concept has such promise for traditionally ad-free media properties: It allows a company to a) turn on monetization without deeply altering the user experience and b) increase the effectiveness of each unit by tailoring the format to the strengths of its platform. That uptick in effectiveness is one side of customization. But there’s a reason why we don’t all walk around in tailored suits: It’s difficult to customize things at scale.

“Native is one form of custom advertising, and because of that, it will always fall within that category,” Peter Minnium, head of brand initiatives with the Interactive Advertising Bureau, told me in an interview. “When you’re fighting in that battleground, you’re going for a balance between effectiveness and efficiency. The more native or custom your ads are, the more effective it is, but the less efficient it is because it costs more and you have a more narrow reach.”

Minnium said that custom advertising (which the IAB defines as a nonsanctioned format) has jumped from 7% to 10% of all ads served to about 20% in the past year largely on the back of Facebook’s and Twitter’s revenue push.

The customization versus standardization, efficiency versus effectiveness dynamic is a fairly universal trait of markets, and a defining one for more fragmented marketplaces. For a fragmented ecosystem like the digital advertising industry, standardization provides the liquidity and efficiency needed to make sure that the market doesn’t just grind to a halt.

For brands and media buyers, the decision to opt for native comes down to a simple cost-benefit analysis: Does the value added by customization exceed the cost of learning and implementing a new ad format?

Native advertising “may work for Facebook and Twitter because they have the scale and money to pay salespeople to sell it,” said Nihal Mehta, CEO of social targeting platform LocalResponse and a veteran of the digital advertising world. “But, in general, media buyers in New York don’t want to get educated on a new ad unit that is not scalable.”

Test Budgets Can Give False Hope
Foursquare is stuck in a dangerous middle ground. It’s large enough to pique the attention of forward-thinking advertisers and tap the test budgets of some brand advertisers but not necessarily large enough to merit a long-term spot in the brand marketing mix.

Part of the issue for Foursquare is that the fundamentals of the local discovery space do not necessarily lend the sort of accelerated growth caused by scale, which we’ve seen with Twitter and Facebook. The value of scale for a local discovery platform — more reviews to log, more check-ins to contribute to a rating — is incremental compared with the transformative effect that ubiquity has for social media. A 50% jump in the number of reviews on Yelp in my neighborhood is helpful, but a doubling of the posts from friends on Path, dramatically changes how I view the service.

“They raised a lot of money, and when you raise that much money, you have a lot of pressure on you to perform like Twitter and Facebook did earlier,” Mehta said of Foursquare. “The problem is that this market is going to take a lot longer to develop and evolve.”

Foursquare has put a big emphasis on smaller and medium-size advertisers, and that market has its own challenges. But brand dollars need to form a solid piece of the revenue puzzle for the company. Its leadership appears to recognize this and the company has already worked with six out of the top 10 brands, according to the chief revenue officer, Steven Rosenblatt, who spoke at an event in New York earlier this month.

But given the way that budgets are structured, simply working with a brand doesn’t mean much. “You can go to a place where you get a $50,000 test budget, but does that mean you can get the $500,000 or a $1,000,000 dollar budget? No,” said Minnium. “If you’re in the middle, then you have a big problem for folks like that. You must have scale.”

Foursquare Is a Consumer Utility. Can It Become an Ad Utility?
One of the the factors that makes native advertising so attractive for properties like Foursquare — that have chosen to build a user base first and dial up revenue second — is the ability to pass along some of the costs of revenue development to advertisers instead of users. Advertisers pay for a native model by having to learn a new format and change buying habits, and users pay less by not having their experience disrupted by run-of-the-mill IAB units.

But in the end, Facebook is a media property and Foursquare is a utility. So why not build an advertising business with that in mind? Mehta suggested that instead of trying to force itself into the impression layer of the advertising stack, where value is defined as time of use, Foursquare could sit on top of the inventory stack, serving as a targeting service across a handful of properties.

“Foursquare doesn’t want to clutter the user experience with additional ads, and I agree with [the company’s managers],” said Mehta. “It’s hard enough for the user to open the app and check in; why do they want to make it any more difficult? So get rid of the ads completely, and leverage that check-in data outside of the Foursquare user experience. If someone checks in to Walmart, and [is] surfing the Wall Street Journal, you could see a Walmart banner ad — all not native.”

Mehta pointed to Facebook’s rumored external advertising exchange as a precedent for the model, though as of now the reports remain mostly speculative. Part of the reason Facebook’s exchange has been slow to develop are likely the wide ranging privacy concerns implied in breaking out of the walled garden that plays such a key role in the compact between social media properties and users.

Making that break requires more than a technological breakthrough or business model innovation. It requires a cultural shift in how we as consumers of media understand advertising. That might come for Foursquare. But the real question is when.

Steven Jacobs is deputy editor at Street Fight.