Twitter may have beat Wall Street this time — but one tech executive says advertisers are still frustrated

Key Points
  • "It's a pretty interesting, and tough and brutal game for anybody who's not Facebook and not Google," tech exec Scott McNealy says.
  • He says only a minute fraction of netizens click on ads, and many of them do it accidentally.
Digital ad space 'brutal game' for social media: Scott McNealy

Wall Street rejoiced Wednesday about Twitter's better-than-expected earnings, sending its shares up sharply.

But online advertising has yet to see a "real breakthrough" that allows any other players to really compete with Facebook and Google, said Scott McNealy, former chairman and CEO of Sun Microsystems.

"It's a pretty interesting, and tough and brutal game for anybody who's not Facebook and not Google," McNealy told CNBC's "Squawk Box." "They're owning so much of the digital advertising space. And the space hasn't really evolved as well, I think, as people wish it had."

McNealy is now chairman and CEO Wayin, a digital marketing platform. When AT&T debuted the first online banner ad in 1994, it seemed promising, McNealy said. But he said that today, a minute fraction of netizens click on ads, and many of them do it accidentally.

"It's kind of a black box, and advertisers I talk to — the big brands — are very frustrated that they don't really know how many clicks they are getting," McNealy said. "They're not getting the data back."

Jack Dorsey, CEO of Twitter and Square.
Rebecca Cook | Reuters

Twitter reported earnings of 11 cents per share on revenue of $548 million, better than the penny per share on revenue of about $512 million that was expected by a Thomson Reuters consensus estimate.

Its premarket stock price was more than 9 percent higher.

But overall, Twitter's earnings and revenue are on the decline from last year, and the company's outlook was bleaker than analyst forecasts, as the company is "phasing out less effective ad formats."

"You have the issues with the advertisers, where they don't trust the content on there," James Cakmak, internet equity research analyst at Monness, Crespi, Hardt & Co., told CNBC ahead of the earnings release. "Fake users, the harassment issue. If you purge users, and make it completely verified, that would solve that problem. And secondly, you should be able to charge those users."

Twitter has ambitions to stream live video programming all the time, according to BuzzFeed News. But so far, it has been losing steam to competitors.

Snap, newly public, is growing super fast: Revenue was $404.48 million in 2016, up from $58.66 million in 2015. And Snapchat has high engagement, especially among teens. Amazon, meanwhile, has deepened its push into "over-the-top" video content, announcing this month an exclusive partnership to livestream "Thursday Night Football." Last year, that deal belonged to Twitter.

"Targeting was supposed to be the holy grail, but all we're doing really is doing the same kind of advertising you see on TV: 20, 40, 60-second spots," McNealy said. "That really hasn't changed the game."

Facebook's Mark Zuckerberg has made big acquisitions and expansive plans. Twitter, meanwhile, has seen a shake-up, with many top-level executives departing, leaving Anthony Noto as chief operating officer and chief financial officer. CEO Jack Dorsey is also at the helm of Square.

Cakmak said Twitter's ad team may be too focused on winning TV advertising dollars.

"With a brand ad, it's all about trying to get to a mass market," Cakmak said. "[Twitter's] ads and their team are mismatched with the skillset and the niche-ness of the model, which should be more direct response, highly tailored."

McNealy said he's working with Twitter on "brand experiences," using chat bots or artificial intelligence to take ads in different directions, depending on the viewer.

"Experiences are where you can actually interact — it's not, 'Lean back and watch a video,'" McNealy said. "Everybody who is watching advertising today has a keyboard, a touchscreen, a speaker and a microphone. So now you can engage."

— CNBC's Julia Boorstin contributed to this report

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