Submitted by Samuel Rae as part of our contributors program.
One of the most widely held opinions among financial and technological journalists at the moment is that the stock market is experiencing a social media bubble akin to the dot-com bubble of the late 1990s. This article seeks to explain why that is not the case, and how the future of social media is bigger than its present.
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Bill Gates said, “Most people overestimate what they can accomplish in one year, and underestimate what they can accomplish in ten years.” Bill Gates based this quote on a slightly less well known version called Amara’s Law. Amara said, “We tend to overestimate the effect of a technology in the short run and underestimate its effect in the long run.”
Take 3D printing for example. In 2008, analysts expected 3D printing to change the world by 2010. This has obviously not happened but, post-hype, the engineering, design and medical industries have found effective uses for the technology. Social media is the same. With the meteoric growth of Facebook’s (FB) user base ? coincidentally explainable using another eponymous law, Reed’s law ? analysts queued up to predict that the social media platform would mean the end for television, news sites and in one case the entire US economy. Again, this has not happened, but it does seem the initial hype is over. According to Amara’s law, this should now make way for application of the technology to the areas in which it can most effective.
As far as current application, the majority of the commercial world uses Facebook for one reason only ? advertising. The company generates 84% of its revenue from this industry. This trend is mirrored across the social media space. As a result of this, most of the time and effort of the company’s employees is devoted to advertising. This was illustrated in former Facebook engineer Jeff Hammerbacher’s now infamous quote, “The best minds of my generation are thinking about how to make people click ads, that sucks.”
When Facebook realizes what possible alternative commercial applications its social media platform has, its employees’ attention will be redirected towards solving the problems of these applications. This now looks to be just around the corner. Why? Because the model is sustainable at present, but not long term.
With the rise of social media advertising, a number of companies have developed ways to cash in on the market. These companies are now attracting the revenue from advertisers who would otherwise be spending it with Facebook, Twitter or other social media platforms. Take IZEA (IZEA) for example. IZEA operates in one of the fastest growing areas of online advertising, commonly called native advertising. Through the platforms that IZEA controls, advertisers can pay blog writers, celebrities, sports stars or pretty much anyone with an online presence to publish promotional material through their personal social media channels. This type of advertising, known as sponsored social influence, is reported to be more effective than both traditional banner advertising and other forms of native advertising.
The natural progression will likely be a shift, from ad spend with the social media companies to ad spend via these platforms, as is the case with traditional online advertising and the ad networks that coordinate it.
This shift will likely halt Facebook’s and other social media companies’ revenue growth in the short term, and shareholder demand for continued growth will force the company to refocus its workforce on expansion of the platforms application. New ways of generating revenue will have to be discovered and implemented. Any prediction as to what some of these alternative revenue streams for Facebook might be would be pure speculation, but one thing is pretty much certain ? they will be rooted in data.
“Big data” is the latest buzzword in the technology industry. It describes the unwinding and interpretation of huge amounts of data, and its application to the commercial world. With over 1.1B active users Facebook controls one of the world’s largest stores of big data. It currently applies it to its advertising model in the sense that ads are targeted at users based on certain criteria. It is only a matter of time before the company discovers a new commercial application from its dataset and starts to generate revenue from this application.
Consider LinkedIn (LNKD), for example. LinkedIn is already benefitting from big data via its “talent solutions” service. The service enables commercial users to draw upon the company’s vast dataset to recruit and find work. The trend away from advertising is clear from LinkedIn’s reporting, with talent solutions revenue growing from $62M in Q2 2011 to $187M in Q1 2013, and marketing revenue only growing from $40M to $78M across the same time span.
The major difference between the dot-com bubble of the late 1990s and the so-called social media bubble of today is revenue. The vast majority of the companies that embodied the dot-com bubble were valued based on ideas, and implied potential, rather than sound financials. The advertising revenue that Facebook and its social media industry peers generate serves to quash any comparison. Having said this, these companies’ current model is somewhat unsustainable, as the future of online advertising transactions will likely be rooted in third party platforms such as those provided by IZEA. Such a shift will necessitate a refocusing of social media companies’ attention towards the big data they have collected, and how it can be monetized to provide alternative revenue streams. The future leaders in the industry will be those companies that do this successfully.