Social Media – Where Is The Money?
What we consider today as Social Media started in 1997 with SixDegrees.com. This early social networking website allowed users to send messages to their friends and post items on boards. At its peak, the website had around 3.5 million users. The service did not last long and was shut down in 2001. Since then we witnessed an abundance of social media websites and applications being introduced. MySpace (2003), LinkedIn (2003), Facebook (2004), Twitter (2006), Tumblr (2007), Pinterest (2010), and Instagram (2010) are only some of services so many of us use. They allow us to tell the world about ourselves, check what is happening with our friends, and discuss common interests with people on the other side of the world.
Almost all of the social media services are either completely free to use or have a free usage tier. We can post, share, blog, or send our message to the world, without paying a single cent to the social media providers.
But what keeps these services running? What are the business models which allow them to pay for their expenses, and in some cases make nice profits for their owners? You can use most of these services for free, they hardly sell any physical goods, and still they are highly valued by investors.
Snapchat which launched in 2011 and never made a profit, is now (early March 2017) valued at $24 billion after a successful IPO. People must really believe that there is some money to be made in the world of social media!
The biggest source of income for the social media industry is advertising, online advertising. Online advertising emerged during the 1990’s and has grown ever since. In its infancy years the online advertising could not support the operations of the social media services. Thus sites like SixDegrees.com had to shut down.
Now days of course social media advertising is big business. In its 2016 financial report, Facebook reported a 2016 full year advertising revenue of $26.885 billion which accounted to 97% of its total revenue. Facebook’s net income for the 2016 summed at $10.217 billion.
This kind of monetization converts the users information into a commodity which is sold to advertisers. These raises issues of privacy, and in essence, how much are we willing to expose in order to get a free service.
Another method of earning money is selling premium features for users, or supplying enterprise level services for companies. LinkedIn offers premium packages that will cost you between $41.99 to $179.99 per month (as at March 2017). LinkedIn selling pitch is that these premium services will help you to advance you career by improving your access to the professional circuits.
There are social media companies which are not able to earn enough money from their on going operations. It seems that some of them have a business model which does not include profitability at all. These companies will try to accumulate big enough users base to be of interest for investors. Successful IPOs or an outright sell to another company are ways for founders, venture capital companies, and other early investors, to gain profit. In 2014 Facebook purchased WhatsApp in a $19 billion deal. At the time WhatsApp had over 400 million monthly users but earned only $10.2 million in the previous year. To this day it is still not evident if and how Facebook will be able to recuperate its investment in WhatsApp.
Looking into the future of the social media businesses, a few questions arise:
- What is the limit of the personal information we are willing to give away and how will that effect social marketing?
- Will companies like WhatsApp will be able to provide value to the companies which purchase them?
- What kind of new goods will the social media companies try to sell us?
- Can we be convinced to pay for social media?
The social media industry is only 20 years old and its underlying business models are still evolving. It will be fascinating to watch and see what will happen in the next few years. After all, it involves billions and billions of dollars, and maybe even more important, our selfies with hilarious snapchat filters.