Twitter has over 100 million users. Facebook over one billion. Even Spotify has 18 million subscribers. If anyone imagines social networks are a fad, or a new-fangled thing for kids (a view to which many venerable BBC presenters appear to subscribe), then they are manifestly wrong. In fact, we are rapidly accelerating away from the position where these platforms represent a distracting media accessory, towards a destination where they become the mainstream media. There is no good reason to think this tipping point won't be reached in the next five years. It will certainly draw ever closer throughout 2013.
Which is as counter-intuitive as it is true. The received wisdom in the media business is that audience equals income. A newspaper's readership is the fountain-head of its fortune, both in terms of the cover price and its value to advertisers. When a radio station delivers listeners to its sponsors, those sponsors cough up the necessary. Much the same principle applies to commercial television and in the case of satellite TV, another layer of revenue is gained from subscribers. Even the BBC derives its funding from those using its services. In short, the more punters you can pull, the more cash you can bank.
But for social media businesses, the old rules no longer apply. Which is a shame, because as we've seen, they can certainly deliver the numbers. The challenge is finding a means of converting those impressive user statistics into big money. Thus far, neither Facebook, Twitter, Spotify nor anyone else has uncovered the solution.
Is this a communication revolution? Undoubtedly. The democratisation of mass media? Yes, pretty much. So our sails are full and a brave new utopian world of tweets, pokes, streaming and feeding is unfolding before us. Well not quite. Because in the room of social media there is a mighty elephant. And before long, it will require intense attention.
Unfortunately, for all its wonder, innovation, potential and delight, this new technology is rather poor at making money.
Unfortunately, for all its wonder, innovation, potential and delight, this new technology is rather poor at making money.
Which is as counter-intuitive as it is true. The received wisdom in the media business is that audience equals income. A newspaper's readership is the fountain-head of its fortune, both in terms of the cover price and its value to advertisers. When a radio station delivers listeners to its sponsors, those sponsors cough up the necessary. Much the same principle applies to commercial television and in the case of satellite TV, another layer of revenue is gained from subscribers. Even the BBC derives its funding from those using its services. In short, the more punters you can pull, the more cash you can bank.
But for social media businesses, the old rules no longer apply. Which is a shame, because as we've seen, they can certainly deliver the numbers. The challenge is finding a means of converting those impressive user statistics into big money. Thus far, neither Facebook, Twitter, Spotify nor anyone else has uncovered the solution.
Hang on, though. Mark Zuckerberg is renowned for his huge wealth, isn't he? He's the bloke Croesus goes to when he's a bit short, that's how rich he is. If Facebook is struggling to find a business model, it hasn't reflected too shabbily on Zuckerburg's wallet. But here's the thing: Mark's fortune hasn't been derived from business transactions as we understand them. He hasn't sold a vast quantity of a product like Coca-Cola. Nor has he provided a service to billions of paying customers like, for example, Holiday Inn. What he has done is attract gargantuan inward investment via the strength of his brand's potential. That is, a collection of folk with money to spare believe that Facebook will make such a vast fortune at some point, they are prepared to put their dollars into the company. Facebook is now a public enterprise of course, and a slab of the Zuckerburg earnings derives from that flotation. Shareholders are gambling on the likelihood of the service generating massive profits in the future and are driven by the desire to be on board when that happens. So, if the social media business model is so shaky, why are those investors not troubled? Well, they are.
In May 2012, Facebook shares hit the US technology stock market (NASDAQ) at a cost of $38.00 a share. Today they are worth $25.14. Whichever way you cut it, that is not a show of confidence.
Twitter's financial structure is rather different. It is still a private business, underpinned by backers. Astonishingly, it has never had a stated commercial proposal. It was built as a concept to attract users, not to make money. Its intention has always been to apply some sort of profit-making framework once the user-base was substantial. Now that point has been reached, it's time for the business model. Worryingly, the current plan has yielded just 20% of predicted revenues. When FiveLive's Richard Bacon asked Bruce Daisley, Director of Twitter in the UK, how the platform was intending to deliver profits, he merely said the company was still 'evolving'. Hardly bullish.
Clearly, there are ways these services can make money. And they do. Advertising is the front-runner. You or I could launch an ad campaign on Facebook. It's a reasonably automated process and many clients already use the network for their marketing. However, it remains to be seen whether Facebook can attract advertisers in sufficient numbers to justify the investment made in their service. What's more, for such a novel and futuristic media outlet, advertising seems a rather predictable and archaic revenue stream. Twitter and Spotify also offer advertising opportunities but that side of their operations is hardly ablaze either. Another service which may well produce income is consultancy. This would see the networks providing reports and analysis on user activity, very useful information to corporate marketeers. Frustratingly for investors, this has been shackled by users' insistence that social media protect their privacy - witness the reaction to (Facebook owned) Instagram's intention to make users' photos available to advertising agencies. That plot was closed off within 24 hours.
One monetary channel enjoyed by traditional media is sadly unavailable to the social networks - paid subscription. If Facebook and Twitter had asked $5.00 from every new user when they launched, we would probably not have baulked and those micro-payments would be rolling in today. Instead, as we know, both services are free to join and use. Any attempt to introduce a fee at this stage would be suicidal. Spotify has tinkered with their free and premium products several times and I understand why. I also understand why each re-shaping has brought complaint and disgruntlement by the truckload.
It's hard to see the boom in social media as a technology bubble, akin to the fatally flawed dot com party which crashed so spectacularly at the close of the millennium. We have embraced these services with such gusto, they feel so much more substantial than that. Nevertheless, the voracious 19th century market in tulip bulbs which brought so many firms to ruin, probably felt unassailable at the time.
I am no economist or financial expert, and so find it hard to predict where this is going (although, almost every economist missed the signs of global crash in 2008, so the professionals may not have any more insight than the rest of us). That said, it is undeniable that the race to unlock - or even uncover - the treasure chest at the heart of social media is far from over.
You'd think it would be easy to turn a billion customers into a profit machine.
You'd think ...
In May 2012, Facebook shares hit the US technology stock market (NASDAQ) at a cost of $38.00 a share. Today they are worth $25.14. Whichever way you cut it, that is not a show of confidence.
Twitter's financial structure is rather different. It is still a private business, underpinned by backers. Astonishingly, it has never had a stated commercial proposal. It was built as a concept to attract users, not to make money. Its intention has always been to apply some sort of profit-making framework once the user-base was substantial. Now that point has been reached, it's time for the business model. Worryingly, the current plan has yielded just 20% of predicted revenues. When FiveLive's Richard Bacon asked Bruce Daisley, Director of Twitter in the UK, how the platform was intending to deliver profits, he merely said the company was still 'evolving'. Hardly bullish.
Clearly, there are ways these services can make money. And they do. Advertising is the front-runner. You or I could launch an ad campaign on Facebook. It's a reasonably automated process and many clients already use the network for their marketing. However, it remains to be seen whether Facebook can attract advertisers in sufficient numbers to justify the investment made in their service. What's more, for such a novel and futuristic media outlet, advertising seems a rather predictable and archaic revenue stream. Twitter and Spotify also offer advertising opportunities but that side of their operations is hardly ablaze either. Another service which may well produce income is consultancy. This would see the networks providing reports and analysis on user activity, very useful information to corporate marketeers. Frustratingly for investors, this has been shackled by users' insistence that social media protect their privacy - witness the reaction to (Facebook owned) Instagram's intention to make users' photos available to advertising agencies. That plot was closed off within 24 hours.
One monetary channel enjoyed by traditional media is sadly unavailable to the social networks - paid subscription. If Facebook and Twitter had asked $5.00 from every new user when they launched, we would probably not have baulked and those micro-payments would be rolling in today. Instead, as we know, both services are free to join and use. Any attempt to introduce a fee at this stage would be suicidal. Spotify has tinkered with their free and premium products several times and I understand why. I also understand why each re-shaping has brought complaint and disgruntlement by the truckload.
It's hard to see the boom in social media as a technology bubble, akin to the fatally flawed dot com party which crashed so spectacularly at the close of the millennium. We have embraced these services with such gusto, they feel so much more substantial than that. Nevertheless, the voracious 19th century market in tulip bulbs which brought so many firms to ruin, probably felt unassailable at the time.
I am no economist or financial expert, and so find it hard to predict where this is going (although, almost every economist missed the signs of global crash in 2008, so the professionals may not have any more insight than the rest of us). That said, it is undeniable that the race to unlock - or even uncover - the treasure chest at the heart of social media is far from over.
You'd think it would be easy to turn a billion customers into a profit machine.
You'd think ...
