Friday, July 23, 2010

Is social media good business?

Lets compare a couple of stats --

A few months back, audited circulation data showed that subscriptions to the New York Times had fallen below one million for the first time in living memory, and declined a whopping nine percent year-over-year. Around the same time Mashable reported that Twitter traffic was growing at a hyperbolic 1300 percent year-over-year, with over 1.2 billion tweets a month.

Numbers like these are thrown about all the time to illustrate an undeniable shift in the way we consume information, news and a whole load of gossip. The economic consequences for the Dead Tree News Business is dire and well-documented, but what about the business prospects for the social media upstarts that seem to be precipitating all this change? Are they making boatloads of cash?

There's no doubt that the main revenue stream that drives the information economy – advertising – is seeing a shift towards online spending:

Forrester Research data for online advertising revenues.

Looking at the Forrester Research numbers, overall online advertising in the U.S. is expected to have a CAGR of about 17 percent over the next few years, which aint too shabby. Within that, social media advertising will be a rocket ship, with 34 percent CAGR, reaching an impressive $3.4 billion in 2014.

All very nice, but does this all add up to big profits? According Reuters, Facebook made a whopping $800M last year, or about two bucks for every user (let me repeat that – over a full year, Facebook made all of $2 for every active account). Small potatoes you may say, yet this was enough for the company to eek out a $10M profit, at least on paper. Facebook's revenue growth has come as the number of users on its website has exploded: the company started 2009 with the January announcement that it had reached 150 million users and by December that number had swelled to 350 million.

What about Twitter? Bloomberg reported that even on a sliver of revenue from Google and Microsoft, a mere $25M, Twitter is also profitable. They have about 58 million users, so they're getting about 40 cents a user. Poor MySpace, owned by News Corp., has something like 111 million users and made about $360M last year (down from $460M the year before), or about $3.50 per user.

None of this could be described as printing money, in my opinion, and there's a very healthy debate about the long-term viability of social platforms as self-sufficient, profitable businesses. Here's Charles Hugh Smith writing on the investor site Benzinga:

Facebook will never be very profitable, for it is a utility which will never be able to charge its users. Its free functions are more valuable to marketers than its advertising, hence it will never generate big ad revenues.

Bo Peabody in the Washington Post thinks social media outfits will always be “crappy businesses”, while Henry Blodget at BusinessInsider thinks Facebook et. al. are the next Google. They can't both be right, but they could both be wrong.

Most likely, some social media properties will figure out a way to make advertising and other revenue streams pay their way. Some will have frothy IPOs. Most will die slow deaths. What I'm sure about is that none of these companies will duplicate what the New York Times does, nor should they. Whichever way you cut it, the vital statistics for the news business remain terrible.


Frank Days said...

Great analysis. I was thinking the same thing. Will Twitter or Facebook ever become crazy high margin business (like Google) and demand their stratospheric valuations or is this just people expecting someone to overpay for them. At $33B there really isn't anyone who would buy FB.

Ian Bruce said...

Thanks Frank. Like the new blog: