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.

Social Media Makes Money?

A lot of people, including me, have made fretful bleating noises about the dismal economics of conventional media. Not so many have made the same bleats about social media, even though these businesses aren't exactly printing cash.

Just today the Wall Street Journal reported that YouTube owner's Google are “aggressively pushing new ad formats and ramping up deals with media companies” in an attempt to make some money from the popular video site. Google acquired YouTube over three years ago and has struggled to make it pay.

Google isn't alone. In 2005 News Corp. bought MySpace for $580 million, only to see the site's popularity wain as Facebook adoption exploded. Earlier this month News Corp. announced a quarterly loss of $205M, citing MySpace as a big cost-sink. Not that rival Facebook is exactly rolling in cash itself – the company hopes to get cash-flow positive by 2010, even as the number of subscribers spirals above 250 million. In March this year Facebook let go of its CFO, and in May sold stock at an evaluation well below the price Microsoft took when it bought into the company back in 2007. Meanwhile, the social media darling Twitter is enjoying a kind of celebrity and ubiquity that seems to eclipse even famous users Obama, Kutcher, and the Iranian nation state, yet the company has essentially zero revenue and is fumbling for a business model.

This is an enviable problem to have. As more and more of our lives drift into the ether, many of these companies are becoming invaluable. Most will find a way to extract payment – directly or indirectly – from us all. The usual default model – advertising – might well work, although I remain skeptical that over the long haul this alone will be enough. And without a doubt some of the social media giants of today will wilt and disappear: People are fickle, fads change, and the very success that many social media sites enjoy will make them less appealing to users who's time and attention become stretched thinner amid all the clutter and noise.

All these services are turning the Internet into a modern-day Babel. The real money may be in technologies that keep all this information at bay, and offer ways to filter, find, manage, and assimilate content, or mechanisms for presenting and preserving our digital indentities in a coherent and controlled way. We need protection. Social media services may not charge a dollar but they ain't free -- they cost us all way too much time.