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The challenge facing Facebook in 2013.

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by Magnus Shaw.


Examine the figures and social media boggles the mind. Facebook boasts over one billion users - a seventh of the entire planet; Twitter has more than 100 million users. Even music-streaming app Spotify, carries 18 million subscribers. To imagine these services are a passing fad, or a plaything for kids is to be foolish indeed. These platforms have long since ceased to be an adjunct to mainstream media and are heading for a place where they are the mainstream media. This destination will certainly draw closer throughout 2013.


So it would appear a brave new media world of tweets, pokes, streaming and feeding is unfolding before us. But just a second - there is a cumbersome elephant in the room. For all its wonder, innovation, potential and delight, this new technology is rather poor at making money.

Which is counter-intuitive, as the received wisdom has always stated that audience brings income. The readership of a newspaper is the mainstay of its financial wellbeing. Radio stations draw listeners to the messages of sponsors, as do commercial television channels. In the case of satellite and cable TV, another layer of revenue is available from subscribers. So obviously, the more punters you pull, the more cash you bank.

But in social media, that model is compromised. Which is unfortunate because, as we've seen, it can certainly deliver the numbers. The challenge lies in finding a way to convert those vast user statistics into big money.

Topeka Capital Markets predicts Facebook's annual revenue will reach $12 billion in 2016. Let's hope they're correct, because right now the business isn't really going to plan.

What? Mark Zuckerberg is renowned for his vast wealth, isn't he? Well, here's the thing: his fortune isn't 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 millions of paying customers. Instead, he has attracted speculators; folk with money to spare who believe Topeka CM and others' perdictions and are therefore prepared to put their dollars into the company. Facebook is now a public operation and a slab of the Zuckerburg fortune comes from that flotation. As with any share issue, shareholders are gambling on the likelihood the firm will generate huge profits in the future and want to be on board when that happens. So, if Facebook's future is so incredibly rosy, why are investors so nervous?

The strategy looks enticing, with revenue stemming from a host of existing or developing products:

Display ads: More than 80% of Facebook's current sales.

Payments: Mostly from games. Facebook is developing its own games system.

Sponsored stories: The first social ad unit on Facebook.

Sponsored search results: Facebook is using this as a testing ground for a new search engine.

Facebook Exchange: Aimed at the 'real-time' bidding market.

Offers: When a user claims an offer it is broadcast to their friends.

Gifts: Due for launch In 2014.

Promoted posts: Will benefit from Facebook's restricted distribution of posts from brand pages.

Mobile App Installs Ads: Facebook gets between $0.50-$3.00 each time a user clicks an app.

Suggested Posts: A social ad unit that's still in testing.

Logout Page Ads: These ads can cost $700K. It is claimed 37 million people log-out of Facebook each day, mostly from public computers.

So far, so adventurous. Nevertheless, in May 2012 Facebook shares hit the US technology stock market (NASDAQ) at a cost of $38.00 a share. Today they are worth $26.62. Whichever way you cut it, that is not a show of confidence.

Incidentally, Twitter is still a private business, propped up by its backers. Astonishingly, it has no firm commercial proposal. Its intention has always been to apply some sort of profit-making framework once the user-base was big enough. Arguably, that point has now been reached. However, the current plan has yielded just 20% of predicted revenues. Bruce Daisley, Director of Twitter in the UK, has merely said the company is still 'evolving'.

As we've seen, there are ways Facebook can make money. And they do. But one profit channel enjoyed by traditional media is sadly unavailable to them - paid subscription. If the service had asked for $5.00 from every new user when they launched, very few would have baulked and those micro-payments would be rolling in today. Sadly, any attempt to introduce a fee at this stage would be suicidal. Look at Spotify. They have tinkered with the cost of their products several times and I understand why. I also understand why each re-shaping has brought substantial complaint. It is a brave company which starts to charge for something they once gave away. Attempts to impose fees at ATMs or for each email sent have been proposed in the last decade. They were rapidly strangled.

So is it possible that Facebook and its cousins represent a technology bubble, like the dot com crash at the close of the millennium? We have embraced these services with such gusto and enthusiasm, they feel considerably more substantial. Although the voracious 19th century market in tulip bulbs probably felt unassailable at the time.

I suspect nobody, least of all me, is able to predict where Facebook is going (almost every economist missed the signs of global crash in 2008, so there is no point in looking to the 'professionals' for guidance). That said, for now, we can be sure the social media treasure chest remains locked.

You'd think it would be easy to turn a billion customers into a profit machine. You'd think ...

Magnus Shaw is a copywriter, blogger and consultant
www.magnusshaw.co.uk

With thanks to http://www.businessinsider.com.

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