It's Time Social Media Stocks Learned to Grow Up

Jacob Harper |

Social media is one of the fastest-growing segments of the tech sector, but is still very misunderstood. To get an idea, take one look at how Snapchat – the fastest-growing social media company in history –was dismissed when they spurned a $3 billion buyout offer from Facebook Inc. (FB). To the pundits the company might as well have thrown the jackpot-winning lottery ticket in the gutter. 

That attitude hinges on the assumption that social media is a fad, or at least overinflated a la the tech boom “New Economy” of the early 2000s. But as the social media industry enters its second decade of existence, the industry looks less like a fleeting blip and more like the real deal.

To ensure survival, publically-traded players Facebook, Twitter (TWTR), LinkedIn (LNKD), along with private upstarts Pinterest, Keek, Foursquare and the aforementioned Snapchat need to evolve in specific ways, or else go the way of the Friendster. 

Step #1: Grab a Larger Slice of the Ad Pie

It is estimated that worldwide digital ad revenue in 2013 will be $117.6 billion, a more-than $30 billion increase from 2011, and the fastest growing segment of that revenue will be accumulated by the social media sector. Social media’s slice of the pie is still relatively low, though – ad revenue for Twitter, Facebook, and LinkedIn for that same time period was roughly $7 billion, or 6 percent of the total. 

Although relatively small, social media’s slice is getting bigger with revenues expected to reach $10 billion by 2017. To continue this upward trend, social media must continue to make their case to web advertisers and grab an even larger chunk of the market.

To be sure, in the 2020’s an even higher percentage of advertising revenue will have permanently migrated from old media to the web. Social media needs to continue capitalizing on the sea change and grab an even larger chunk of online ad revenue.

Step #2: Keep Users on the Site Longer

At some point a social media company will get to a place where it will be difficult, if not impossible, to continue growing its user-base. At the same time, loyal users will age out of the coveted 18-39 advertising demo, further eroding a social media company’s potential ad revenue. The solution to this problem is not to try to re-establish appeal with young users, but to get existing users more engaged.

Facebook CEO Mark Zuckerberg was admonished at one point for downplaying disappointing user information by arguing that “likes” and comments were up 50 percent. To investors at the time, it seemed like a useless bit of trivia, a false accomplishment that did not translate into increased monetization. But that increase in “likes” actually did mean something: it proved people were more deeply engaged with the site, and thus spending more time on it.

Google Plus has arguably taken this thinking to its logical extreme with their videoconference “hangout” feature, literally encouraging users to work (or hang out), and thus spend copious amounts of time logged onto the service. The other companies are sure to employ variances on this strategy going forward.

Step #3: Become Search Faster Than Search Can Become Social

Perhaps the best way for social media to thrive in a market dominated by search is to become more like search. Facebook tackled this problem with the introduction of Graph Search, which allowed users to search Facebook’s vast stores of user data to find other users with specific interests. Features like Graph Search actually satisfy steps #1 and #2, edging onto search’s portion of the pie while encouraging users to explore within the site for a longer time period.

Twitter has long understood this necessity of encouraging exploration with their hashtag function, and has continued to further ensnare users with the highly popular Vine app. And LinkedIn, for their part, encourages searching out other users more than perhaps any other social media service. This helps explain why LinkedIn has become so popular with job recruiters and headhunters.

Social media companies tend to spike on news of improved search functionality. The faster they can collect data (that search is not privy to) and organize it into searchable terms, the faster they can move onto that coveted advertising revenue.

Google Plus bears mentioning at this point, as the endeavor represents search’s biggest foray into social. While not being quite as disastrous as the Microsoft Corporation (MSFT) move into search with Bing, Google’s move into social has not lit the tech world on fire. User engagement has been greatly propped up by forcing YouTube commenters to get Google Plus accounts, and counting every time a user clicks the notification bell on a Google site (YouTube or Gmail) as “activity.” 

Google, and its eponymous search function, still dominate the market. And perhaps one day Google Plus will provide real competition against the upstarts. But for the time being, Google Plus is far from supplanting Facebook, Twitter, or one of the rising stars of social media.

Step #4: Spread Into Emerging Markets.

Although Americans invented social media, they are far from being the only players in the market. Several large social media companies have sprung up around the world and are growing very quickly indeed, usually outpacing the publically traded concerns. In some cases it’s not even close. For instance, Facebook is only the fourth most-popular social network in Russia, with homegrown services VK and Odnoklassniski dominating the market.

This is not to say an upstart like VK – essentially a Facebook clone – cannot coexist with American-based social media companies. But if the “Big Four” of Twitter, Facebook, LinkedIn and Google Plus are not careful, they could one day not only lose out on a market, but even get edged out by an international innovator, like China’s YY Inc (YY).

Predicting the exact nature of social media 10 years in the future is a near impossibility. But while we can’t say for sure what social media will look like, we can say that it will need revenue, and without taking these four steps the nascent industry will fade.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
FB Facebook Inc. 118.91 0.96 0.81 22,442,756
YY YY Inc. 44.04 3.04 7.41 1,505,369
TWTR Twitter Inc. 19.64 0.16 0.82 19,698,905
LNKD LinkedIn Corporation Class A 195.96 0.00 0.00 0
GOOG Alphabet Inc. 776.42 5.23 0.68 1,488,110
MSFT Microsoft Corporation 61.01 -0.36 -0.59 21,220,754
NEOMD NEOMD n/a n/a n/a 0

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