Social Media Companies make Money…. How? By Social Butterfly
Social media is being slowly integrated into business as a necessary change in how we share information. Yet social media is bigger than anyone could have imagined and hard to harness. Facebook has over 1 billion users, 600 of which are using the network mobily.YouTube gets 4 billion views per day, there are 150 million people tumbling on Tumblr, 140 million people tweeting on Twitter, 175 million registered users for Linkedinand 33 million people are streaming their favorite music through Spotify. These services are some of the most subscribed in the entire world—but they are, for the most part, free. How can a free service, that is incredibly popular, provide flawless product (note backlash when something goes wrong), for free?
Historically, when social networks finance their startups, they base their numbers on an assumption of growth—the money on day one is different than year two, and is still different from year five, and so forth. Getting a social media company off the ground requires involvement with a venture capitalist, or group of venture capitalists. These people invest in the company anticipating an eventual payout as the company grows more valuable, bringing a healthy return on their initial investment. However, as platforms become more popular they often require more capital investment to build and maintain operations. In the case of a popular social media platform, servers and technicians need to be added to compensate for increased traffic. It is at these points in a start-up’s evolution that it can either go in for further rounds of investment, or hope to get bought out by a larger company.
Whether a company gets bought or not, it needs to become profitable. The turn most companies take is towards advertising—and this is not a passing fad. Out of the $16.9 billion (up from $11.8 billion last year) in revenues made by social media outlets, $8.8 billion came from advertising. Another route is subscription based services, such as Spotify, which make considerably less comparatively to their advertising brethren—showing that people would rather be advertised to than pay a fee to sign up.
Facebook, the behemoth of the social media industry, has recently upped the advertising antie, however. Instead of simple banner advertisements, they began their “Facebook Exchange” program in June with the basic premise that advertisements are not only tailored to your interests in banner form on your facebook page, but actually follow you from webpage to webpage and remember you for long periods of time. This advancement in data mining and connectivity comes after prolonged pressure from Wall Street to make Facebook more profitable than it has been. Facebook has yet to disclose actual click numbers, yet potential advertisers and investors are very much on board and have contributed to a recent spike in the companies stock.
There are a few other ways to make money from a social service. Companies offer “levels of access” accounts, which limit the amount of functionality that a service offers based upon what a subscriber pays for. Companies have tried “professional,” “executive” and “full member” accounts in tandem with a free, less complete service—though they do not often fare as well as the non-premium-based advertising service which typically sees more use. The fear among social media platforms for requiring a provided service cost lies in the fact that users are fickle. A young up and coming company can steal another company’s user group with the click of a mouse, and it is a story we have seen before.
A roundabout way for making the user pay is a tactic called “gamification.” Here users can pay for experiences in a game, give gifts to friends, or achieve preserved status based on participation or spending. Gaming and gift strategies are being called “money-spinners” and are catching the eye of larger companies. While profits don’t come close to that those garnered via advertising, it is at this point a solid second place opportunity for financial gain beyond the current bread and butter, advertising.
Experts are predicting that the number of people joining social networks is going to taper off over the next few years, often citing that those who have the financial and technical ability to have social media already do. Because of this, instead of focusing on extreme growth (keeping up with network and hardware demands), as most social media platforms have been forced to confront in their infancies, we will see much more effort placed on the monetizing of existing companies and enhancement of already existing services. It is thought that not all hyped platforms will survive through this next phase.Groupon, a social coupon platform, began with a loud boom and wild support from people with smartphones everywhere, though just in the last few months we’ve seen stock prices plummet, and interest decrease because of lackluster performance that could not live up to original projections.
Internet start-ups continue to be one of the hottest and most interesting areas of tech business development. This is no arena for the faint of heart. A saturated market and no current gold standard solution to monetization make the barriers to entry higher and higher. Yet as obstacles to continued success grow, so does the challenge to create the next big thing in social media.