The BUSINESS OF SOCIAL MEDIA and NETWORKING SITES

Today we live in a world where social media has taken a centre stage and a sizeable percentage of the overall world population is actively using various types of social networking platform. Social Media is about connectivity and interactive engagement where a single POST or an OPINION is shared, liked, and commented upon creating a feedback loop almost immediately.

So a company today is able to collect more or less an accurate feedback from consumers without a time lag. For example, a company or a marketing firm with access to thousands of emails can now follow the individuals linked to each emails on a social media platform for a week or months and better profile their behaviours as consumers as well as individuals. And these sort of informations are extremely important for a company. So companies that are able to keep an interactive and engaging presence on Social Networks will surely see the benefit. Take for example TESLA, by using social media networks the company was able to quickly spot the problem with Model S fires and managed to instantly respond to its customer base and got engaged in an interactive conversation winning back most of the customers or as TESLA would say ” able to correct the misperception ” around the product.

And besides commercial companies today you have authors, universities, celebrities of all sorts connected to their audience on various social networks and able to instantly promote a book or simply keep their readers informed and also every now and then get engaged in an interactive discussion enabling an author to better understand their readers and expectations etc. Universities are not only able to promote themselves but also get engaged in various types of conversation, debates etc. And Celebrities have 24×7 instant connection with their fan base enabling them to not only promote a movie or an album etc but also interact with their audience on day to day stuff. Researches and LABS are creating communities on social networks that allows them instant connectivity and visibility with a wide range of audience and the open nature of the social media platforms is helping them create better, open and efficient collaboration. So a research post or a headline is instantly picked up by thousands and the commentaries with all types of opinions  comes pouring in immediately.

In short with the advent of Social media networks, we have started to live in a 24×7 very interconnected world where OPINIONS on anything and everything are shaped and re shaped almost immediately.

And overtime the SOCIAL MEDIA space will most likely evolve and that’s already happening. For example look at INSTAGRAM, today it has it’s own interactive community with millions of user in social media. Then you have VINE ( the video sharing platform ) which has over 40 million active users. PININTEREST has also started making waves in the social media space with over 10 million active users on a monthly basis. So the social media space is clearly evolving and will continue to evolve going forward.

But as a word of caution I must add that the astronomical PRICE TAG that most of these platforms carry does create an inherent bubble because it is very likely that some of these ideas will or may fail down the road and also the core business model will need to evolve to make sure the underlying business is and remains sustainable. There is also a real risk of SOCIAL MEDIA FATIGUE as evident from the fall in overall usage of social networking sites like Facebook, Twitter by average folks and this is why leading companies like Facebook would need to be forward looking in order to stay relevant and most likely the recent acquisition of whatsApp by Facebook carrying a whooping $ 19 billion price tag is a part of that strategy.

And some would rightly argue that overpaying is quite a risky way to grow your business and many Silicon Valley based companies have already paid the price of getting overboard with an acquisition. And here are some examples of spectacular failed acquisition. After paying $ 15.3 billion to acquire  Network Solutions, VeriSign sold the company for just $ 100 million taking a write down of $ 15.2 billion. The other one that comes to mind is Terra Network’s $ 13.8 billion acquisition of LYCOS only to sell it later for  $ 95 million. Then there is HP’s $ 8.8 billion write down over AUTONOMY. And the list goes on. In short Silicon Valley does not have a solid track record in being able to monetise pricy and premium acquisitions.

So is quite plausible that Facebook may have to take a write down on the price it paid for WhatsApp going forward because the instant messaging space is quite crowded and even with a freemium model “FB” may struggle to generate the sort of return required to justify the $ 19 billion price tag but this blockbuster acquisition has clearly pushed up the overall valuation of the instant messaging companies and in most likelihood BlackBerry Messenger Service could be one of the biggest beneficiary.

A business needs to keep evolving to stay relevant and the same rule applies for businesses  operating in the social media space. The difference is Social Networking sites don’t sell a product to their user base but instead use all of their users as PRODUCTS to make money. So the users i.e. all of us ( as users ) will have a strong say in what happens to companies operating in the social media space. And with regards to social media platform as an investment, I personally believe the astronomical valuation could potentially be damaging to the overall progress of the sector because remember perception plays a key role so a couple of big failures could seriously put off investors and this is why businesses operating in the sector will not only have to evolve in terms of the uniqueness of their respective services but also on how they generate and create revenues going forward as for now almost all of them have a similar revenue model. And companies like Facebook can and should learn from Google on how to build a real and sustainable business.