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Social Media and the Billion-Dollar Question

30 May 2012

The Facebook IPO has ignited a predictable frenzy. According to the Harvard Business Review it's certainly true that social media have profoundly changed the way we interact, find information, and network - but the billion-dollar question is whether all this activity is going to generate solid economic returns.


The conversation about the business model behind sites such as Facebook, Twitter, LinkedIn, and Pinterest reminds me of the conversations that took place during the 1990s tech bubble. There is the same faith that, if we can just get a new technology adopted, the business model will follow. People also seem to be obsessed with the number of users, which reminds me eerily of the lust for "eyeballs" that characterized the first wave of Internet-based companies. Back then, we thought that just getting a lot of people to a site was worth something (remember WebVan? Or Value America? Or Pets.com?); today we think having millions of users spending time on a site is worth billions.


The algorithm we don't yet have is the one that translates time spent on a site into economic returns for the company hosting the experience. Unlike a membership or subscription organisation, Facebook and its kin depend on users either buying from advertisers or spending money on other activities, like games, to generate income. The fact is that these dependencies are based largely on untested assumptions about user behaviour - specifically, whether user behaviour will eventually become buyer behaviour.


We're also seeing a bit of the "get big really fast" mentality that was so prevalent back in the day. Facebook, I think, has been smarter about this than many others; they began with niche markets and gradually expanded outward. (The biggest sign-ups these days are from Baby Boomers!) Contrast that with Groupon, a company that has grown like crazy, but has not been super smart about its business model. Size and ubiquity (and their famous on-the-ground salesforce) will not compensate for lack of stickiness and indispensability.


My biggest concern with the commercial model for social media, however, is that I don't see how they are going to deliver complete user experiences in exchange for payments or advertising. I've written for a long time about the need for companies to create a complete "consumption chain" in order for their products or services to be successful. A consumption chain is the total set of activities a customer goes through in order to get their needs met, or their jobs done. When a link in the chain is broken or unfulfilling (or offers more than the customer actually wants), the business model breaks down.


Social media have some of the links in the chain covered perfectly. But they don't make payment easy, delivery is unspecified, and there is no particular social benefit to buying from one party or another. On Amazon, in contrast, you expect to be sold something (it isn't an interruption in a social conversation); they cover every link right through to final disposition; and it is easier to do business with them than to cobble together a solution from many different players.


Contrast the two experiences. Say you hear about a cool new something or other - say a handbag - from a friend on Facebook, or through a Facebook ad. If you want to buy the handbag, you have to visit the vendor's site. Then find the model you want. Then dig out your credit card and enter a ton of information about shipping and payment. Then (probably) pay more for shipping, etc. The experience takes a lot of effort, and it's fragmented. Shoppers are very likely to drop out somewhere along the way. Let's take the same experience on Amazon. An image pops up saying, "People like you bought this handbag." You click on the handbag. There it is. You click on one-click - there is your payment and delivery information. And if you are a "prime" member, there's no delivery charge. It is easy and effortless, all the way through the entire purchase and delivery process. Facebook and other companies similar to it are a long way away from having something like that to offer advertisers. And of course, if the advertising on Facebook is truly engaging and interesting, why would an advertiser pay them to feature it?


I'm not down on the promise of social media at all - but I think a lot of experimentation will need to take place before we know what the economic model is. And that could spell "bubble."


Source: Harvard Business Review

 



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