There is no doubt that social media has become an enormous success over the last decade and that it has in many ways made a great impact on how we interact with each other. One could argue that this was exactly what the early innovators envisioned – disrupting the incumbent, fat and often arrogant traditional media barons. The consequences of this disruption have been nothing less than spectacular. Many decades-old or even centuries-old media are struggling to survive.
Many of the innovators at the start of their careers had big ideas about democratising society, bringing powers back to grassroots level and creating a sharing economy. But for the newcomers to be successful and grow beyond the garage or bedroom where they started they needed to tap into another incumbent industry, that of finance. For them to get the money to grow they had to conform to very strict financial rules that had to lead to massive returns for these financiers, either through IPOs or through mergers and acquisitions. In that process long-term innovative leadership often was in second place after short-term shareholders value.
This led to a more aggressive focus on revenue earnings, with emphasis on rapid growth on a quarter-by-quarter basis. That required major adjustment to the original vision of the early entrepreneurs and innovators, this being reflected in comments from Google such as ‘Don’t be evil’, “Our goal is to maximize the search experience, not maximize the revenues from search “and our purpose is “to organize the world’s information, making it universally accessible and useful.”
Facebook claimed that they would “give people the power to build community and bring the world closer together. Amazon stated that it was seeking to become “the most customer-obsessed company to ever occupy planet Earth.”
But, as revenues from new business models were not forthcoming, and in order to deliver the financial outcomes that were required by the financial institutions, they started to concentrate on the advertising market by utilising the online data that they collected from their users for profiling in order to maximise advertising outcomes.
They have not been able to create totally new business models that are making money on their own. In reality – from a financial income point of view – it has largely become a replacement business. Advertising money now flows to the new social media companies instead of to the traditional media.
At the same time aggressive use of personal data and the misuse of that data (by the American government, for example) made many people wary of the social media services. Not that they departed en masse from them, but the companies did lose some of their shine. It quickly became clear that their operations were more about making money than creating the new environments that were promoted by the early entrepreneurs. The event of large scale ‘fake news’ on social media also harms the credibility of the early statements made by these companies.
But also, from a business perspective, no matter how one looks at this, like all other markets the advertising market does have its growth limitations; so once those limitations are reached where can they go?
With the venture capitalists breathing down their necks new revenues are needed to feed these hungry beasts. It is no longer the entrepreneurs that are in charge of where the company is going – it is their venture capitalists.
Many of the companies have been developing new services and applications in order to try and generate truly new revenues, but so far none of those initiatives have been overly successful.
A good avenue would still be the sharing economy. If the social media could create real economic value for their users then these media would indeed be able to deliver on their early promises; and there are some good examples in music and video entertainment. However building more of these communities deeper in the market will take time and a lot of effort if they are to deliver real economic benefits to the users. The companies will have to develop much deeper revenue sharing models with their communities and not take a winner-takes-all approach in relation to their own companies. This will require more transparency and a much more financially flexible approach from their investors, currently they require solid financial results quarterly by quarter with clear growth paths attached to them.
The market reality going forwards means that this will lead to a battle between the companies and their investors, as investors will have to change their financial expectations.
As these social media so far have not really been able to establish large-scale new business models that are generating large sums of money the question is how much longer will these investors support them. Their share prices still reflect massive business opportunities but the reality of this will eventually be questioned.
This doesn’t mean that the social media will suddenly also lose the interest of their users. On the contrary, I don’t see any change to this in the foreseeable future. They remain extremely popular, but for how long can they maintain that popularity once investor interest begins to wane, and how quickly will they be able to develop sharing economy models that both work for their users and their investors?
Another problem that these companies will be facing is their monopolistic – or at least dominant – position in the market. As we have seen in the past with other sectors with high market concentration (eg, the telecoms market) once such companies come under pressure they will try to use that position to find ways to hamper competition and extract more money from their captive users.
As we have seen for over a century, once that starts happening people will begin to complain and eventually political pressure will lead to regulations aimed at reining in these monopolists. We already see the European Union actively pursuing such issues with the internet media companies. Tax offices around the world are also hot on the heels of these global organisations now, to make sure that they pay their fair share of taxes to the countries in which they make their money.
So, while I don’t see any changes soon to the success of the social media companies, I do spot several dark clouds on the horizon that will increasingly begin to affect these organisations. There are positive signs as well, but it will take more time to develop truly new business models and it will require a much better outcome for the end users. And that will mean that investors must change their longer-term financial expectations of these companies.