September 25, 2018

LAM | Social Media Firms Need to Provide Tangible Services to Live on Ad Revenue

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This past summer lacked one thing: a new social media fad. It seems that app developers have finally realized that an idea doesn’t cut it unless they figure out how to make money from it. Social media is a peculiar good or service in the economy. It adds some value like communications and entertainment, yet people are often unwilling to pay for access, unlike a bottle of water or a subscription to Netflix.

This phenomenon is probably because of the demographics involved: teenagers or college students often don’t have a lot of cash to spare. Additionally, perhaps because these services are a proxy of another product they paid for, namely their phones, people don’t feel an obligation to pay for online services. So, many startups are trapped in this Catch-22 of preserving user base and making profits. Snapchat is one good example. After being released for seven years, brandishing nearly 200 million users and even selling shares on the New York Stock Exchange, Snapchat still makes no bottom line profit. In Q2 2018, it reported a net loss of $350 million, its revenue wiped out by high cost of revenue and research and development expenses. How can they and other social media firms get out of the hole?

Advertisement revenue seems to be the savior, but not for all platforms. Because usage of an app or website is key to exposure of advertisers, the platform must actually add value to a user’s real life instead of just providing distractions. Twitter, for example, offers up-to-the-minute information, while Yelp and TripAdvisor serve as basically online community bulletin boards of people’s experiences in stores, etc. Information from these platforms is the product and people are willing to scroll through some block ads to get to them. Not surprisingly, advertising is the main revenue source for almost all of these companies — out of Twitter’s Q2 $711 million of revenue, $601 million were from ads. Facebook and its subsidiary Instagram have an even more dramatic reliance on ads in return for its social networking capabilities. In Q2 2018, $13 billion of its $13.2 billion revenue were from advertising, roughly 98%. A measly $193 million are from a line item called “Payments and other fees,” probably from its new transactions services for Facebook friends. Instagram, a subsidiary, follows suit with major reliance on ads and that’s probably why its founders have just left to “explore our curiosity and creativity again.”

Others have had less success on this ad revenue reliance strategy. Snapchat, for example, tried to create a revenue source through its Discover feature with little progress. Just think, how many times have you swiped right to Discover when you snap? And if you did, probably inadvertently, how long did you pay attention to it? Probably no more than 5 seconds, and marketing executives worry about their content not being effective. A sign of its troubles with advertisers, Snap quietly ended paying upfront fees to its publishing partners earlier this year, signaling that usage and therefore, revenue, from Discover have been tepid. Additionally, Snap’s main product of sending quick, temporal photos to friends can be easily substituted by another startup, making their business model even more precarious.

As much as social media firms are sprouting and growing their users, the industry’s mission to find the Holy Grail of monetization have been fraught with uncertainty. While some firms can rely on advertising revenue, others like Snap are spinning their wheels or have simply closed, namely Vine and Yik Yak. The difference is that the successful ones offer a service that not only lives on the Internet but add intrinsic value of convenience or connections in real life. Only with a sizable and staying user volume can ad revenues, in lieu of subscription fees, sustain such a company.

Matthew Lam is a senior in the College of Arts and Sciences. The Despatch Box runs every other Wednesday this semester. He can be reached at [email protected]