Why Aren’t Social Media Companies Making Money?

Eventually you get what you pay for.

Eventually you get what you pay for.

Because they give their best stuff away for free.

Why buy an ad on Facebook when a company can create an interactive, multimedia Facebook page and engage directly with consumers or customers for free?  What display ad can do that?

I recently attended a social media conference that featured a sales executive from Facebook.  He gave a dazzling presentation on the power of Facebook – all of it impressive:

  • One billion photographs are uploaded to Facebook every month (2,000 pictures a second)
  • 300 million people visit Facebook every month
  • 70 million people regularly use Facebook every day – in just the United States
  • One million people sign up for Facebook every day

But when he got to the point of his presentation to show the impact of Facebook – he didn’t have any advertising examples.  It was all about what companies and organizations were doing with their free Facebook pages.  For example, he spent a lot of time talking about how Facebook became an integral communications platform for opponents of the Revolutionary Armed Forces of Colombia.  The opposition started with a single voice and grew into a movement of more than one million people – using Facebook as an online base of operations.

Impressive?  Heck, yes!

But unfortunately it has nothing to do with advertising.  Because the FARC opponents didn’t buy any Facebook ads.

And really why would they?  Why would anyone?  Because aren’t the free Facebook pages are supposed to replace traditional advertising?  Aren’t the advantages of social media all about engagement?  One-to-one interaction?  So why pay for old-fashioned display ads – on a place people come to get away from display ads?

And that’s a large part of the reason why Facebook remains an unprofitable business today.  The company is stuck in a conrundrum: they give away their premium services but want customers to pay for their basic, less effective service. That’s like a transportation company offering free door-to-door car service and asking for customers to pay for bus service.  Good luck with a business model like that.

It’s not just Facebook that’s trapped in this quandry.  Twitter, FriendFeed, YouTube, MySpace and other social media companies are in similar situations.  For all intents and purposes, Twitter doesn’t even have a business model yet.  They don’t sell any advertising – nor do they have significant charges for any of its services to have any real impact on the bottomline (which if you haven’t guess is firmly in the red).

So far investors in social media platforms have been patient – allowing their properities to grow and – in the case of Facebook, Twitter and YouTube – become engrained into the mainstream.  But sooner or later, they will need to make money.  They are businesses.  And eventually what is probably is going to happen is what gives social media pundits a shudder:

They will charge a subscription fee.

Users will no longer be allowed to create a Twitter profile or a Facebook page without paying for it.  And when that happens it will open up a whole new conundrum for social media and people will begin to ask – just how valuable is it?

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