This is the multibillion-dollar question: What makes social media websites worth as much as they do? This is especially intriguing when we apply the principles of economics used to measure worth of a business in other industries (like brick-and-mortar ones).
How much something is worth is usually linked to how much money it generates in profits (profitability) and its potential for growth. Dot.com companies have challenged this perception from the word go. Things are worth how much people estimate they’ll make in a sometimes-distant future. Dot.com companies became a bet on a futures market, and in this bet the power of the idea, and the players’ ability to execute on it, became the principal elements to determine value.
Many dot.com bets have been a bust (hey Pets.com I’m talking to you, or to you GeoCities the first social networking site that could but didn’t), but many more are still going strong and investors wait to cash in potential earnings on others.
The power of the idea, its strength, uniqueness and the number of people it attracts are the current sights of future financial gains for investors. Only this can explain deals like the recent purchase of WhatsApp by Facebook for US$ 16 billion, a company with 32 employees and almost no profits to speak of. What does WhatsApp have then to justify its purchase power? Potential, and plenty of it. 70% of WhatsApp users log into its service daily, compared to 61% of all Facebook users doing the same on Facebook. Social media networking sites thrive on user data, getting more people to come into the site and stay there longer, and getting to know more and more about those people (what they do, who they interact with and how they interact). The reason behind this quest for warm bodies and data is do they can be turned into monetary opportunities by letting advertisers pay to target users using this information.
As ads become more relevant, you can even say become more accurate (right for the people they are targeting getting, in turn, more clicks that turn into buys), advertisers are more prone to use that website to advertise since the site that delivers proves to be a great return on investment (ROI – the crux of all marketing campaigns). The big numbers draw in the advertisers (1 billion users, 500 million users, etc) and the ability to target them correctly because the website has the information to provide (left handed vegan mothers who live in Denver) is worth a premium.
No website worth its user base weight in gold lets advertisers have that information to keep, they get to use it, without actually seeing individual data, to target their ads and reap the rewards they are able to sow by accurately targeting their messages (and having those messages be of appeal to those they are targeting).
Back to US$ 16 billion WhatsApp, they process 50 billion messages a day. Just the amount of time people spend exchanging messages through this app, and the content they share (the information) can offer an unlimited potential for gathering data about people. If you are Facebook, with a healthy amount of data on file about many people and their habits, having the ability to cross-reference your base against info WhatsApp might have can be literally priceless.
Data is the mining gold that make social media websites worth so much. And it’s the best kind of data to, about habits, places, visits, interests, friendships, all those things that make advertisers salivate like a dog in from of a tasty bacon strip. Know what someone likes and you’ll likely to know what they’ll like next.
Two years ago McKinsey valued the social media economy at US$ 1.3 trillion because of its power to aggregate information to different sectors of the economy enabling brands to become more connected with their customers and allowing them to use this connection to know more about them and create better (more efficient) products. Knowledge is power and social media offers information about behavior markers that can be of immeasurable value to many industries.
Building relationships is the current holy grail of marketing, and not just any relationship but meaningful ones. Social media provides the best toolset to help brands achieve this goal. Not unlike a friend that sets you up on a date and provide meaningful information so you can be well on your way to strike up a new relationship (what the person likes, what his/hers interests are, a few background pointers), social media helps brand start the conversation on the right subject and get closer to people by showing they know them and know what they care about.
Selling information to facilitate this is where the money is at in my opinion. Getting to the point where you have meaningful information to sell is where the business currently is for social media websites. This means building a user base, gathering information about them by making them spend more time at your site and interact more using it.