Why I Won't Invest in Social Networks (Yet)

Erin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I have worked in social media marketing since before we coined it 'social media marketing.' I look at social media tech stocks from a very different point of view than most investors or analysts. I do not look at them from the perspective of cash flow and profits. I look at them and analyze their value as a tool, and then look at the numbers.

IBM released shopping and online retail performance data following Cyber Monday.  Online shoppers turned Cyber Monday into the biggest spending day ever with online sales growing 30.3% over the same period last year, according to cloud-based analytics findings by IBM.

Shoppers referred from social networks such as Facebook (NASDAQ: FB), Twitter, LinkedIn (NYSE: LNKD) and YouTube (owned by Google (NASDAQ: GOOG)) generated 0.41% of all online sales on Cyber Monday, a decrease of more than 26% from 2011.

Let’s repeat that. Cyber Monday online retail sales grew 30.3%, but sales referred by social networks decreased 26% to a measly .41% (Black Friday online sales also grew a respectable 20.7%).

With numbers like that how can anyone argue for the fiscal perks of social media? Don’t get me wrong--I like social media. I actively use Facebook, LinkedIn, Twitter, and YouTube every day. But I do not endorse social media as a wise financial investment or as a business tool. It all comes down to something called “commercial intent.”

Social networks have to make money. And thus far, the only way the networks have found to monetize is through ad sales. And when users are on social networks, they are there to socialize and interact with other users. They are not there to shop. When people are shopping, they have what is called commercial intent, which means they are looking for something they want to purchase. No one has ever said, “I need a plumber. I think I’ll get on Facebook and look for ads for a good plumber.”

Commercial intent does not exist on Social Media. These websites are there for the purpose of conversation and interaction with others.   Bradley Horowitz, the Google VP in charge of Google+, compared an advertisement on Facebook to a man wearing a sandwich sign walking up to a couple of people having a conversation on a sidewalk.  No one wants to talk to the sandwich sign, and it is an unwelcome interruption.

In 2011, Google AdWords represented 9% of all online ads. Google ads brought in $36.4 billion in revenue for the company. An advertiser pays for an ad once a user has “clicked through” on the ad (and not just for the exposure of the ad). Click-Through-Rates (CTR) are very important to advertisers. A high number of eyes on the ad means nothing if the CTR is low. Comparatively, Facebook represented 17.1% of online advertising, with $3.7 billion in revenue. Facebook generated nearly twice as many ads as Google, but only made a fraction of the revenue. CTR on Google is very high. It is very low on Facebook.

Why? Commercial intent. No one gets on Facebook to shop. But Google is the modern-day yellow and white pages. It is where users go with the intent to find information and products. The Facebook (and Linked In, for that matter) business models are intrinsically doomed to fail. If ad revenue is to be their main source of income, and users are inherently annoyed and turned off by their advertisements, how is this a recipe for success?

As a business advertising tool, I recommend Google over Facebook every time. (As a social media professional I never say not to get on Facebook. Businesses should build profiles on Facebook, but that is all. They should not waste any further time or money beyond that.)

Facebook boasts 500 million active users per month (out of a total 1 billion subscribed users).  Businesses cannot help but be drawn to the potential ability to reach that many users. But, Google (in 2011) averaged 4.7 billion search queries per day! Google clearly has the advantage over Facebook with commercial intent and in user audience potential.  

The true value of social media is that it is a tool for communication. As a medium, social networks provide a very effective communication method for businesses and individuals to share a message. Social media is a business tool for communication that has not proven its ability to become profitable. As long as the business models of the social networks continues to rely on the advertising investments of other businesses, I cannot endorse them as a wise financial investment.

The numbers for social networks are still young. The financial reports and analyses have not stood the test of time. As a social media “expert," I can appreciate these networks as business tools. But I cannot in good faith put my money behind them when I cannot see the long-term viability of their business models.

ErinAnnie has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, Google, and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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