Social Media - Friends, Followers and the Value of a Following

By Maxwell Fisher - September 15, 2012 | Tickers: AAPL, FB, GOOG, MSFT, YHOO | 0 Comments

• Email
• Print

Now that Facebook (NASDAQ: FB) has received approval to use stock in its acquisition of photo-sharing application Instagram, and its stock has fallen so much in price that the value of the transaction fell to roughly $740 million from around $1 billion, it begs the question what other deals could be in the works. Remember, Instagram has never made a dime. It is entirely a company without revenue.

Facebook CEO Mark Zuckerberg negotiated the deal directly with Instagram founder and CEO Kevin Systrom, with the intention of giving roughly 1% of Facebook’s equity for Instagram. Facebook's head of corporate development, Amin Zoufonoun, said that “factors considered by Facebook in assessing Instagram included its growth trajectory and the value of its brand,” writes the Wall Street Journal.

In other words, people like the service and more people are using it everyday – but the idea of a revenue-less company, moreover a company that never even tried to generate revenue, is unique. Now, Facebook has to find a way to monetize the service, and there is really only one course for that monetization to take – advertisements.

These ads are targeted to users based on the pages they “Like.” Now, according to the Wall Street Journal, Twitter’s “new ad-targeting strategy... follows in the footsteps of Facebook, which long has let advertisers pitch ads to people who indicate they ‘like’ certain brands or topics on their Facebook pages.”

"This has been one of the most interesting things that Facebook has had to offer to advertisers," said Jonathan Strauss, co-founder and chief executive of social-media marketing firm Awe.sm. "For Twitter to do their own version makes sense."

In both the case of Facebook and Twitter, targeting ads involves a bit of demographics and statistical probability and a lot of guesswork. But, there are also some crucial differences between the companies approaches. “In this type of interest-based targeting, Facebook may have a leg up in determining users' hobbies and interests, because people tend to include those as part of their Facebook profiles. Twitter, which collects less personal information about its users, has to extrapolate people's interests based on the kinds of people or companies a user chooses to follow,” notes the Wall Street Journal. “Twitter said it doesn't target ads based on the text of a user's Twitter posts, known as tweets.” Instead, the service looks at the people and companies the user follows to determine his or her interests, so if someone lists “football” as an interest and follows several teams, football personalities, and sports commentators, he or she is likely a football fan.

This is roughly the same way that search engine giants Google (NASDAQ: GOOG), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) and Yahoo! (NASDAQ: YHOO) target their ads – they look at what a person searches for. Also like the big search engines, Twitter and Facebook have started using location-based technology to better target advertiser messages as well as produce better search results for users. These companies look at how a user connects as well, so that mobile user may see different ads or search results than someone who is using a laptop and Mac users may get different results or ads than PC users.

My question is where does it stop? How long will it be until users logging into Apple’s App Store will receive recommendations app recommendations based on applications installed and which are used most? Moreover, how long will it be until deeper search engine and social media integration pulls all such information together?

Google already allows users to search personal email alongside local search results and traditional search results, and it currently has 67% of the search engine market according to comScore. Microsoft has almost 16% of that market while Yahoo! has 13% and AOL 1.5%. What if those companies provided some integration into social media or into user operating systems? Obviously, this is the direction things are going – Google has its social media offering Google+, and it is only a matter of time before other search engine companies seek to gain the same advantage in targeting ads and producing relevant search results – the question is how can you profit from that trend?

I recommend looking to the big players. Facebook is down but not out and it is really everywhere. People will continue to use the social media giant regardless of whether its IPO was priced fairly. Further, they will continue to use it over Google+ because all their friends are on Facebook. It is a matter of buy-in.

 I would also look to the companies that are making early inroads in social media. For instance, Apple integrated Twitter into its operating system and a Facebook update is rumored to be on the horizon. This integration allows users to post social media from just about any application without leaving the program. I think this will be an added incentive for both Twitter and Apple going forward, as well as Facebook if the integration materializes.

 I recommend steering clear of the smaller players like Yahoo! and AOL. The odds that either company could rise to the level of Microsoft or Google is highly unlikely and, at a minimum, would take more years than most investors are looking to spend on such a play. That said, investing in social media is not a short-time frame prospect. While social media is firmly integrated in the lives of most consumers, the idea of integrating social media throughout other technology is relatively new so uptake will be slow. Look toward a medium-term time frame of 2-5 years for the best return.

Dig Deeper

After the world's most-hyped IPO turned out to be a dud, most investors probably don't want to think about shares of Facebook. But The Motley Fool has outlined some things every investor needs to know about the company in a new premium research analysis. Access your report by clicking here.

• Email
• Print
• Feedback