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Social Media and the Hunt For Revenue

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

When rumors of a Facebook (NASDAQ: FB) IPO first hit, the primary concern was revenue. A secondary concern, mostly amongst its users, was whether an IPO would change the social network they’d grown to love. Has the hunt for revenue manifested itself in ways detrimental to the user base? A recent post from New York Times tech writer Nick Bilton raises the question again, pointing to a potential grey area for the company and for social media in general.

Bilton’s story starts with a noticeable drop in interactions, which spurred him to use Facebook’s promoted post function. For $7 a post, Bilton was able to make sure his content was visible and was rewarded with an impressive 1000% increase in engagement. This then led Bilton to question whether the company was intentionally depressing engagement to push its paid feature to the forefront.

From a user’s standpoint, it is clear that such behavior is problematic. It is also clear that Facebook understands that such behavior would be a public relations nightmare, as evidenced by what appears to be a reply to Bilton in this blog post. While Facebook sells advertising, I think at this point all parties involved know the real product is its user base. Milking users for revenue is analogous to looking for the cheapest way to produce a physical product; tradeoffs must be made. As a Facebook user I certainly don’t welcome such behavior, but from the business’s point of view it is a necessary evil. The real balancing act is to extract as much value as possible while still providing a service people are willing to contribute to.

The same can be said across the social media spectrum and may be the reason LinkedIn (NYSE: LNKD) and its performance are an exception. LinkedIn has nearly doubled since its IPO, while other social media companies have seen their share prices flounder. I’d argue this is due, in part, to an alignment of incentives.

LinkedIn’s revenue is driven by three business units: talent solutions, marketing solutions, and premium subscriptions. While all three target different segments, the unifying thread is placing talent workers with companies that need them. LinkedIn’s user base is more than happy to participate because the company delivers tremendous value in the process of generating revenue and it seems this synergy is paying off. In its most recently announced earnings, the company managed to blow away Wall Street’s expectations. LinkedIn’s EPS came in at $0.35 a share, compared to expectations of $0.19. Additionally, revenue grew 81% on a year-over-year basis, impressive by most standards.

Unfortunately, at least for other social media companies, LinkedIn seems to occupy one of the few niches where incentives align. While Facebook’s advertising isn’t completely at odds with what the users want, it isn’t something they’re looking to actively take advantage of. As it looks to innovate and add features like post promotion and messaging fees, it also opens up grey areas that may engender user distrust.

Even companies like Yelp (NYSE: YELP) suffer from a similar issue; monetization doesn’t necessarily add value and can harm it. In Yelp’s case, approaching businesses for anything other than advertising revenue destroys their entire model. It is such a big issue that Yelp has a myth busting webpage dedicated to dispelling various myths about how the company operates. However, Yelp is continuing to monetize. Recently the company announced the addition of display ads to its mobile app, but will have to do so cautiously to avoid completely disrupting the user experience. In March, Taco Bell and InterContinental Hotels will appear exclusively in searches for their respective categories with the option opening to everyone in April. While these are clearly display ads, they still take valuable screen space from local businesses and their reviews.

The point is that social media companies depend on their user bases to create value for shareholders. Accordingly, they have an incentive to squeeze as much revenue as possible out of the user base which puts companies like Facebook in an awkward position. They’re forced to walk a fine line, monetizing while trying to avoid compromising the user experience too much. Because of this, LinkedIn seems poised to remain best in breed for the social media space, at least in the near term.


TigerAnalyst has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook 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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