Data Center Journal

VOLUME 36 | FEBRUARY 2015

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THE DATA CENTER JOURNAL | 19 www.datacenterjournal.com In light of these considerations, the business model of social networking—per- haps with the exception of Facebook for the present—may require revamping. A diversified company like Google can afford to lose money on its social network, but a dedicated company like Twitter may be prime for acquisition or worse if it is un- able to turn its financial fortunes around. New arrivals on the social-media scene face similar difficulties; to be sure, some innovative approach might surprise, but it will need to be just that: innovative. sociaL meDia Quo vaDis? Although Facebook appears to still be on a path to growth, the circumstances for its competitors seem less certain. And even the market leader is facing questions about the effectiveness of its advertising model. One of the principles of establishing a social network is to gain an audience. User growth has its limits, however—ultimately in Earth's total population, but realistically in some small fraction thereof. Facebook has surpassed a billion active users, but its growth among online adults has stagnated, according to the Pew Research Center's report "Social Media Update 2014." By contrast, the competition has seen accel- erating growth. Facebook went from 67% of online adults in 2012 to 71% in 2013, according to the report, but remained at 71% for 2014. Pinterest saw steady growth over those three years, rising from 15% to 21% and then 28% in 2014. As Twitter has shown, however, volume is no cure for a losing business strategy. In addition, the once burgeoning mobile-device market has shown signs of cooling off, meaning less hope for a quick "shot in the arm" to social networks. According to an IDC forecast from late December, smartphone unit shipments will see a compound annual growth rate of 10% between 2014 and 2018—still strong, but nothing like the explosive growth of preceding years. For new entrants into the market, and for those that are still private, going public can provide a quick rush of capital, but it also ties the company to the demands of shareholders expecting returns. And with the market likely in bubble territory (on the basis of the fact that no systemic changes have taken place since the last crash, to say nothing of the dot-com crash at the turn of the millennium), publicly owned social networks face an even greater threat. e question, then, is whether all those details about users' lives—what they do, eat and buy; with whom they share relationships; what they like; and so on—are worth the billions of dollars of advertisement revenue and data-brokering agreements. sustainaBLe Business moDeL? On the surface, a social network seems like a great place to advertise: in addition to getting access to potentially hundreds of millions of users, the provider knows such minute details about its clien- tele that advertising can be finely targeted. Unfortunately, no one seems to know whether this approach actually works. According to Forrester VP and principal analyst Nate Elliott, the easiest means of measuring return on advertis- ing investment, "social engagement," is simply unreliable. "I understand that it's hard to measure social success: Marketers tell us measurement is their single biggest social challenge. And I know that track- ing engagement feels like an easy option. But the simple fact is, engagement is not a useful social marketing success metric. We've spoken with scores of social vendors who measure engagement, and none has proven if—or how strongly—engagement correlates to business success metrics like loyalty or sales," he said in a blog post. El- liott also said in another post, "Aer years of pushing brands' reach lower with one hand (and opening marketers' wallets with the other) Facebook has finally announced the end of organic social marketing on its site...[T]he social giant warned brands that 'Beginning in January 2015, people will see less of this type of content [promotional page posts] in their News Feeds,' and ad- mitted that brands that post promotional content 'will see a significant decrease in distribution.'" at doesn't mean there's no way to measure the value of a social-media cam- paign, but accurate measurements require more work than simply counting up likes and retweets—even if you ignore "fake" activity such as nonexistent followers and interaction from like-mills. And absent a demonstrable relationship between social-media activity and sales, businesses will be hard pressed to continue handing precious resources over to Zuckerberg and company. According to a Gallup poll in late 2012 and early 2013, 62% of respondents said social media had "no influence at all" on their purchasing decisions, and 30% said it had "some influence." Assuming these numbers are representative, adver- tisers should at best cut a social-media provider's user count by two-thirds to get a reasonable estimate of how many they might effectively reach—and even that high a fraction may be a stretch. at leaves data brokering as the main alternative revenue source. But this business rests on the assumption that users will continue to view their data as worth nothing more than the ability to interact with others via a particular service. Should privacy concerns begin to weigh in (a rath- er unlikely scenario), or should users start gaining a sense that their data is worth more, margins for brokering data could shrink. Either way, the business model for social media remains precarious. concLusions Social media faces some tough questions about its future. Apart from Facebook, which has all but cornered the market for non-specialized social network- ing, profitability is a major sticking point. Twitter has demonstrated that growing out of a losing business strategy is tough to do, and chasing growth has its own limits. Clearly, users demand social-networking services, but the value of the data that they trade for those services may turn out to be less than the costs of operating all the necessary IT equipment and performing peripheral functions. e future for social media will thus depend in large part on whether the existing business model is sustainable, and if not, how providers will adjust their strategies to recoup costs. n

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