How Do Social Media Make Money

How Do Social Media Companies Like Facebook and Twitter Make Money http://www.marketoracle.co.uk/Article42647.html Oct 11, 2013 - 12:44 PM GMT
By: Money_Morning
Tara Clarke writes: Over the last month we've seen Facebook's (Nasdaq: FB) dramatic share price rebound, Twitter's stock IPO announcement, and LinkedIn (NYSE: LNKD) stock on fire, but have you ever wondered... how do social media companies make money?
To find out, we turned to Money Morning E-commerce Director Bret Holmes. Part of Holmes' job is to utilize web advertising via social media platforms to best market Money Morning. As a result, he's on top of what's going on inside of today's social media giants.

Holmes said the key to unlocking value for social media companies is successful advertising models.
"Social media companies are legitimate advertising websites, no different than, say, Google or Yahoo. The same way Google made its money is the same way Twitter and Facebook will make their money," Holmes explained.
Web advertising is a growing market. In a 2013 Nielsen report, data showed that 89% of advertisers use free social media advertising, and 75% use paid social media advertising. The report also highlighted that 64% of advertisers expect to increase their paid social media advertising budgets over the course of 2013.
That means a lot of opportunity for social media companies to make major money.
The trick for social media companies looking to profit as ad platforms is to find the best way to insert advertising into the user's experience without impacting the user in a negative way.
For any doubters out there who don't believe that advertising methodology is hugely important to investing in social media stocks, take heed...
In late July, Facebook announced that mobile ads account for a whopping 41% of its $1.6 billion second quarter ad revenue. Facebook shares closed at $26.51 that day. But in after-hours trading, shares skyrocketed to nearly $31.
It's clear that advertising plays a huge role in a social media company's value - and the success of social media stocks.
To learn how to gauge which companies will succeed, here's how social media advertising actually works...
How Social Media Companies Make Money: A Lesson from Facebook
The Facebook initial public offering (IPO) was an unmitigated disaster. It lost more than half of its value within six months of listing and was priced at 107 times trailing 12-month earnings, making it pricier than 99% of all companies in the S&P 500 at the time.
But boy did it rebound.
From July through September, the Facebook stock price has more than doubled. On Sept. 30, it hit an all-time high of $51.5 a share, putting it $13.5 over its IPO price of $38.
It was advertising that undoubtedly turned the tides for Facebook.
"Facebook has gotten really good at advertising. It's new, it's inexpensive, and it's smartly done," Holmes said. "When Google first started, it wasn't good at advertising, and look at them now. Facebook is going to be a success story."
Here is what Facebook did to unlock its value and become what Holmes described as "the most advantageously competitive product on the market for advertisers, hands down"...
Originally, Facebook started with space ads. Then, it added self-promoting individuals' or a company's Facebook page. But things were still sluggish.
However, about nine months ago, Facebook developed a new advertising format.
"Facebook has integrated in-stream ads to the user experience. Response rates are high and advertisers will always chase the least expensive ad with the best response. It works because it's new and cheap," said Holmes.
In-stream ads can be videos. For instance, a commercial will appear before the user may watch an Internet video. The in-stream video ad will typically last 15-30 seconds.
On a social media site like Facebook, which has real-time update feeds, in-stream ads can be inserted into a streaming feed. So, for example, the user scrolls through the News Feed to see what friends and family are up to, and in-stream ads are peppered into the Feed.
By far the largest social network, Facebook saw over $1 billion in ad revenue at the beginning of 2013, and it's getting better at integrating ads into its News Feed.
"Recently, Facebook let advertisers access FBX, an ad exchange where you can customize your own ads," explained Holmes. "Now we can glean information and better target our audience. We can also advertise on mobile now."
The ad model is helping Facebook monetize its massive 1.15 billion users who increasingly access the site via mobile devices.
And to top it all off, Facebook continuously improves its method to provide performance-based analytics that are invaluable to advertisers.
Watching Facebook's advertising Cinderella story shows us a great deal about how advertising makes money for social media companies. Having taken a glimpse into the past, we can now see if Twitter - and its stock - will have the same success...
Twitter Stock Success Hinges on Ad Model
Just on Sept. 12, Twitter filed its IPO. And according to Holmes, its advertising will have to improve to make it a viable success.
"Twitter is going to start off similarly to where Facebook did last year," Holmes said. "Advertisers aren't flocking to Twitter. I'm sure it will try outside ads, and that will probably yield good results, but unfortunately for Twitter, it just doesn't have the right demographic."
According to an August study released by nonprofit research company Pew Internet, Facebook not only has by far the largest user base, but it also reaches an older demographic.
When compared to other social media sites, Facebook blows away the competition - as shown in this chart by Adweek.

Reaching an older demographic means you're reaching more users who click ads. According to PaidContent.org, women over the age of 50 have a 22% click rate, significantly higher than any other demographic.
"If Twitter can tweak its advertising and reach an older demographic, it will get closer to the kind of profitability that has fueled Facebook's rise over the last four months," Holmes noted.
Just yesterday, the Twitter IPO became official - the U.S. Securities and Exchange Commission filing was revealed to the public. The symbol is to be TWTR, though no exchange, pricing, or share information has been listed yet.
But will Twitter's IPO bomb like Facebook's?
Here are 5 reasons why we think it won't...
Source :http://moneymorning.com/2013/10/04/how-do-social-media-companies-make-money/

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Inside Facebook's money machine http://money.msn.com/technology-investment/post.aspx?post=869a1b6c-0bb7-47b3-ac0a-25d10f6a5404 The social network's biggest asset is its user base, which generates billions of likes and comments per day.
By MSN Money Partner May 17, 2012 11:28AM
By Julia Boorstin There's been a lot of talk about Facebook's valuation, but the real question behind that valuation is how Facebook makes money and what its prospects are. First: The value of Facebook's reach shouldn't be underestimated. Facebook had 901 million monthly active users at the end of the first quarter -- and it turns those users into dollars, primarily by showing them ads. It had 526 million daily active users at the end of the first quarter, 41 percent more than in the prior year. Users generated an average of 3.2 billion likes and comments per day in the first quarter, and there are more than 125 billion friend connections. Mobile is a huge driver of growth. The company now has about 500 million monthly average users. That's a potential source of revenue growth but also a challenge. The company only recently started running ads on its mobile platform, but it doesn't put as many ads on the mobile experience as it does on its website. Since mobile usage is growing faster than its overall usage, that means Facebook's ad revenue can't really grow as fast as its usage. Nuts and bolts: Facebook generated $3.7 billion in revenue in 2011, up 88% from the prior year. While that growth is still impressive, it's worth noting that revenue growth is slowing -- it grew 154% between 2009 and 2010. Growth continued to slow in the first quarter of this year, as revenue increased just 45% from the year-earlier quarter. And the company's earnings are bearing the weight of the costs of growing -- marketing, administrative costs, research and development, etc. Net income grew 65% from 2010 to 2011, to $1 billion. But in the first quarter of this year those costs weighed on the company's balance sheet, pushing net income down 12% from the year ago quarter to $205 million. How does Facebook make that money? The vast majority comes from advertising -- responsible for 82% of revenue in the first quarter of 2012. The company appeals to advertisers with its reach, but even more important, the fact that it can target ads with "relevance," based on all the personal information users decide to share. Perhaps more interesting, Facebook can target ads with "social context" -- which means highlighting users' friends connections with a brand or business. And people are much more likely to respond favorably to a message if they know a friend has endorsed the brand or just "checked in" at a store. What's the future of Facebook's ad business? It all depends on how well those ads work for marketers. But Facebook says its potential share of the nearly $600 billion global advertising market is huge, because it doesn't just compete with other online display ads, but also can compete with traditional offline advertising. The big question here, is how well its mobile ads work, and whether they annoy users accustomed to an ad-free mobile experience. The rest of Facebook's revenue comes from payments -- Facebook takes a cut when users buy virtual goods on games -- like a cow purchased for Zynga's Farmville. Users put in their credit card information to purchase those goods, and Facebook takes a 30% cut of Zynga's revenue, and a roughly similar cut from other companies. How big a business is this? The worldwide revenue from sales of virtual goods is expected to hit $15 billion in 2014, and Facebook aims to get a growing percentage of that market. Right now Facebook only takes a cut of payments for games. But the company says it "may seek to extend payments to other types of apps in the future." I'd expect retailers and entertainment companies to start offering more on the Facebook platform -- movies, live concerts, and clothing -- and for Facebook to start taking a cut. It won't be able to take the same 30 percent it gets from Zynga (ZNGA +0.28%), but if say, J. Crew, starts offering shopping without leaving Facebook, if the social network takes even 5 percent, that could be meaningful to its bottom line.

Tech Investing
How Do Social Media Companies Make Money? http://moneymorning.com/2013/10/04/how-do-social-media-companies-make-money/ With the Twitter stock IPO filing made public this week, it's time for investors to understand how companies like this plan to be rewarding for shareholders.
By Tara Clarke, Associate Editor, Money Morning · October 4, 2013
Over the last month we've seen Facebook's (Nasdaq: FB) dramatic share price rebound, Twitter's stock IPO announcement, and LinkedIn (NYSE: LNKD) stock on fire, but have you ever wondered... how do social media companies make money?
To find out, we turned to Money Morning E-commerce Director Bret Holmes. Part of Holmes' job is to utilize web advertising via social media platforms to best market Money Morning. As a result, he's on top of what's going on inside of today's social media giants.
Holmes said the key to unlocking value for social media companies is successful advertising models.
"Social media companies are legitimate advertising websites, no different than, say, Google or Yahoo. The same way Google made its money is the same way Twitter and Facebook will make their money," Holmes explained.
Web advertising is a growing market. In a 2013 Nielsen report, data showed that 89% of advertisers use free social media advertising, and 75% use paid social media advertising. The report also highlighted that 64% of advertisers expect to increase their paid social media advertising budgets over the course of 2013.
That means a lot of opportunity for social media companies to make major money.
The trick for social media companies looking to profit as ad platforms is to find the best way to insert advertising into the user's experience without impacting the user in a negative way.
For any doubters out there who don't believe that advertising methodology is hugely important to investing in social media stocks, take heed...
In late July, Facebook announced that mobile ads account for a whopping 41% of its $1.6 billion second quarter ad revenue. Facebook shares closed at $26.51 that day. But in after-hours trading, shares skyrocketed to nearly $31.
It's clear that advertising plays a huge role in a social media company's value - and the success of social media stocks.
To learn how to gauge which companies will succeed, here's how social media advertising actually works...