The billion-Dollar Social Media question

Columbia Business School professor Rita McGrath examines innovation, corporate venturing, and entrepreneurship. Her most recent book is Discovery-Driven growth (2009).

1: 28 PM Monday 21 may 2012 | Comments

The Facebook IPO has inflamed a predictable frenzy. It is certainly true that social media have changed the way we communicate, deep find information and network — but the billion-dollar question is whether all these activities generate solid economic efficiency goes.

The conversation about the business model behind sites like Facebook, Twitter, LinkedIn, and Pinterest reminds me of the discussions that took place during the 1990s tech bubble. There is just the same faith that, if we can get adopted a new technology, the business model will follow. People also seem to be obsessed with the number of users, who eerily reminds me of the lust for "eyeballs" that characterized the first wave of Internet-based companies. Just when we thought a lot of people to a site was worth something (remember WebVan? Or value America? Or Pets.com?); Today thinking we have millions of users spending time on a site is worth billions.

The algorithm that we do not yet have is the one who spent time on a site in revenues for the company hosting the experience translates. Unlike a membership or subscription dependent organization, Facebook and its relatives of either users or advertisers buying money on other activities, such as games, to generate revenue. The fact is that these dependencies are largely based on untested assumptions about user behavior — specific, or user behavior will eventually be buyer behavior.

We also see a bit of the "get really fast big" mentality that was so prevalent back in the day. Facebook has been, I think, about this smarter than many others; She started with niche markets and gradually expanded outwards. (The greatest sign-ups these days are of Baby Boomers!) Contrast that with GroupOn, a company that has grown like crazy, but it's not super smart about its business model. Size and ubiquity (and their famous on-the-ground sales force) will not compensate for the lack of stickiness and indispensability.

My biggest concern with the commercial model for social media, however, is that I don't see how they're going to deliver complete user experiences in exchange for payments or advertising. I've written for a long time about the need for companies to make a complete "consumption chain" in order for their products or services in order to be successful. A consumption chain is the total set of activities that a customer goes through in order to get their needs met, or their job done. When a link in the chain is unfulfilling or broken (or more than the customer actually wants to offers), breaks down the business model.

Social media have some of the links in the chain perfectly covered. But they make no payment easy delivery is specified and there is no certain social advantage over buying a party or another. On Amazon, in contrast, are you expecting to be sold something (it is not a break in a social conversation); They cover every link to ultimate disposal; and it is easier to do business with them than to cobble together a solution from many different players.

Contrast of the two experiences. Say you hear about a cool new something or other — say a handbag — from a friend on Facebook, or via a Facebook ad. If you want to buy the handbag, you have to visit the vendor's site. Next, find the model you want. Then dig out your credit card and enter a ton of information about payment and shipping. Then (probably) paying more for shipping, etc. The experience takes a lot of effort, and it fragmented. Shoppers are very likely to fall somewhere along the road. Let's have the same experience on Amazon. An image pops up saying, "people like you bought this handbag." You click on the handbag. There it is. You click one mouse click — there is your payment and delivery information. And if you are a member of "prime", there is no delivery charge. It is easy and effortless, all the way through the whole process of purchase and delivery. Facebook and other companies similar to being a long way from with something similar to offer advertisers. And of course, if the advertising on Facebook is really fascinating and interesting, why would an advertiser they pay function?

I'm not down on the promise of social media at all — but I think a lot of experiments will have to take place before we know what the economic model. And that could spell "bubble."

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