I don’t usually blog about business here but, in light of the recent news of Twitter’s $15 billion IPO, I thought I’d revisit the idea that social media isn’t particularly good for capitalism. This idea – that social media isn’t a good way for firms to sell goods – would royally fuck with the business model of just about every major social media company, whose revenue is ad-driven. Disappointing revenue from social media ads = fewer ads = no more billion dollar IPOs for social media companies.
The logic behind a business model based on ad revenue is that if Y firm places ads on X social media platform, the platform’s users will buy that firm’s goods. But even big social media companies are admitting this isn’t the case.
When Facebook went public last spring and was trying to legitimate its high valuation it needed to show investors that ad revenue would continue to grow. This means it had to make an argument why advertisers should spend their marketing money on the platform. Yet even Facebook staff do not claim that there’s a direct advertising-sales relationship. From the New York Times’ Media Decoder blog:
“It’s a myth that Facebook is trying to figure out R.O.I.,” said Brad Smallwood, the head of measurement and insights at Facebook, using an acronym for “return on investment” or proof that money spent on advertising actually works. “Facebook is a demand-generation platform,” Mr. Smallwood said. “This is demonstrating that as you run messages on Facebook that it impacts people’s behavior when they are in store.”
I’m sorry, but “demand-generation” sounds like another word for “bullshit.” It’s basically taking a causal step backwards, saying that no, there isn’t a direct link between social media advertising and sales, but in some vague way we make people want to buy your product and we call that vague way “demand-generation.”
The same post includes results of research (conducted by Facebook, it seems), that they were able to find a causal link between Facebook advertising and sales for two companies – Target and Starbucks – but what was their total sample? For what percentage of advertisers is their no (or low) sales bump? You can’t just share the findings that support your theory, that’s not good research.
And what about free social media advertising, the so-called “buzz” phenomenon by which ecstatic customers love your brand so much that they share it with their friends for free and those friends then become customers? All I can say is, I have my doubts, and my number one case study is Nokia.
Nokia has great social media buzz. There is actually an entire genre of memes about how their phones are indestructible. But this free peer-to-peer advertising hasn’t helped Nokia’s sluggish sales (purple line in graph at left).
One way to interpret this is that the Nokia meme is a backhanded complement: the old 3310 model’s indestructibility is evidence of old-fashioned stability, which doesn’t help its image in the smartphone market, where style, design, and innovation are prized. However, this could also be seen as evidence that even significant social media buzz can’t counteract the market trends of a company that is hurting in other ways.
In this way, social media buzz (at least as measured by meme creation), is going against market trends. The meme at left mocks Apple’s fragile iPhone, while raising the Nokia to almost superhero status, yet Apple’s iPhone is outpacing Nokia in sales (red line of graph).
Again, just as Facebook’s evidence that social media advertising and sales are sometimes linked is not proof that theyalwaysare, the Nokia case is not proof that social media marketing and buzz never provide good return on investment. However, it is evidence that paid social media advertising and free social media buzz are only one part of a firm’s total sales context. It’s not a magic bullet. Then again, is anything?