Why Social Media Is Worth Money

I decided to do my blog post on social media and all of the random applications that really don’t serve a real purpose but we consume them in huge quantities anyways. One could say the social media sensationalism started with Myspace, which soon turned into Facebook, and from that point, we’ve consumed numerous applications such as Tinder, Instagram, and Yik Yak. What I wanted to explore is the fuel of this huge consumption of social media and random applications.

Facebook was founded in 2004 which in my opinion marks the start of an era. In the past 11 years, numerous applications and other social media services have popped up and many have managed to become quite successful in this relatively short time. Yik Yak is a newer social media platform that came into existence in the past year or so. It basically allows users to post anonymously to their area (a 10 mile radius around their location) and to read other anonymous post in the area. That is the complete service that this application provides. However, despite the simplicity of this application, Yik Yak, only a year after its launch, has almost 75 million dollars of new financing. Furthermore, Instagram, a photo sharing service was bought by Facebook for 1 Billion dollars in 2012, now has an estimated worth of about 35 billion dollars. Instagram has also recently hit the market of approximately 300 million users.

Where does this value come from? Why are people willing to invest money into services that do not require any money from consumers? It turns out, you do not have to require consumers of a product to directly pay money in order to generate revenue.

One such method to generate revenue is offering consumers a basic model of the service and then offering an optional enhanced version of that service for a price. An example of this would be Tinder and Tinder plus, Tinder plus being the enhanced tinder version that consumers can buy for extra options. Pornhub would also be an apt example of this method of revenue generation. Users who subscribe to the service and actually pay money get more out of the service.

Another method of generating revenue is offering consumers virtual goods for real money. Examples of this include facebook presents for friends. Furthermore, many “gaming” applications will offer cheats and shortcuts for money. This method of generating revenue is interesting because the price that consumers pay is real money, but what they receive is in no way tangible. The variable cost of offering consumers “10 hours off of the time to hatch your dragon” has to be next to nothing! Although I doubt most people are invested enough in their applications to actually buy something virtual for real money, the cost of offering this option has to be extremely low, and therefore easy to turn a profit on.

The most effective method of generating revenue has to be from advertisements. Social media and applications in general are essentially ubiquitous around the world, and therefore reach a huge pool of consumers. The basic gist of how it works is companies pay to air advertisements through outlets to get their products exposure. Ads comprise a huge percentage of income for most social media outlets and is growing. From 2011 to 2014, social network ad revenue has grown from 5 to almost 12 billion dollars.

Sources:

http://www.statista.com/statistics/271406/advertising-revenue-of-social-networks-worldwide/

http://techcrunch.com/2014/11/14/yik-yak-is-close-to-closing-on-roughly-75-million/

http://fortune.com/2014/12/19/instagram-could-be-worth-35-billion/

http://mashable.com/2009/07/14/social-media-business-models/

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One thought on “Why Social Media Is Worth Money

  1. taylorqjohnson says:

    It is interesting to think about how people benefit (socially) from joining social media websites even when they are not directly paying for their membership on that website. I wonder if the advertisements shown on these websites could potentially be considered “costs” that consumers pay for using the website (because the advertisements convince consumers to purchase other goods).

    Like

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