This two part series is a more detailed consideration of several themes and ideas that have been discussed on this blog previously, in a more logical and researched presentation.

This part one considers the transitioning incentives of social media services. Part two will consider the role of advertising as well as present a strategic solution.

Please feel free to contact the author Al McCann if you would like access to any footnoted references.

Introduction

According to recent research by Adobe, 50% of marketers lack confidence in their digital ability. The study — Digital Distress: What Keeps Marketers Up at Night? — makes for interesting reading because it confirms the complexity of inputs impacting marketing decision-making today.

It is understandable that anyone working in marketing communications today — regardless of experience in any capacity — would ruminate on the appropriate steps to add value.

Media consumption habits have shifted almost entirely from print to screens, as 90% of media is now consumed via a screen.1 Behaviours have changed too. 4.4 hours of leisure time is spent in front of screens each day.2 And standing apart is hard. The average person passively sees between 1,500 and 20,000 brand impressions every single day.3

In this environment, the customer path-to-purchase is complex and can follow various channels, mobile screens or tablet screens. And yet it is never clear which part of the path-to-purchase a customer is at, forcing communications to target all stages of the customer path-to-purchase at all times.

It is imperative that marketers develop a strategy to operate successfully in this environment. This essay brings into focus several important considerations in this task.

The social media environment has evolved

Generally, social media businesses adopt an advertising supported business model. Utilising this model, these businesses serve two separate customer segments: users, whose use of the service is provided free-of-charge and whose attention the business monetises; and advertisers, who purchase advertising products that distribute their messaging to the user base. In terms of targeting two separate customer segments, the business model is identical to any advertising supported magazine or newspaper.

Over a ten year life span from startup to mature publicly listed company, social media businesses progress through two distinct strategic phases.

In the first, the company aims to grow the the size of the user base as quickly as possible and to maximise the ‘stickiness’ or amount of time users spend using its service. This phase is undertaken while a private company and generally with external funding sourced from venture capital. In this phase, the company is incentivised to maximise the value and experience of its service to users as a means to increase their number. Consequently, the company will undertake policies mutually favourable to both user and advertisers, such as offering advertisers free access to the audience via products like Facebook Pages.

In the second strategic phase, the company aims to understand the value of its user base such that it may list on a public stock exchange at an appropriate valuation that justifies the risk taken by its initial venture capital investors. Upon listing, the public company strives to monetise its user base subject to the rigorous return on capital expectations enforced by the public markets.

Almost all prominent social media services popular in Australia are now publicly listed companies with obligations to shareholders to maximise their advertising (and services) revenue: Facebook (NASDAQ: FB), Twitter (NYSE: TWTR) , LinkedIn (NYSE: LNKD), Google+ (NASDAQ: GOOG), YouTube (NASDAQ: GOOG) and Instagram (NASDAQ: FB). Pinterest is the only prominent service not listed on a public stock exchange.

Importantly, this has implications for all businesses utilising social media as customer acquisition or marketing channels. These listed public companies are no longer in a growth phase nor seeking to distribute as much value as possible to stakeholders (users, developers, advertisers and other social media services) to maximise the network effect of their service. Rather, as mature companies they must now extract maximum financial value from the ecosystems they have built up over half a decade or more.

Public social media companies have shifted focus to profitability

A social media service is an ecosystem or extended system of value, relying equally upon input from users, developers, advertisers and other services to deliver an overall user experience. They rely on network effects, much like the telephone system relies on everyone owning a telephone to be of any use to anyone. As such, a social media service may be viewed as an accord between a platform owner and its stakeholders.

However, under the control of public markets the owners of the prominent social media services (in Australia) must now ultimately act in their strategic and financial interests.

Paying for audience access

The long-term trend will be for brands marketing via the services to be afforded less reach from the free channel or products. Instead, brands will be pushed into paying for access to ‘their’ social media audiences and this customer acquisition channel, thereby maximising advertising revenue for the media company. This means paying more for content to be surfaced and prioritised amid the sea of content flowing through the service. In the clearest indication of this emerging trend, as of December 2013 Facebook is now advising brands to use its advertising products and services rather than rely on the free distribution provided by its Pages product.4

It is foolish for any business to view the audience of followers it currently accesses on social media services as its own, or perpetually accessible at zero cost.

Platform risk

The strategic interests of the media company generally coincides with the interests of all stakeholders, although not necessarily. There are recent examples when modern media and advertising businesses have acted against the interests of certain stakeholders in favour of the broader strategic interests of the platform ecosystem as a whole:

From open to closed ecosystems

Similarly, the public media companies are no longer incentivised to share access to valuable aspects of their data and usability as they once did as start ups. In effect shifting from ‘open’ or expansive extended systems to more ‘closed’, restrictive or controlled ecosystems. An early example of this is the current turf war between Twitter and Facebook relating to direct in-app access on Twitter to photos hosted on the Facebook subsidiary Instagram.

Losing your voice

Social media services rely on users sharing or creating content on their platform because its the content that makes the service valuable to users. Importantly though to profitability, the more content that flows through the service the more items the service has to wrap in advertising.

This duality is the reason Facebook’s stated mission is “to give people the power to share”.5

There are now one billion items posted to Facebook every single day.6 Unfortunately for any businesses that has invested heavily in buying followers to its Page, the Facebook ‘like’ database is now akin to an email database in terms of the open rate of posts and click rate of links. It is usual to reach only 10% of the total followers of the Page for any given post, depending on EdgeRank – the algorithm Facebook uses to determine the relevance and authority of content.

It is increasingly clear that brands will derive value from customer acquisition channels they own and control, rather than relying solely on channels owned by public media companies like Facebook, Instagram or Twitter. To mitigate risk, valuable relationships can be developed in communities entirely owned or controlled by the brand in question.

Part two of this post considers the role of advertising as well as presents a strategic solution.

1. Google/Ipsos/Sterling Brands. The New Multi-Screen World: understanding cross-platform consumer behaviour. 2012

2. Google/Ipsos/Sterling Brands. The New Multi-Screen World: understanding cross-platform consumer behaviour. 2012

3. Eric Johnson. Founder & President. Ignited.

4. http://adage.com/article/digital/facebook-admits-organic-reach-brand-posts-dipping/245530/

5. Facebook Investor Relations: http://investor.fb.com/faq.cfm

6. Facebook Form S-1. February 2012.