IAA Debates Bengaluru: The verdict: ‘Social media is not a good business’

The International Advertising Association India Chapter’s IAA Debates in Bengaluru presented by the Dainik Bhaskar Group on 26 July 2013 saw the verdict being delivered in favour of the motion: ‘Social media is not a good business’.

Arun Anant, CEO, The Hindu Group of Publications and Partha Sinha, managing partner, BBH India spoke ‘FOR’ the motion, while Ashok Lalla, global head - digital marketing, Infosys and Zerin Rahman, co-founder, IndigoEdge spoke ‘AGAINST’ the motion. The session was moderated by Sanjay Trehan, head – MSN.

Trehan set up the debate with some facts on the business of social media. One was Facebook’s ‘phenomenal’ 1.15 billion active users (monthly). He also quoted from a BusinessWeek report: only 2 per cent of venture capital funding has gone into social media start-ups the last quarter.

Engagement Vs interruption

Opening the debate by asking whether Rupert Murdoch (News Corp) was in attendance, Partha Sinha said, “If he was here, we could have ended the debate with the answer to just one question: ‘Could you tell us what happened to MySpace, your first ever venture on social content platform?’ I don’t think any other group has burnt their fingers as strongly.”

On Facebook’s revenues of around US $ 2 billion, with an advertising revenue contribution of around 1.8 billion dollars, Sinha inferred, “The social media business model is about advertising. Everyone says social media is all about engagement, and people get so engaged that they don’t know what’s happening around them. I agree. And, therefore, the business model is interruption.”

Quoting financial results (in US$, 2012) of Apple (market cap: 500 bn; revenue: 156 bn), Google (300 bn; 31 bn) and Facebook (84 bn; 1.8 bn), he said, “If you are to define a bubble, I think these will be the fundamental dimensions on which you can define the bubble. I don’t know whether it makes sense for fundamental business, which is: putting money and getting money back.”

“At the end of the day, the day social media can charge for content, and charge for being a part of the community or group, that day we will realise that social media has a very robust business model. The content and interruption doesn’t go hand in hand in this context, and therefore there is fundamentally something wrong in the business model,” he surmised.

Defining a ‘good’ business

Opening the defence, Zerin Rahiman wore the investment banker’s hat, and said, “What I will define as a good business is when the company rewards all its stakeholders: customers, employees, investors, entrepreneurs and the entire ecosystem. If you look at customers, 1.1 billion Facebook users in nine years, that’s like acquiring three lakh customers a day. Twitter: 500 million tweeting 300 million tweets a day. LinkedIn: adding two members every second. What is very clear is that the numbers are clearly growing and even the amount of time spent on social media is growing. So, customers are getting rewarded. If you look at the entrepreneurs, all the founders of Facebook, Twitter and Google, have amassed close to a billion or half a billion dollars each, in less than 10 years. Look at Accel Partners which invested US$ 10 to 12 million in Facebook eight years ago - they are sitting on 10 per cent of US$ 50 billion. With respect to employees, Twitter, with around 400 employees, clocks around half a billion in revenue and that’s around US$ 1.25 million per employee. Facebook is clocking around US$ 1.6 million per employee. So, if you look at all the parameters required for a good business, social media is coming at the top.”

“There is an interesting statistic which says that more people are now on social media than watching porn. Therefore, I believe social media is an amazingly sexy business,” he added.

Counter point

Rebutting the argument put forth on ‘good’ business, Anant said, “Lots of businesses are considered good when you are not in debt, when you are making good money, when you have a good amount of customers every day, and when you have loyal employees. For most of these (parameters), social media businesses don’t make a cut.”

He elaborated, “Are you in debt? All social media companies are spending their investors’ money. You might argue it is equity, but actually it is a different form of debt. Are they making good money for the amount of money these people are putting in? If they are not running their operations by the money being generated, then all of us know what it stands for. Do they have customers every day? From whatever I have heard, at this point of time, all social media companies are Section 25 companies because most of the examples cited so far are in terms of blood donation drives and so forth, which makes a good NGO. But, the discussion we are having is, does it make a good business? And, finally do we have loyal employees? Yes, I do think they have loyal employees because they are waiting for the next investor sucker to buy out the earlier one and work along with them.”

“History has shown that technology-based businesses with dominant market shares and apparently bullet-proof business models will eventually be replaced by younger, more innovative versions of themselves. And, that’s what happened to Orkut, Myspace and that’s what will soon happen to a Facebook or Twitter. The only reason it may not happen is because this definition says: ‘apparently bullet-proof business models’ which some of these don’t have. So, they will survive only because they don’t have a business model. The business model is the hope that there will be more and more investors replacing the earlier ones in the quest for the gold mine at the end. It is pretty much like the gold rush that happened in California where no gold was found,” he added.

“A lot of advertising revenue on social media comes from data, and we know that in the next few years, data privacy is going to become more and more relevant and people are going to share less and less data. If that happens, targeting of advertising for Facebook and Twitter audiences will become much lesser. Moreover, research points out that advertising is still most relevant and credible in print media and preferred television programs, and it is seen as a nuisance in the digital space,” Anant pointed out.    

Summing up his argument, he said, “So, with currently advertising being the only real revenue model for social media, which itself is not currently sufficient, and coupled with a declining trend in the future, we don’t see social media being able to make money.”

Doing ‘good’ for the ecosystem

Trying to expand the perspectives on the social media business, Lalla said, “Social is about people and social media has changed the face of media with people becoming the media. Social media provides access to brands to their competitor’s customers. If you listen smartly, you will know what your competitor’s customers are saying in real time, and create business opportunities. Social media also widens the reach of brands. If you are reading an article on NDTV.com and if you are signed into Facebook, everyone on your network could know that you are reading it. That is the width offered by social media. It allows cross-platform integration. You can read tweets on Facebook and watch videos on Facebook. Which traditional businesses actually integrate competitive businesses in this manner?”

Lalla cited examples of filmmaker Prem Kumar who crowd-funded his movie, a facility to book cabs using tweets in Bengaluru (which not only draws business but also markets the brand), and Shradda Sharma who became popular through her YouTube channel and was signed up by Marico as brand ambassador.

Verdict

The verdict at the end of the debate was delivered by the audience. Switching loyalties, several amongst those who were ‘AGAINST’ the motion at the beginning of the debate stood ‘FOR’ the motion after hearing arguments, delivering the verdict: ‘Social media is not a good business.’