Success mantra for social networks

• How smartphones and rising internet penetration influenced the industry?
• What differentiates a popular social network?
• What lies ahead in the industry for established and new players?

In 2004, Google’s social networking website, Orkut and its only major competitor, Facebook commenced operations. Orkut was an open social networking site, whereas Facebook was initially focused on graduate students. Further, Orkut was leading the social networking space (around 2007-08). However, six years down the line (2014), Google shut down Orkut’s operations, while Facebook reached the pinnacle with users in each and every part of the world. Similarly, there were numerous social networking firms which seemed a lot more promising but failed. The present blog explores the factors, which may decide the success of companies in this space. Moreover,  it explores the scope of growth within the industry. But prior to this, Televisory examined, what led to the exponential growth of the industry?

Smartphones and boom in social networking

The social networking platforms existed earlier as well (2008-09), with companies such as Twitter, Facebook, Orkut, Renren, etc. However, few of these companies realised the true potential of their popularity following the advent of smartphones.

Smartphones sales grew exponentially after 2009 and enabled the use of the internet on mobile. This supported the growth through increased penetration of the internet globally.

This started the new era of growth for social media and networking on the move. Social networking companies witnessed a rapid growth in their user base and increase in average time spent or active users on social networks since 2009.

New opportunity and revenue streams

Prior to the affordability of smartphones, social networking websites relied on desktop advertising. Thus, the use of social networks was limited due to the immobility of desktops. However, growth in smartphone sales and rise of mobile applications use enhanced the possibilities of reaching out to the target customers in a fast and frequent manner. Consequently, advertisers started moving from desktop, TV and magazine to mobile advertising. The internet accounted for roughly 36% (2016) of the global ad spend as compared to 15% (2009). Hence, sensing the opportunity various firms started launching the mobile applications for better user experience. Social networking companies witnessed a higher revenue growth after 2009 and presently, these are observing a sub-50% growth, this is significantly high.

Furthermore, with the passage of time, the advertisements became the mainstay for numerous social networking companies and their contributions reached as high as 80-100%. Secondly, revenue source for companies converged to advertising. The below chart shows the contributions for various firms. But LinkedIn is an exception, which earns its revenues through premium subscriptions.

In the below chart, a sharp uptick for Twitter Inc. (FY 2011) was an outcome of the launch of key advertising initiatives, which led to the growth of revenue from advertising. On the other hand, the share of advertising in total revenue increased for Renren Inc. as contribution from games subscription business declined at a higher rate. This division was ultimately sold off in FY2015. Thus, it can be stated that generally, the companies in this space tend to move towards high advertising revenue based on rising user growth. 

However, there were certain social networking firms which were unable to maintain their user base and thus, lost their advertising revenues to competitors. Hence, as a result, either a company turns out to be popular via network effect or ceases to exist.

What makes a social networking company successful?

Orkut from its inception in 2004 to early 2007 had the edge in social networking as compared to the players such as Myspace and Facebook. While Facebook was popular among university students in the United States, Orkut had already established a user base in the USA, Brazil, India and a few other Asian nations. However, Google was unable to identify the potential of the ancillary project it created. The company did not spend on the R&D and Orkut stagnated.

The aforementioned were the factors that led to the exponential growth of the industry, which were evaluated by Televisory. The key elements, which kept the social networks active are discussed below:

• Maintaining user interest

The successful firms in social networking space have continuously invested in R&D and this is the most significant aspect which keeps these companies relevant and exciting for users. Additionally, most of the successful companies bear an R&D expense of 30-40% from their revenues.

Facebook persistently invested on upgradation of its website, tweaked the interface, developed virtual products, mobile applications, etc. It remains the top social network with over a billion users accessing the website daily. Twitter is one of the top social networks and it has been introducing new features such as video auto play, buy button (this directly lands on sales page of the advertisers), call buttons, video views, moments and embedded tweets. These innovations make social networks more lucrative and create a sticky base of users. On the other hand, Myspace, once a promising website (2006-07) lost the user base due to lack of innovation, this caused the migration of its users to other platforms.

• Gauging preferences and adaptability

While innovation remains the key factor, successful companies deal with this very carefully as changes or additions are rolled out after a diverse market research on user adaptability and preferences. This is because an immediate, adverse and drastic change in an application, website or software might draw disinterest from users, even if the changes are in tune with time. A classic example was Digg, which failed as it revamped the entire website (2010) and progressively eliminated the features liked by users. The new site was also marred by bugs and glitches. The earlier version comprised a feature which highlighted top users, this was pulled down and alienated the users.

On the contrary, its competitor Facebook effectively implemented all its new feature as it was cautious and aware of user preferences.

• Security and data protection

It is a known and acceptable fact that the social networking companies track the data of their users and profile them and accordingly advertisements are fed to the people. However, tracking of the personal data if compromised can be a threat to the financial and personal well-being of an individual. Thus, data security and malware protection remains a key consideration for users. Orkut had the first mover advantage in the social networking space, however, it was exposed to hackers, this was never experienced before. For instance, a click on the Orkut’s website could install a JavaScript in a user’s computer and transmit the data, while the firm remain unaware of the process. In addition, other cases included messages from users’ account to everyone on their network. A malware on Orkut could unknowingly make a user member of hate communities.

Hence, such incidents make a social networks unpopular among users and may eventually lead to close up shop.

• Diversification

There are more than 200+ social networking firms internationally (as researched by Televisory). However, there are only a handful of networks with large users base and global presence such as Facebook, Twitter, Snapchat, Flickr, Instagram, LinkedIn and Pinterest. These popular platforms have marketed their products globally. On the contrary, there are social networking websites such as Yookos, Xt3, Xanga, which are not very popular as they are limited to a particular geography and cater their content for certain areas. For example, Xt3.com is focused on serving catholic content, videos, etc. and only serves Australia.

But, there are a number of successful regional companies such as Renren, Weibo, Momo, etc. However, these networking firms are mostly based in China, where internet access is governed by the administrative regulations. Thus, these are protected from other popular networks. Therefore, diversification is an important parameter, but protectionism for a regional entity may help it to survive and grow. (Explore more: Social media in China, the world within)

• Ease of operations for advertisers

The revenue from advertisements still remains the mainstay for most of the present-day social networks like Facebook (95%), Twitter (90%), Weibo (84%), Renren (100%) and Snapchat (100%). Likewise, since advertisements are an indispensable part of the gainful existence of these companies, thriving firms invest to make advertisements simple and easy. One of the biggest examples is Facebook, which launched FBEX (Facebook Exchange) for the advertisers to select the space and time. Similarly, the microsite (MoPub) was launched by Twitter for advertisers. These innovations eliminate the red-tapism within a company and almost reduce the wait time for advertisers. Moreover, advertisers can choose their target users based on profiling, geography, time of advertisement and various parameters online.

The websites such as Viadeo do not have an online support for advertising. It made efforts to increase the share of advertising revenues, however, the contribution remained 20% of the total revenues. Correspondingly, other websites, which are unpopular do not even have an advertisement space.

Increasing mobile ad spends  opportunity for social networking firms

Consequently, even the largest social networking companies generate 80-100% of their revenue from advertisements as stated above. Thus, global spend on internet advertisements and specifically on a social network is the key growth driver for social networking companies. The internet is utilised for about 32% of the global ad spending, half of which is spent on social networks.

Hence, with the increasing internet penetration and accessibility, global ad spend on the internet is expected to rise at 12.3% CAGR accounting for around half of the global ad spend by 2020 (incl. internet, TV, print, radio, etc.).

Therefore, with growth in smartphones and applications, the share of ads on social networks has increased by 11% points in past 5 to 6 years. This trend is likely to continue on the basis of increasing smartphone shipments, rising penetration of the internet and high use of mobile internet. This would result in mobile phones accounting for more than 90% of the ad spends for social networking applications.

These developments make social networking an attractive proposition for potential investors. Hence, there were close to 90 big deals in the online community space with a valuation of more than $10 billion in last 5 years and this is just the beginning.

Thereby, an increase in the internet penetration, mobile internet access and high expected shipments of smartphones, the reach of the internet is set to rise manifold. This increase of access will be conducive for revenue growth for the industry. A persistent R&D, new features and innovations are the key factors, this would allow big players to remain in the game.

Conversely, low entry barriers will continue to lure newer entrants, which might create ripples with interesting products. However, start-ups would continue as targets for acquisitions by existing players, especially for acquiring novel and developed products, this will avoid a delay in development of a product and eliminating potential competition. Thus, obtaining consolidation in bigger companies remain a key motive for many of new entrants in the industry as these aim to reap high valuation. However, these rewards are only available to those who innovate, adapt and diversify to maintain users base.