Social media firms still lack clear biz proposition

Early movers Facebook and LinkedIn have grown in profitability over time, but the industry in general still lacks a clear monetization path to establish a sustainable business.
Written by Liau Yun Qing, Contributor on

Popular social network operators such as Facebook and LinkedIn may have grown into successful, profitable organizations and will continue to expand with acquisitions, but the industry in general is still weighed down by the lack of a clear business proposition.

Alex Ashby, research analyst at exchange-traded funds Global X Funds, noted how industry pioneers such as Facebook and LinkedIn have grown in stature and profitability.

Facebook derives a significant amount of revenue from advertising, while LinkedIn generates revenue by charging recruiters and headhunters for premium services to aid in hiring and marketing purposes, Ashby added.

The profitability of Twitter, another popular social networking service, cannot be determined as it was a privately-owned company, he said.

Facebook and LinkedIn have faced profit pressures in recent times though, as they increase their hiring and acquisition efforts to grow their businesses. Ashby said: "Both companies have been aggressive in their expansions in terms of hiring as well as acquisitions, and these investments may pressure profitability in the short term though revenues continue to expand."

Given that the social media industry is still young, companies will continue to look for acquisitions to help them expand into new revenue streams or absorb potential competitors before these companies become a larger threat, the executive explained. It would help the bigger players grow their technology, programming, and engineering talent base, he added.

Lyon Poh, partner of management consulting at KPMG Singapore, had a different perspective on why social media companies will continue to acquire their competitors. He said social network operators have yet to find a clear business proposition, and they are actively looking for clarity through acquisitions.

"Social networking companies have to go beyond offering basic social networking services in their business model, and they have to be very clear who their target customers are--consumers or corporations," Poh stated.

Asia presents growth opportunities, challenges
Asia, too, will offer opportunities for social media companies to expand their market presence. Ashby said with the increase in Internet penetration and consumer upgrading their handsets to smartphones, these two factors will provide a good environment for the industry to grow.

Facebook, for one, had opened an office in Singapore in 2010 to ride on the opportunities in the region. Executives said then the outpost will help support operations in Southeast Asia--which will play a significant role in the company's global sales plans.

Ashby did note the region, particularly China, still poses challenges to social media companies. Web censorship is one clear barrier, with Facebook and Twitter banned in China, he noted.

Additionally, many overseas operators will find it difficult to compete with local Internet giants such as Tencent and Sina which provide similar services and has a bigger subscription base, he pointed out.

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