How Facebook, Twitter, Social Media Make Money From You
There are 277 million users on LinkedIn (NYSE:LNKD), and a similar number for Twitter (NYSE:TWTR). There's 1.2 billion on Facebook (Nasdaq:FB), give or take. Then we have 540 million people on Google+ (mostly people who haven’t yet figured out how to delete their profiles while keeping their Gmail accounts intact). Even MySpace manages to retain about 36 million users. Such volume is the short answer to the question “How can these companies make money?”, given that they more or less give away their products. But it still doesn’t explain where the revenue comes from: After all, 248 million Twitter users times zero is zero.
This isn’t a unique observation, but it’s a crucial one: If you’re not paying for the product, the product is you. The real transaction here isn’t you receiving enjoyment in the form of a free temporary distraction created by a media company at great expense, but rather, that media company renting your eyeballs to its advertisers. For many people, that truth manifests itself most clearly in television. CBS (NYSE:CBS) doesn’t come up with a new episode of "NCIS" every week strictly to please you, the demanding viewer with a limitless capacity for being passively entertained. It’s because you and 18 million other people will watch that episode, and thus pay at least subconscious attention to the 16 minutes of commercials that are interspersed throughout it. For a car manufacturer or fast-food restaurant, there are few more efficient ways to grab customers’ attention, something CBS and its rival networks are well aware of. Media companies are interested in pleasing the brewer before the viewer.
For social media, this goes double, if not quadruple. There’s a reason why Facebook’s 10-K filing with the U. S. Securities and Exchange Commission (SEC) uses the acronym ARPU, as in average revenue per user. Your account contributed $5.32 to Facebook last year. Congratulations, you’ve been commoditized and you never even knew it. Multiply that by the aforementioned estimated user base, and now you can understand why Facebook stock trades at 110 times earnings and has a market capitalization 10 times the size of its asset holdings. The company’s stock price has doubled since its initial public offering of two years ago, which some people thought even then was unjustifiably high.