Tuesday, June 26, 2012

Social Value

Steve Ballmer, Microsoft CEO, announces purchase of Yammer

Microsoft announced yesterday that it would buy Yammer, a social media company, for an estimated $1.2 billion dollars. Weeks ago, announced the $689M purchase of Buddy Media, another social media plug-in company. The stories continue from Oracle buying Virtue all the way to the biggest fish of them all: the unwitting public buying Facebook.  So why are social media companies so highly valued? What, if any, opportunity does social media present to small businesses as an information strategy?
Let’s boil social media’s value down to three abstract value points.

In Friends We Trust

I recently got engaged and since the announcement, my fiancĂ© and I have been asked the standard “how did you two meet?” question an awful lot. Our answer is boring and predictable – ‘Through friends’. Yes, people meet in bars as strangers all the time, but the majority of relationships, personal or professional, begin through the introduction or recommendation of someone we already trust. Our brains are just built this way. The difficulty for businesses trying to reach new customers has always been that they are strangers at the bar; unpredictable, potentially dangerous, and likely to take advantage of you. Through social media, advertisers hope to receive willing endorsements, transforming the relationship to “friend of a friend”. Certainly advertisers spend years and billions trying to make their brand warm and inviting, but this may prove to be a convenient shortcut. Well, that is the hope anyway. The industry is so new that predicting its value is quite difficult. In fact, the advertising industry would have to change completely in order to validate the high expectations that have already been levied into Facebook’s IPO price point. 

We Are Our Habits

Social Media companies never want to talk about this side of their business. It’s the most stable and proven value the companies possess. It is at once the most boring and controversial. It’s data. Market research is as old as markets, but it has never seen a boom like the one it is experiencing right now. Companies like Facebook and Twitter track data that can present new insights into our habits and desires. The problem, from their perspective, is that market research is vanilla when it comes to startups. It’s a predictable industry with fairly steady revenues. Nothing to get investors excited about. Additionally, from the user's standpoint, irresponsible distribution or collection of data is a big worry. Concerns over personal privacy are understandable, especially when minors are participating.

A Better Mousetrap

Email has been around for over 20 years.  We have been able to send communications around the world, instantly, and at no cost (strictly speaking).  We were always able to send messages of 140 characters, more if we liked. The lure of social media has been a better way to communicate. But how much better could it really be? I would like to point out that for small business, this is where the REAL value lies in social media. It’s all about capturing an audience. Facebook, for example, creates a semi-public audience by capturing those who would most likely be interested in your public utterances.  As a business on Facebook, I can address only the customers that are most likely to make a purchase. Choosing the public media platform (Twitter, LinkedIn, Facebook) to pour your time and effort into has more to do with the type of mouse you are trying to trap. B2B sales? LinkedIn. Recipe book? Twitter. Interoffice communication? Microsoft hopes Yammer is the answer.
I would not be surprised if we looked back in 5 years and came to the conclusion that this social media buyout phenomenon was nothing more than an arms race to calm panicky shareholders. After all, shareholders want to see their investments keeping up with the crowd. With all of the benefits that these tools present, count me on the naysayers list. It seems that these companies fall in a third generation of technology booms. First it was Microsoft, Apple, Dell; companies that sold tangible products. Next it was Google, Amazon, EBay, and PayPal. All of these are essentially the virtualization of existing business models. There is no doubt that the social media's effects on culture, politics, and life have been profound. While I believe that social media will have a significant effect on how business is done, I doubt the current expectations of an Arab Spring for industry will materialize.

Ted Hughes
Managing Director
OCC Service Incorporated