(cc image: Darren Barefoot)
On the verge of an IPO, Twitter is estimated to have a market value of $15-16 billion. What does that mean for our society?
In theory, stocks are valuable because they entitle you to a share of a corporation’s profits. The relationship of a stock’s price to the earnings per share varies widely, but a price/earnings ratio of around 15 could be considered fairly normal.
As a still-private company, Twitter doesn’t reveal its profits to the public, but its profits if any right now are relatively small, and would give the company an enormous p/e ratio. Its value, though, is based on perceptions of future earnings—so a value of $15 billion could be taken to mean that investors eventually hope it’ll be making a profit of at least a billion dollars a year.
A profitable tech company might have a profit margin in the range of 25 percent. So let’s say that a profit of $1 billion implies revenues of $4 billion
Twitter derives its income from advertising—so that $4 billion comes from companies paying Twitter to reach its users with “sponsored tweets” in hopes of influencing their economic decisions. Obviously, these for-profit companies are hoping to take in from consumers more than they’re paying out for advertising; a study by Nielsen Analytic Consulting (12/1/09) found that online advertising got a particularly high return on investment, with businesses getting $218 more in increased sales for every $100 they spent on online ads. To avoid misleading precision on these back-of-the-envelope calculations, let’s say advertisers are expecting to get back $2 for every dollar spent on Twitter.
That means that the corporate world thinks Twitter can get you to spend about $8 billion you otherwise would not have—very roughly half the value of the company. Twitter now has about 240 million users, so in round numbers that’s about $32 a user. (Discount that by however many people you think investors eventually expect to be using the service.)
So can Twitter get you to see four movies that you wouldn’t have gone to otherwise, or eat eight more Big Macs? I can’t remember any buying decisions that I’ve made that were influenced at all by a sponsored tweet, but I guess it’s the nature of effective marketing to go unnoticed.
Every media business dependent on advertising leaves a footprint on the economy—if not measurable, at least estimatable. Facebook‘s market value recently surpassed $100 billion, which implies that investors think the social media site will eventually be able to drive roughly $50 billion a year in sales to advertisers. With more than a billion Facebook accounts worldwide, that’s less than $50 per user per year—though that’s a harder target to hit in countries like India and Indonesia, No. 2 and No. 4 in number of Facebook users, where $50 is more than 1 percent of the annual per capita income.
In the end, people are going to spend about as much income as they have (if they invest some of it instead, well, mutual funds advertise too), so advertising does not actually increase the size of the economy; instead, it shifts demand from one product to another.
Does advertising help to distribute demand in a more optimal way, to better meet consumer needs? It’s hard to make that case with a straight face after thinking about the substance-free emotional manipulation that is the content of most ads.
So the cost of “free” media really is a cost: The price of using a social media site without charge is allowing corporate advertisers to reprogram our minds to buy products we would not otherwise want. When you see the gushing business page stories about the fortunes being made from the latest Internet IPO, remember that the enormous sums mentioned are a price tag placed on us.
“The price of using a social media site without charge is allowing corporate advertisers to reprogram our minds to buy products we would not otherwise want.”
Not this mind, and I imagine not the minds of the vast bulk of folks who visit this site.
But obviously many others, and I think it speaks to how far from fully evolved our species is, as well as how extremely evolved is the art and science of manipulation and exploitation.
Why does this pop into my head?
Advertisement works it work well, and it even works on people who think that advertisement does not work on them. There is really no reason for starbucks to exist when home made coffee is cheaper and more convenient. Pepsi and coca-cola are not really better than generic brands and none of them really taste that good considering price and calories.
So yes $32 per user per year is actually a good deal just for advertising. But deal is even better when you consider that with advertising you get analytics and targeted advertising. Companies can mine twiter data for consumer trends, and can even create consumer trends (Hey, your friend likes pepsy and you should too, etc)
Actually the first myth in the public’s mind, that advertising will cause you to switch or try something that you have not, is just that. A total myth. Advertizing is not about getting new people (though it doesn’t hurt), it is about keeping the people they have; and to that effect it is completely and irrevocably working. The people who spend the money on advertising know this. Look up William Poundstones book “Bigger secrets”. He pointed this out back in the late 80’s. It is the big secret that the Madison Ave folks don’t want you to know, but don’t care if a couple of folks know it. But it was pointed out then that the commercials you see and hear are not about getting you, it’s about keeping you. And if you don’t think it works, then explain why the corporations are willing to spend Billions, because they are not going toss money down a rat hole, in the hopes that the rat might return a coi or two. Henry M. Caroselli noted in ‘The cult of the mouse’ the U.S. corporations are not interested in making investments that have any chance of not working. They will spend Billions if they are sure it will produce Trillions in returns. There is no american corporation today who will take a chance on losing a nickle, not if it’s only “Possible” to get it back.
That tells us the whole social media is working for them; not the people who built it or the ones who use it, but the ones who are looking for “More and more, Faster and Faster”.
I think I read that 70% of the US economy is driven by consumer products. Lots has been written about “consumerism.” I believe advertising helps drive this vast engine — not by just getting us to switch products but, as others point out, helping create wants and ‘needs’ we didn’t know we had. (Case in point: Ask your doctor about “restless legs syndrome.” Really?)
There is at least one other way that companies like Twitter, as well as Wall Street, cash in on an IPO. They ensure that the estimated worth of the company is overvalued before the IPO, and ta few favored investors (the execs and the bankers taking the company public) are given advance shares free, or at low cost.
When the IPO is executed, the favored investors wait for the stampede of buyers that think they’ll make a killing by buying the stock quickly, before the stock price rises. When it peaks, the executives and favored investors sell, and the price drops to a more realistic level. In the end, most investors in the IPO lose money on their “investment.”
The Facebook IPO was a disappointment to the favored investors, because many people realized that Facebook was overvalued before the IPO. Still, those at the top did well. Just not as well as they expected.
The ad-driven model of funding is a CORRUPTION of Capitalism and should be refuted before it destroys our society. If these people cannot ask you to pay for the services they render to you, they have no business staying in business merely by spamming you with ads instead. Tell Twitter users to DEMAND TO BE CHARGED A FEE FOR USE and that if Twitter insists on spamming the user, the user will QUIT TWITTER. “Free”, my ass – being bombarded with “buy this, buy that” is in no way “free”. Whatever shred of respect I had had for Twitter is vanishing by the second. Did you know that you cannot even search for the word “Socialism” there? When you try, they rewrite the query as “Social Media”! And so all you can then find is people who are IN IT FOR THE MONEY – which is NOT what Socialism is about. That’s Twitter’s idea of supporting their users: redirect them to support the sick Status Quo.
I suggest that once an outfit you have an interest in gets a user base in excess of 100,000, you should then BOYCOTT it. Once they get big enough they no longer need to care what any on of their users thinks, and they go into “arrogant professionally-deaf” mode. So BAIL ON THEM.