It’s been a tough week or two for Instagram. Last week they announced their revised terms of service which stirred up quite the backlash from its users. The most controversial of the changes was a new set of terms which would allegedly allow for user photos to be sold without compensation as well as a clause forcing users to waive the right to participate in class action lawsuits.
Needless to say, these actions caused some serious criticism; with some users going as far as to say that they would stop using Instagram altogether. These threats weren’t merely contained to the crowds of teenage girls who suddenly found themselves without a viable market for their “selfies”, but pretty soon many celebrities also threatened to take their photos elsewhere. Without them on Instagram, the world would be a much sadder and darker place. I guess I wasn’t the only one who felt that way, as within a week the firm’s founder and CEO, Kevin Systom, blogged a revised set of terms of service. The terms included more information about Instagram’s plans on how user photos may and may not be used. The terms also removed the section about selling photos without compensation. This, however, did not stop a group of Instagram users from filing a class action suit against the firm. We’ll all have to wait to see how the lawsuit plays out in the courts.
Reading more about the changes and the subsequent reaction got me thinking about the whole business of social media. One specific comment on an article I read caught my attention; someone remarked that in social media “If the product is free, you, the user, are the product”. I guess this vaguely suggested that firms see their users as something that can be sold to others. Right off the bat, I thought that this was a rather cynical view of social media. Nevertheless, I could see where they were coming from. Over the next couple of days, I researched how the biggest and best of social media companies made their money. I did this by both reading articles written about the firms as well as the annual reports and IPO documents published by the same companies.
Before we jump ahead to how social media firms work, let’s start with the basics and define how a typical business operates. Businesses sell products or services, the person who buys the product is a customer. Think of a pair of Nike shoes, Nike is the firm that makes these shoes (let’s not dwell how and where,we’ll save that for another post), and the individual who buys them at your local Foot Locker is the customer.
Social media firms don’t quite work like that, we go on Facebook or LinkedIn for free where we then post, share and use their technology for free. We are the users of their service and in a way, their customers, yet we don’t pay for this directly. They could start charging users but that will probably be the end of many companies as it’s very important that new online ideas build a critical mass of users to be successful (this blogger is dying to build a critical mass of readers). Once a critical mass of users is achieved, the firms think of ways to turn the online masses into revenue (this blogger for one doesn’t need revenue, my dependents live off smiles and rainbows). You can think of paying for their service with your attention/time or presence on the social network website. Yup, those scandalous photos you posted on Instagram are currency. In return the firms try to turn your social presence and clicks into dollars.
Social media firms come up with varying ways to achieve this transition with varying levels of success. Taking the example of Google, LinkedIn and Facebook we can see the different approaches:
- is probably is the most successful firm when it comes to turning clicks into dollars. The firm employs a sophisticated auction system to sell sponsored ad space and search results to firms. What this means is that for each word you google, the results are instantaneously auctioned off to firms who then get to display ads as the sponsored links (usually the first results that are shaded) and ads to the right off the organic search results.
– employs a similar approach to ads but they play a smaller role in their revenue. LinkedIn makes their bread and butter from what they call Hiring Solutions. This refers to the paid service that allows recruiters access to a database of resumes LinkedIn users have submitted over time.
– Ahhh.. Facebook. To be completely honest, I don’t think they have yet figured how they’re going to make money. Facebook has the biggest dedicated user base, incredibly creative ideas to get attention of its users but also the smallest idea how to create revenue. They have tried with ads but we all know no-one ever really clicks on them. Businesses who’d like to engage Facebook members have a very tough time doing so and often seem inauthentic. Also, because Facebook is incredibly more social and more personal than other websites any new revenue ideas are rightly constrained by privacy and safety considerations of users.
This is precisely where Instagram found itself last week. The service is now mainstream, with a massive amount of users. The firm now faces the challenge of coming up with a viable strategy to fund itself. Likely, there is also a fair amount of pressure on both on Instagram and Facebook (which bought the former) to show new ideas and new sources of revenue, something that is amplified by the fact that Facebook is now publicly traded. Being a public company means you have to respond to investors who demand a return on their investment; not usually the most patient bunch, those damned one percent-ers.
I think this is a good point to get back to the original question “Are you the user, a product that can be bought or sold?” I’d say “No”; social media doesn’t work that way. It’s a very nontraditional business model, but also one that is a two way street between a user and service provider. For a lot of these companies their primary motivation is to get people to use their website or technology, they value and respect users as they know how hard they’ve worked to gain their trust. Nevertheless, they are a business with expenses and plans that require revenue to fund them. The challenge truly becomes coming up with meaningful ways to generate money while respecting this trust.