So far in 2014, we've seen Facebook stock (Nasdaq: FB) continue its dramatic share price rebound, Twitter stock (NYSE: TWTR) plunge more than 40%, and two new social media IPOs debut – GrubHub (NYSE: GRUB) and Weibo (Nasdaq ADR: WB) – but have you ever wondered, how do social media companies make money?
We asked Money Morning E-Commerce Director Bret Holmes to give us the scoop. Part of Holmes' job is to utilize web advertising via social media platforms to best market Money Morning. As a result, he's on top of what's going on inside of today's social media giants.
Holmes said the key to unlocking value for social media companies is successful advertising models.
"Social media companies are legitimate advertising websites, no different than, say, Google or Yahoo. The same way Google made its money is the same way Twitter and Facebook will make their money," Holmes explained.
And web advertising via social media is a market that's growing at a staggering rate.
A 2013 Nielsen report showed that 89% of advertisers use free social media advertising and 75% use paid social media advertising. The report also highlighted that 64% of advertisers expected they'd increase their paid social media advertising budgets over the course of 2013. On May 12, BIA/Kelsey released its U.S. Social Local Media report. The research firm projected that total U.S. social media advertising revenue will grow from $5.1 billion in 2013 to $15 billion in 2018, for a compound annual growth rate (CAGR) of 24%.
That means a lot of opportunity for social media companies to make major money.
The trick for social media companies looking to profit as ad platforms is to find the best way to insert advertising into the user's experience without impacting the user in a negative way.
And that advertising methodology is hugely important to these companies' revenue growth.
The same BIA/Kelseyreport in May revealed that the greatest year-over-year jump in social media ad revenue ever has been seen this year. It's grown from $5.1 billion in 2013 to $8.4 billion, which the firm largely attributes to a surge in both native and mobile advertising. It estimates that social mobile revenue alone is projected at 38.3% CAGR.
Exemplary of the profitability of this kind of social media advertising growth is Facebook. In late April, Facebook announced that its mobile ads accounted for 59% of its second quarter ad revenue, up from approximately 30% of ad revenue in the first quarter of 2013. Mobile ad revenue alone came in at a mammoth $2.265 billion for the quarter.
This kind of advertising success is tied directly into a social media company's bottom line – and its profitability for investors.
To learn how to gauge which companies will succeed, here's how social media advertising actually works…