Social Media vs. Traditional Media: Frenemies?

Live tweeting of the Navy Seals raid on Bin Laden’s hideout in Pakistan only confirmed what we already knew: Social media is here to stay.

Unless you are living under a rock or don’t know how to use a computer, chances are that you’re part of the success story. Social media platforms, such as Facebook and Twitter, have seen an explosive growth in user numbers. For example, Facebook, the world’s most popular platform, has 500 million active users, making it the third most populated “country” on earth. Similarly, Twitter has reached a user base of 200 million in less than two years.

Social media’s popularity is predicated on sharing: members share personal information, content and data. In fact, In fact, 30 billion pieces of content were shared across social media platforms  in 2010. The number has huge implications for traditional media companies, such as AOL (NYSE:AOL) and newspapers, because they are in the business of producing content.

So, what does this number really mean to them? More competition for advertising, to begin with. Like their traditional media counterparts, social media companies also depend on ads as their primary source of revenue. However, they offer a much more compelling value proposition to advertisers. While Google (NASDAQ:GOOG) revolutionized advertising by quantifying it, social media companies have taken it a step further by adding analytics and personalized information that is gleaned from user data and statistics.

This results in a highly customized form of targeted advertising. The results are already showing: Facebook and Twitter earned advertising revenue of $2 billion and $150 million, respectively, last year. That figure is expected to increase to $8.3 billion by 2015, representing an annual growth of 31.6%.

For media companies such as AOL, advertisers’ shifting priorities hurts top-line growth: the company brought in $331.6 million in advertising revenue during the last quarter of 2010, a 29% year-over-year decline. No wonder, its stock has plummeted in recent times. (To be fair, AOL did say earlier this week that its online display advertising revenue grew 4% in the first quarter).

Similarly, Google, the leader in online advertising, is taking moves to counter the social media threat. After its own failure at a social media service and an acquisition attempt, the company is developing its own social media products

Social media’s impact on traditional media companies is not limited to advertising: it is also becoming an important content distribution platform for traditional media companies. Google dis-aggregated content by distributing it across multiple websites and links. The effect was to reduce page impressions for media websites.

On the other hand, social media enables aggregation of content from multiple sources on its platform. In addition to reducing reliance on dubious search terms, the strategy also enables traditional media to increase user engagement and push content. For example, a magazine like The New Yorker can push content, in the form of articles, and generate user feedback and discussion through its Facebook page or Twitter stream. No wonder then, AOL acquired Huffington Post, a new media company that integrates social platforms into its content strategy, last December.

Finally, while social media companies are not listed in the stock market, their valuations are already soaring in the secondary market. Six-year-old Facebook recently hit valuations of $83 billion. For perspective, consider that this valuation figure is approximately $5 billion more than that of Amazon (NASDAQ:AMZN), the big daddy of e-commerce. Similarly, Twitter, which is barely three-years-old, has already hit valuations of $10 billion in the secondary market.

Social media platforms have been lauded for their recent role in the Middle East uprisings. There is a good chance that they might just end up inciting a business model revolution in traditional media companies.  

As of this writing, Rakesh Sharma did not own a position in any of the stocks named here.

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