Social Sites Will Never Match The Per-User Revenue Of Non-Social Sites
Social media websites have never been able to match the per-user revenue performance of websites that use professionally-produced content. There are two reasons for this, and those reasons are not going away.
The social media sector is growing strongly: between 2015 and 2020 revenues earned by all the world’s social media websites will increase at an average of 25.2% per year.
This growth will be achieved partly because websites like Facebook, YouTube, Twitter and LinkedIn are delivering more value: competitive rivalry means that the social media sector is in a state of constant innovation: new features and services are being introduced which has the effect of increasing the total amount of value delivered each year.
But the main source of growth is a displacement of value: value that used to be delivered by traditional companies – such as physical-format media companies and bricks and mortar retailers – is being increasingly delivered by companies like Google, Amazon and Facebook – plus 100s of others. For instance, advertisers are being forced to allocate a higher percentage of their ad budgets to internet channels because their target audiences are spending a higher percentage of their time using those channels.
Four powerful trends are driving this growth:
- More users are coming online: more users mean more social networking accounts which means more revenue.
By the numbers: the total number of internet users worldwide at the end of 2014 was 3.1 billion but this will increase to 4.0 billion by the end of 2020 - a compound rate of increase of 6.7% per year.
- People are spending more time online because services are getting better: people are spending more time online because the intrinsic value of the services accessible via the web is increasing all the time. More time online means more opportunities for e-commerce and increased ad expenditure as advertisers distribute their ad budgets in proportion to the distribution of media time.
By the numbers: the digital economy was worth USD 1.4 trillion in 2014 and this will increase to USD 2.2 trillion by 2020.
- Mobile devices are increasing total consumption time: smartphones and tablets are increasing usage even further, especially for social media. Mobile devices allow users to access the web for a higher percentage of the 24 hours available in the day. More time online creates more ad inventory, which means more ad revenue for all websites.
By the numbers: comScore data shows people in the US spent a total of 500 billion minutes online in 2010 but this had increased to about 1,000 billion minutes by 2013. Critically, practically all of the increase had come from increased usage by smartphones and tablets. PC usage was about the same.
- Publisher sites are finding ways to increase their average revenue per user (ARPU):
More sophisticated targeting options: the rich data being harvested by social sites is being used to develop increasingly sophisticated ad-targeting strategies. These capabilities are being sold to advertisers as value-added targeting products that attract a premium.
New types of ad inventory/ad units: as users have shown an increasingly propensity to ignore conventional ads so publisher sites and advertisers have worked together to develop new types of digital advertising.
For instance, ads are served within a social news feed (e.g. Facebook, Twitter), advertisers can pay to insert stories into a user’s news feed, which is a form of content marketing and, more generally, some publisher sites are trying new formats which combine editorial and advertising (e.g. advertorials or so-called ‘native advertising’).
So social media is growing strongly and that growth is underpinned by solid fundamentals.
The worldwide value of the entire social media industry this year will be $35.5 billion, compared with $25.8 billion in 2014. Over 90% of this will come from advertising.
To see social media in the correct context, if we compare these figures to the total size of the digital economy, then we see that social media will account for just 1.1% this year, up slightly from 0.9% last year. Even by 2018, in spite of strong growth, social media will only account for 1.5% of the value of the entire digital economy.
For clarity, ‘digital economy’ includes all digital advertising (mobile and PC, social and non-social), mobile broadband, fixed broadband, IPTV, PC’s, tablets, smartphones, wearables and online retail (online retail includes all expenditure on digital content and content services, such as Netflix, Spotify, iTunes etc.).
Even if we restrict our attention to digital advertising, then social media still only accounts for a relatively small proportion: in 2015 out of all the money that advertisers will spend on websites, about 20% will be spent on social media sites. By 2018 this will have increased, but only to about 25%.
It is finally worthwhile comparing the absolute size of the social media market with a few other major markets which are part of the digital economy. As noted above in 2015 the value of the social media market will be about $35.5 billion. In comparison:
- Digital advertising: The digital advertising market (excluding social media) will be worth about $127 billion in 2015, which is about 3.6x larger than social media.
- Mobile broadband: Mobile users will spend about $453 billion on their mobile data plans in 2015, which is about 12.7x larger than social media.
- Online retail: Consumers will spend a staggering $1.6 trillion buying products and services from online shops in 2015, which is about 45x larger than the entire social media market.
The point here is that in spite of its super-high profile, the actual monetary value of the social media market is quite modest.
There are basically two types of website:
- Social media websites: the content is mostly contributed by users. Examples are Facebook, YouTube, Twitter, LinkedIn etc.
- Non-social media websites: in this case the content is created by the website or a third party who is using the website as a distribution channel.
When viewed on a revenue-per-user basis, social media websites are lagging some way behind non-social media websites:
To obtain the above figures for social media ARPU, I added together the advertising revenues for all social media websites worldwide and then divided that by the average number of active social media users per year. The ARPU figure for non-social media was obtained by subtracting the advertising revenue earned by all social media websites worldwide from the total value of the digital advertising market and then dividing the result by the total number of Internet users.
This chart shows that over the period 2015 to 2020 the ARPUs achieved by social media websites will be about half that of non-social media websites. There are two reasons for this:
When it comes to monetising a webpage using advertising it is fundamentally more difficult to know what advertisement to serve when the content on the page has been contributed by users. The advertiser is not 100% sure what the context is, what the quality of the content is or even why the user is viewing the page.
The highest advertising rates occur when the advertiser and publisher both have control over the content on the page - because this enables a strong correlation between the material that is occupying the user’s mind and the advertiser’s objective.
If the content is being contributed by the user then complex technological measures must be used to understand what the content is, what it's quality is and therefore establish a connection between the user and given advertiser.
It is of course true that sites like Facebook have invested heavily in software that can analyse a vast amount of rich data pertaining to users which allows ads to be targeted on individual users - both on the social media site itself and on other websites. This is one of the reasons why Facebook and other social media websites have been able to increase their ARPUs over the last few years.
It is also true that Facebook and other sites, for example LinkedIn, have been very clever at creating new types of ad unit which allow advertising to be deeply embedded within the content, rather than just being placed around it.
But my analysis is that, on average, a page of user generated content is of a far lower quality than a page of ‘professionally produced’ content and, ultimately, it is this which means social media ad inventory will never - on average - be as valuable to advertisers as non-social media ad inventory.
The next reason why social media ARPUs are lower than non-social media ARPUs is because of the growing role of mobile, specifically smartphones.
The trend for all social media websites is towards higher usage by mobile devices. For example, in 2013 24% of Facebook’s monthly active users worldwide accessed Facebook exclusively by mobile. For Twitter the equivalent figure in 2013 was a staggering 85%.
As can be seen in the chart below, the trend for mobile engagement is clearly upwards:
While increasing mobile usage is great for users and mobile service providers, it is bad for social media websites.
The small size of the mobile screen means that the mobile channel is fundamentally disadvantaged when it comes to advertising.
Ultimately the limited screen real estate on a mobile device means that fewer ad units can be served per page without those ads becoming annoying – compared with what is possible with larger screens.
The average number of ad units served on a regular webpage (i.e. one that is being viewed using a PC) is around five. Some sites, particularly those focusing on sensational-style content are extremely aggressive and will load a page with perhaps 10 ad units, or even more, while also 'stretching out' the content so it covers multiple pages. The user experience offered by some of these websites is pretty dreadful, but users seem to tolerate it anyway - if they are really desperate to 'Learn the 10 ways to be the perfect lover'.
But if one looks at the state-of-the-art for mobile, then it is extremely rare to see more than two ads per page on a smartphone. This is becoming even more the case as mobile usage shifts from pages to apps.
Whilst it is true that mobile ad impressions can have higher recall and higher engagement, these positive effects are not enough to compensate for the sheer lack of inventory that can be created with a mobile platform.
Looking into the future, perhaps when virtual reality becomes a mass market proposition, then these limitations may no longer apply. Indeed, in this somewhat expansive view of the future the tables may be turned and mobile will become superior to PCs when it comes to being monetised using advertisements.
But for now mobile is compromised compared with PC.
In spite of these disadvantaging effects, the ARPUs achieved by social media websites will continue to increase, from an average of $17.5 per user per year in 2015 to $29.6 per user per year by 2020. These increases will mainly come from social media websites becoming increasingly sophisticated about how they analyse the vast trove of data that they are collecting on users to serve highly targeted ads, both when users are engaged with social media websites and apps and when they are elsewhere.
In summary, the overall story for social media is one of growth - across the board - but against a backdrop of a positive picture it is important to see social media as being a relatively small part of the overall digital economy, and one that has a number of structural limitations when it comes to monetisation. Nevertheless, judging by the stellar results being achieved by Facebook these limitations are not very limiting. At least, not yet.