The Future of Social Media:Economics and Predictions

This past week California played host to two conferences about the outlook
of social media. EconSM presented in Los Angeles was billed as an economic
outlook for the industry. Dealmaker 2008 presented in Mt. View tried to predict
the future of the industry.

The definition of social media varies but in general, it refers to any media (text,
photos, video, etc.) that has a social element built around it on the Web. Examples
can range from Flickr for sharing photos, to user-generated encyclopedia Wikipedia,
to Muxtape for publishing music playlists, to Facebook for "poking" and staying up
on friends. "It's really an evolution of media from a one-way direction to a highly
interactive model, where people are developing relationships around content. Social
media is a topic and should be better understood by business, community, economic,
workforce developers and redevelopers because it's creating a new opportunity in how
people spend their time online and how they relate to media. All those involved, from
advertisers to entrepreneurs to major media companies are trying to figure out what it
means to their business and how they should take advantage of it. Even more, many
social-media companies are still figuring out how to turn a profit.

It was unfortunate that these two events occurred at the same time, because so much
insightful information was provided at each, no one individual could be at each,  hence
the reason for this review.  But more importantly, this review not only brings forth the
insight but also brings forth attention that there is a battle for the social media business
brewing in California, a north vs. south, a civil war for supremacy in this market. But hold
on to that thought and let’s first look at the remarks made at each conference.

                                                           EconSM

EconSM was the larger of the two conferences.  It had a star studded panel of representatives
from the who’s who in the industry and capital markets. 

The Current State: Not Chasing Every Technology, but Getting Better
From advertising, politics, mainstream media, Hollywood studios and even the people who
brought you Web 2.0, there remains a sense of conservatism amongst all groups.

“Advertisers and media companies have a strange disconnect when it comes to social media. 
On one hand, they heartily embrace the ability to directly engage with consumers.  And on the
other hand, they fear that engagement and are desperate to figure out how to control it and
measure it,” said David Kaplan, paidContent.org.

“News and political analysts find that people are more engaged with online politics, much more
than four years ago.  News used to be something that was reported, now there’s a feedback
loop – it’s reported, it’s commented upon and then reported on again,” said Leonard Brody,
CEO, NowPublic News

“Social media is still in a transitional form and won’t be fully felt until the next election” said,
Manuel Perez, Senior Supervising Producer, CNN 

“YouTube did not exist in 2004.  The Swift Boat Veterans spent a few hundred thousand dollars
four years ago.  They wouldn’t have to spend that today,” said Chuck DeFeo, VP and GM
Townhall.com and Salem News/Talk Online.

Jeff Price, president, Time Inc.'s SI Digital stated, “Last year, digital comprised 15 percent of our
revenues. We always knew that sports were a social conversation and created a Facebook like
application.”

Gordon McLeod, president, The Wall Street Journal Digital Network, stated that “The reality is
that everybody, the bloggers, were far ahead of us in terms of social media. The key is not
screwing up the brand while adapting to the new changes.”

Kinsey Wilson, executive editor, USA Today stated “We got into social media and blogging
three years ago. Last year, our site redesign put social media on every page of our site.”

Thomas Mueller, VP, Creative/Product, Martha Stewart Living Omnimedia, MSLO said “That
getting all the MSLO properties in sync - from TV, print and the web is a lot easier when you
have an idea."Martha declared Cupcake Week and all the properties rallied around it. That's
how you can leverage the power of large organization."

It is apparent that issues for the mainstream media involve ownership of product and authenticity
provided by users when they post it.  And that can easily be understood.

“Mobile platforms are great for social content but poor for advertising.  Advertisers argue that the
display space is too small,” said Gordon Paddison, EVP New Media and Marketing

And from the people, ( or at least one source, Yahoo) that has help bring social networking to the
consumer, Jeff Weiner, Network division EVP Yahoo said that the world does not need another
social network.  But Yahoo has over 25 different profile experiences including Mail, Chat, Groups
and several others.

Future looks Vibrant
At a panel discussion on ‘Deals’ the comments were very ‘bullish’.  For example, Geoff Yang, of
Redpoint Ventures identified that there is a lot of money wanting to invest in the consumer internet
and that action(s) has been pushing extremely high valuations for companies.  In turn companies
are worried about the economy and want to raise large sums of cash, specifically among later stage
companies. Concerns related to a slow down may cause the price of acquisitions to fall, but Yang
felt that for the next two to three years, there will still be a vibrant Merger and Acquisition market
because there is a backlog of cash looking for a place to park itself. Ross Levinsohn, Velocity
Interactive Group, felt that we are entering the end of the cycle.  He however did not feel that is
because things are dying down, because he is seeing more innovation than ever, but the innovation
is accompanied by compression in the market.  He also said that his firm is telling companies to
preserve cash and look out for good buyout opportunities. 

The question of greatest interest was: Does merger of Microsoft and Yahoo harm the deals market? 
Geoff Yang said yes!  He claimed he would rather see a healthy Microsoft and a healthy Yahoo.  He
believes the marketplace does better when there’s ‘arms’ races.
He added, “Somebody’s gotta stop Google, it’s almost an unnatural share of the market that they have.” 
If it doesn’t happen, Yahoo could be a huge buyer, added Yang.  He identified that it may have to make
a bet-the-company kind of move to stay competitive.  But as he stated, who but Facebook (and that’s
not going to happen) would move the needle for Yahoo right now?

What do you get when you cross a VC, a Comedian and a Geek?
Continuing at the EconSM conference, social media conversation turned humor into serious business. 
In a panel discussion moderated by Jordan Levin CEO of Generate, a next generation production studio
who interviewed Dick Glover, CEO of Funny or Die website known for the smash hit short film, ‘The
Landlord,’ starring Will Ferrell and also interviewed Chris Henchy, head of West Coast coordination of
Gary Sanchez Productions, a studio started by himself, Will Ferrell and Adam McKay. Comedy sells.
The Website, Funny or Die since it launched its site a year ago has attracted between 18 to 19 million
page views and monthly unique visitors stand at 3.2 million.  In addition, 200 million videos have been
watched, while 30,000 have been uploaded.  Now you know what you get. The money came from
Sequoia Capital, the tech team was from Palo Alto and the funny guys were from Hollywood. They
have found that while monetizing their site by advertising is currently their major source of revenue,
they have found that they are looking more at product placements and offline opportunities.

                                                         Dealmaker Forum 2008

Dealmaker Forum 2008 held in Mt. View had a host of superstars on its schedule too. And the
questions and answers were much the same.

Current State
"It's really an evolution of media from a one-way direction to a highly interactive model, where
people are developing relationships around content. That drives engagement and creates a whole
new opportunity for business," said Mike Jensen, director of the Technology Group at Credit Suisse.
Jensen likened some of the high-ticket acquisitions in social media to "drunken sailor" behavior. He
alluded to Google’s purchase of YouTube for $1.6 billion. Google’s CEO Eric Schmidt said only
recently that the company still hasn't figured out how to make money from the video-sharing site.

Much of the hype in social media has gone to application makers like Slide and RockYou, which have
amassed valuations as high as $500 million. But most of the smaller widget makers aren't going to be
lasting companies, according to Charlene Li, a senior analyst at Forrester Research. "You can get viral
quickly, but let's track and see how long that app stays around," Li said. Instead, she said, more
developers should be working on applications that provide utility to people, rather than just entertainment.
For example, spin-offs of Twitter for health care or emergency workers could hold promise, she said. Li
even touted Dogster, a social network that helps dog lovers arrange play dates, as a hit in the arena. An
executive from the company was in the audience and suggested that the company was for sale.

Future
Dave McClure, an angel investor at 500 Hats, believes the future of the business will be in so-called
social commerce, or the intersection between online shopping and socializing. Netflix might be an
example of early social commerce because it encourages members to recommend movies to friends.
But he envisions social commerce going much further. "Social commerce is where (the business is)
headed. Companies that have mined enough social graph data and can combine shopping to it--whoever
 figures that out, they will be set," said McClure.

Nicolas Kardas, senior product manager at Microsoft's Windows Live Platform Group, said “Despite
the forward twist on social media, the business models aren't that different than those of years past.
 It's just that with social networks, companies know much more about the consumer, and that
information delivers the option of a much bigger premium for advertising. "It's better targeting for
advertising. But from a business standpoint, I haven't heard anything new than what I heard
before," said Kardas.

That isn't slowing the competition in social networking and media. For that reason, venture
capitalists expect more consolidation and buyouts in the market. "I think big media companies
will continue to be aggressive in this area. But in my mind there will be a lot of carnage," Credit
Suisse's Jensen said.

                                              Opportunities: Its California’s Turn

As was previously mentioned, it was too bad that these two programs were held at the same
time creating conflict in attendance, but at least they were not held in the same part of the
state creating even greater competition.

Both programs did a good job of selecting timely discussion points coupled with expert panels.
But in review, it is strangely interesting that these events were held in California, or is it? 

Rhetorically, is it because California has become the leader in this industry, because this is
where the industry, its supply chain and financiers are for the most part located in the nation?

From an economic development perspective, it appears that California is ‘the center of the industry’
due to several key factors.  First, two key existing industries – the film industry found in ‘Hollywood’
- Los Angeles and the high tech center of the ‘Silicon Valley’- San Jose which are both leaders in
technology  and content lead the way. And in review because of this, everywhere else in the nation
pales in comparison, so in retrospect it seems logical to have presented these forums in these
areas given their prominence in the industry.

Recall the earlier statement regarding the battle for the social media industry brewing in the state,
a north vs. south; a civil war for supremacy in this industry. The economic development actions
going on in California regarding this industry probably didn’t even dawn on the progenitors of these
events.

But there was no discussion on how to enhance the business environment for continued growth
such as issues dealing with sufficient infrastructure or on the availability of an educated workforce.
The lack of panel discussions addressing these issues was void at both events. Simply, it was
because these two events were industry based forums. But in review, that unto itself should have
been enough to drive a panel discussion on ‘how to enhance the industry.'

Suffice it to say, it is time for California to present a forum for Californians, by Californians on
social media.  Why? Part of the issue associated with the recent strike by the Screen Writer’s
Guild in Hollywood revolved around the revenues from property and content being placed on the
web by the studios and the determination of the dollar value to writers for its use in this media.
This growth whether you entitle it web-based or social media oriented requires content.  So from
Hollywood, they are driving content along with some technological advances from the southland. 
Conversely, in the Silicon Valley, they are driving technological advances along with some content.
If California is by either plan or default the nation’s leader, the question needs to be answered how
to enhance and retain this position even in an environment where experts are forecasting compression
in the market.

Governor Schwarzenegger has lead discussions and even created two major statewide initiatives on
issues of significance for social media’s growth: Telecommunications and Educating Engineers to
meet the demand.  In addition, as a trend, California leads the nation with businesses receiving nearly
50 percent of all venture capital issued annually. But, answers must be obtained to determine if venture
capitalist such as AT&T’s recent entrance into the venture capital market in California with $500 million
for start-ups working on technological advances to place advertising on mobile platforms will continue to
support growth of start-ups in social media and whether private equity markets will continue to drive the
extensive merger and acquisition activity in the state. And for a state that is considered an ‘innovator,’
social media is a business that has been growing by leaps and bounds. We owe it to ourselves to begin
this discussion keeping the healthy competition between north and south while looking for a high ground
such as the partnering between the geeks and comedians.



Tim Johnson
www.CaliforniaBusinessMinute.com