29
Mar
2015

Who will social media creatively destroy?

I have been wondering for some time now, if social media is so disruptive, who is it going to put out of business? That is, with other technology, there is always a loser. Amazon has put many high street book sellers out of business, and is not threatening to shake up the publishing business. Apple, first put CD retailers like HMV out of business and has been a thorn in the side of the music labels, and companies like EMI have been a terrible investment. Google has really shaken up the advertising industry, and put companies like Yellow Pages out of business and put pressure on traditional journalism.

All these

“perennial gales of creative destruction”

are actually healthy, as Joseph Schumpeter noted more than a century ago. Constant dislocations are the result of innovation and drive higher living standards.

Schumpeter was an interesting chap*, an economist who actually was interested in ecological and biological processes. Applying Darwin’s theory of natural selection to economics. He grew up in Austria, and studied in Vienna, he was a man of the world, studying at LSE in London, working as a lawyer in Egypt, and being offered an associate professorship in Cernowitz, which is now in modern day Ukraine, where he wrote ‘The Theory of Economic Development’.

Schumpeter was the first to work out that resources were by and large irrelevant to a nation’s economic success. What mattered was not what a nation had, but what it did with what it had. In 1820, the average standard of living in the world’s richest country (Holland) was 3.5x that of the poorest countries in Africa and Asia. But 1910, the lead of the richest over the poorest was 8x. Rather than territory, natural resources or population growth – the differences in countries living standards was driven by productivity.  Schumpeter then became the youngest finance minister in Austria’s history, but he had the misfortune to take up the role at the end of WWI and his political career ended badly.

But if social media is making us more productive, I can’t help wondering who Facebook is a threat to? Who are the luddites that will lose out to it? The valuation of many social media (Twitter, FB) is suggesting that revenue growth will keep growing, but from who will this revenue growth come from?

 AmazonAppleFBGoogle
2014 Sales ($bn)89182.212.566.0
Market Cap ($bn)172.0717.9233.1376.0
Price/Sales (x)1.93.918.75.7
Price/Earnings (x)n/a16.67827.5
Sales Growth (%)19.57.072.418.9

Perhaps the targeted advertising is where the value will come from? When I originally signed up to FB I was worried about identity theft – so I gave a false birthday. If Facebook datascience is so great, it should be able to work out that I was not born in 1906, because of the friends I tend to associate with. Yet, my advertising wall had many adverts for pension annuities, mortgage equity release, over 60’s dating, and slippers. I have now changed my birthday to see what advertising I get targeted with now.

Perhaps payments? I noticed this announcement from early this month (March 2015). “Send Money to Friends in Messenger. Today we’re adding a new feature in Messenger that gives people a more convenient and secure way to send or receive money between friends. This feature will be rolling out over the coming months in the US. It’s easy and free.”

Perhaps. But it is hard to see how they are going to generate significant revenues from a service that is free.  It is not clear, when it comes to trusting technology companies with our money, whether we will trust them more than banks.

If Facebook continues to grow sales at the current rate of 77% per annum, in three years it will hit annual sales of $63bn (which is roughly what Google reports Full Year 2014). Who will the loser(s) be? Suggestions please.

Disclaimer:  I am playing a trading game with CFAValue Investors Group Special Interests Group.  I have a paper short on Facebook.  I am losing money on paper.  Do your own homework!

*Sylvia Nasars book Grand Pursuit-The Story of Economic Genius for biographical details of Schumpeter’s life.

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