Social media meets Wall Street
Issue #36
Picture this: a major, publicly-traded company is operating at a loss, and hemorrhages more than $5.2 billion dollars over the course of two years. And despite the early losses, the company is still valued at almost $80 billion. Or how about another scenario, where a company goes public—and then loses money for five consecutive years. After finally managing to turn a some small profits, the company is valued at more than $37 billion.
While these scenarios seem to defy logic, they describe Snapchat and Twitter respectively. How are these companies, that showed massive losses over their first years while trading in public markets, so valuable? Simple—it is because of you, me, and everyone else who gets on their platforms and engages with the content on our feeds.
Companies are valued by investors’ expectations of future prospects or profitability. Snapchat and Twitter held tremendous value despite having significant losses because investors believed that those companies would be able to turn all of their users into revenue. The word for that is monetization—a term you’ll hear a lot about when you follow the companies that rule Silicon Valley. When social media companies have large user bases, investors make a bet that the company will turn those users into profits eventually. That’s why they give these companies higher values than the pure numbers might dictate at the time—they believe in the future earning potential of that platform’s user base.
There is so much value to be gleaned from user data—and as a result, markets measure the value of these social media platforms not just by assessing their profitability, but by tallying us up in the form of daily and monthly active users. As we’ve seen with Snapchat and Twitter, being profitable is not a prerequisite to holding tremendous value. Your presence on a particular platform builds up additional market value for that company because your participation adds to that company’s data set.
Facebook and Google, on the other hand, have both been profitable since they began trading in public markets. Facebook’s IPO was in May 2012 and Alphabet’s in August 2004. Both showed relatively modest profits in their early years and have continued to grow in profitability over the since. Still, both Google and Facebook have proven to be more valuable than the average profitable company. Why? Again, because of the vast amounts of daily and active monthly users.
Due to the huge volume of consumer data that can be gleaned from platforms with large user bases, profitable social media platforms are valued much more highly than the average company in the eyes of investors. The point is this: investors place a premium on companies like Facebook and Google versus other large corporations because of the immense number of users on these platforms. Investors think they can drive more future value from all that available data.
The more data these platforms can collect, the more valuable they become in the eyes of investors. That's why capturing and keeping our attention is extremely important. Companies will go to great lengths to ensure that we habitually return to their platforms—and they purposely design their systems in a way that leads to compulsive and obsessive use. They create designs to hack our brains and keep us wanting more.
The way a company makes money influences the way it builds its products. Business models that rely on data harvesting and targeted advertising are extremely common in the tech world—and they're also totally inappropriate for younger users. Kids need tech that's designed for their best interests, not for a corporation's bottom line. They don't need platforms that suck up all their attention and keep them perpetually screen captured.
A deeper dive
Here are a few helpful resources in case you want to really dig into today's topic:
Björn Jeffery is the founder and former CEO of Toca Boca, one of the most beloved kids' platforms in the world. His writing on the kids' app market offers a great overview of why this niche segment is so unique and challenging. Check out the section on business models to learn more about why data harvesting is ill-suited for children's tech.
You might be wondering: if a tech platform doesn't make money from selling our data or targeting us with ads, then how do they make money? Well, one attractive alternative is the subscription-based model, where companies charge users for premium or value-added services. This is something that Twitter is actively exploring with Twitter Blue. According to the New York Times, "In June, the company announced Twitter Blue and a plan to charge users a small fee in exchange for extra features like the ability to organize bookmarks and undo tweets. On Tuesday, Twitter said it would ask users to pay $3 a month for those features, as well as access to the ad-free articles."
TL;DR
Too long; didn't read. It shouldn't be a full-time job to keep up on industry news, so here is a mercifully quick summary of some other notable developments:
Netflix is introducing a new feature aimed at kids. As Bloomberg reports, "The “Kids Clips” feature, appearing on Netflix’s iOS app, will show short videos from the company’s existing library of children’s programs and movies. Netflix plans to add new clips daily based on its current and future offerings." Apparently, this is all part of a plan to help kids discover more of Netflix's programming—and target the kind of viewers who might normally watch shorter clips on TikTok or YouTube.
As kids get older, they inevitably start exploring the digital world more independently. TikTok, Twitch and Discord are popular among younger users, and the Washington Post has put together a guide to help teens stay safe while they're using them. Check out this rundown of all the safety settings kids and parents need to be aware of.
And lastly
Here are a few more pieces of original writing from me and my team—just in case you're keen for more:
At Kinzoo, we've put a lot of time and energy into thinking about our business model. It's important to us that the way we make money supports our mission and vision. My team put together this post where you can learn more about how we plan to build a sustainable business that puts kids' needs first.
Now that so many children are relying on tech to learn, lots of families have added new devices at home. The Chromebook has emerged as a popular choice among schools and parents, so my team put together a guide explaining the safety settings you need to know about.
Okay, that's it from me until next time. If you enjoyed this newsletter, and know of another parent who would as well, please feel free to forward it along.