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Q8-4 How Do (Some) Companies Earn Revenue from Social Media?

There is no formula for computing social capital, but the three factors would seem to be more
multiplicative than additive. Or, stated in other terms, the value of social capital is more in the form of
Social Capital = Number of Relationships * Relationship Strength * Entity Resources
than in the form of

Social Capital = Number of Relationships + Relationship Strength + Entity Resources
Again, do not take these equations literally; take them in the sense of the multiplicative interac-
tion of the three factors.
This multiplicative nature of social capital means that a huge network of relationships with peo-
ple who have few resources may be of less value than a smaller network of relationships with people
who have substantial resources. Furthermore, those resources must be relevant to the organization.
Students with pocket change are relevant to Pizza Hut; they are irrelevant to a BMW dealership.
This discussion brings us to the brink of social networking practice. Most organizations
today ignore the value of entity assets and simply try to connect to more people with stronger
relationships. This area is ripe for innovation. Data aggregators such as ChoicePoint and Acxiom
maintain detailed data about people worldwide. It would seem that such data could be used by
information systems to calculate the potential value of a relationship to a particular individual.
This possibility would enable organizations to better understand the value of their social networks
as well as guide their behavior with regard to particular individuals.
Stay tuned; many possibilities exist, and some ideas—maybe yours—will be very successful.

Q8-4 How Do (Some) Companies Earn Revenue

from Social Media?

Having a large social network with strong relationships may not be enough. Facebook, for
example, has more than 1.4 billion active users that generate 4.5 billion likes each day. YouTube
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has more than 1 billion active users that watch more than 6 billion hours of video each month.
Both companies have extremely large numbers of active users. The only problem is that they give
it away for free. Billions of anything multiplied by zero is zero. Do all those users really matter if
Facebook and YouTube can’t make a single penny off of them?
As a business student, you know that nothing is free. Processing time, data communication,
and data storage may be cheap, but they still cost something. Who pays for the hardware? Social
media companies like Facebook, Twitter, and LinkedIn also need to pay people to develop, imple-
ment, and manage the SMIS. And where does Web content come from? Fortune pays authors for
the content that it offers for free. Who is paying those authors? And from what revenue?

You Are the Product
Social media has evolved in such a way that users expect to use SM applications without paying
for them. SM companies want to build up a large network of users quickly, but they have to offer a
free product in order to attract users. The dilemma then becomes how do they monetize, or make
money from, their application, service, or content.
The answer is by making users the product. That may sound strange at first. You don’t want
to think of yourself as a product. But try to look at it from the company’s point of view. When a
company runs an advertisement, it’s essentially being paid to put the ad in front of its users. In a
way, it’s renting your eyeballs to an advertiser for a short period of time. Google is paid to target
users with ads by using their search terms, sites they visit, and “scans” of their emails to place tar-
geted ads in front of them. In essence, then, users are the product being sold to advertisers. As the
old saying says, “If you’re not paying, you’re the product.”