There have been a couple of interesting deals in the past seven days, but I wanted to hold off on commenting on those until next week. Rather, this time I wanted to take a look at the world of social media.
Just five or six years ago, nobody, a few hyper-geeks aside, knew what social media really was. Then came Facebook, and social media became The Next Big Thing. Social media didn’t begin with Facebook of course – in the early ‘90s early internet adopters gathered together via BBS and Compuserve – but it was with the rise of Facebook and then Twitter (and to a lesser degree, MySpace) that social media, social networks, call them what you will, entered mainstream consciousness.
When Facebook floated back in May, it was oversubscribed and valued at $104bn (about £66bn). Shares have since tanked and the company is worth a fraction of what it was just five months ago. At the time of writing they were hovering around $20 each – up a bit from September’s low, but still way short of that heady IPO price of $38. Even the recent announcement that the social network giant had a billion (one seventh of the world’s population!) users left investors distinctly unimpressed. The long-mooted flotation of that other social behemoth, Twitter, still seems a very long way off – possibly because enthusiasm for social has waned somewhat since May.
The problem is that although millions of Facebook users regard their social network as one of life’s essentials along with food, water and shelter, investors are interested in profits. And Facebook doesn’t make very much money – just over a billion dollars last year, which makes it look overvalued even now, and certainly at IPO. More critically, it’s actually difficult to see how it will ever make the kind of profits its great rivals, Amazon, Apple and Google do. Nobody’s come up with a truly convincing way of monetising social media. Users seem less and less tolerant of intrusive ads, voucher/ticket offers and group buying have never fulfilled the promises made for them, and even social games (think Zynga’s Farmville) seem to be declining in popularity.
If we look at the Green Square Deal Monitor, there have only been four social media acquisitions of any significance this year: The Mission’s buyout of Addiction Worldwide last month; a private equity firm snapped up sports specialist Picklive; US-based Buddy Media swallowed up a small UK social agency called Brighter Option; and, in perhaps the biggest of these deals, Ulster TV bought Simply Zesty.
Otherwise, all the action has been in mega-deals such as the purchases of LBi and AKQA; or in specialist areas such as data analytics, PR, experiential and mobile. These kind of businesses are attractive to acquirers because they operate in fields with proven track records of sustainable profitability and growth. They are likely to continue to be so.
There is no shortage of good, well-run and highly-regarded social media agencies in the UK: We Are Social, Yomego, Qube, Fresh Networks and many, many others. Most of them are still independent, perhaps because they like it that way (more on this in a moment), but it could be because the major groups haven’t really understood how the value is generated within a social media context.
If these highly regarded social media agencies had been operating in any other area – advertising, analytics, search marketing, data, design – and had the reputations they currently enjoy, I can’t help thinking that the big boys would have snapped them up.
Perhaps the real reason that many of these agencies still enjoy some degree of independence is that potential acquirers are just not convinced that anyone can make money out of social media – a feeling that will have only been strengthened post-Facebook’s IPO.
But this is where they are wrong. I am becoming increasingly convinced that making money from social media via digital direct marketing and pushing offers should not be a brand’s biggest driver. The value should be seen as the true engagement (often in real time) that they experience with their consumers and a way of helping reassure consumers in their brand choice by listening to them.
Thus, social media spend by a brand should not always be measured in terms of how many sales it generates, but in the wider context of driving brand value and trust over the long term - which is of course far more difficult to measure than simple sales. (This ultimately leads to the question over what is deemed social media and what constitutes PR. Not a debate for this piece but certainly for a later one).
What this means is that those agencies that are focused on the more consulting element of managing social media on behalf of brands must ultimately have the highest inherent value. Consulting, as many PR agencies know, is a sought-after added-value proposition. Brands need to realise that social media isn’t about more sales but audience engagement and they need to stop stressing about how they make money from it. This should be pleasing news to the social media agencies delivering these services.
Which brings me neatly back to why so many good social agencies haven’t yet been snapped up. At Green Square we know that it’s because the big agencies themselves aren’t yet ready to sell – even when the offer of a tempting deal is waved in front of them. They’re doing what any sensible business does – they’re concentrating on becoming more profitable and more skillful, building sustainable models and scale and adding real value. I believe that by the time they’re ready to sell, the acquirers will be queuing up to buy them.
So, while economic uncertainty hasn’t hit M&A activity too hard this year, it seems that buyers are going for stuff they know, or can see benefitting them in some way, something that has – at the very least – reasonable prospects for growth and profitability.
We may all love using social media, but nobody’s currently buying or selling – but probably only because the medium isn’t properly understood in terms of the value it offers with everyone hung up on measurable ROI.
Once investors realise that social is possibly more about long-term brand building than advertising and digital DM, things will change.
Tony Walford is a partner at Green Square, corporate finance advisors to the media and marketing sector.
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