What's not to like about social media? People freely share their thoughts and photos while social media websites and advertisers make a lot of money.
Those good times won't be ending anytime soon, according to a new report from Gartner Inc. The Stamford, Conn.-based IT analyst firm predicts global social media revenue will reach $16.9 billion by the end of this year. That would amount to a 43% increase in revenue from last year.
And those gains should happen despite only a moderate uptick in new social media users, the study said.
"Usage of online social media has matured, and more than one billion people worldwide will use social networks this year," Neha Gupta, a Gartner senior research analyst, wrote in the study. "Although the number of social media users is large, and in some cases, increasingly mature in their usage patterns, the market is still in its early stages from a revenue perspective."
Advertising will keep driving social media revenue this year
Businesses typically worry about losing revenue when their industry matures and customer growth slows. But social media should continue to see big gains in revenue this year, largely because of new approaches to online advertising, the study said.
The money that social media firms like Facebook, LinkedIn and Foursquare generate through advertising has historically been the largest contributor to social media revenue, the study said, and it's expected to keep revenue flowing this year, potentially bringing in $8.8 billion.
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The Gartner study explained just how advertising drives social media revenue: Marketers allocate a high percentage of their advertising budgets to social networking sites because they know the eyeballs are there. Marketers can also target those ads to select consumer segments by unlocking a user's friends, comments, messages, photos and all their social connections. The social media companies, meanwhile, gradually increase the advertising rates that marketers pay as the number of users on their sites grows.
"Social media sites are becoming more innovative in their ad products to attract marketers," Gupta wrote. "Social networking sites should deploy data analytic technologies that interrogate social networks to give marketers a more accurate picture of trends in accordance with consumers' needs and preferences."
Gupta could not be reached for an interview prior to the publication of this article.
Social media revenue depends on innovative advertising
The new Gartner study comes out amid growing concerns about the maturity of targeted advertising in social media, and specifically, whether marketers can use those ads to foster personal relationships with current and potential customers.
For example, Facebook lost nearly half of its estimated market value after its much-hyped IPO, in large part because of investor doubts about how the social network can profit from advertising. Doubters point out that it's one thing to know if a user "likes" a product, but a social media site such as Facebook typically doesn't know if the user ends up purchasing that product.
Zach Hofer-Shall, an analyst at the Cambridge, Mass.-based research firm Forrester Inc., said this is a hurdle for social media networks such as Facebook. Seemingly every month, Facebook introduces a new tool or vision to address how it will advance advertising, "but they need innovation," he said.
Essentially, the great hope of social media advertising is for marketers to have individual relationships with users, to interact with them directly about products, and take advantage of the connectedness of social media, Hofer-Shall said. "That's the relationship part we've never had before. They need to monetize that," he said.
Still, the current form of social media advertising is nothing to sneeze at, Hofer-Shall said. Marketers use social media sites for "hypertargeting," the targeting of interest-based segments of users with display ads. These are ads many users ignore, but still generate a lot of revenue, he said. For instance, a display ad on Facebook -- which is expected to reach 1 billion users this fall -- is a better platform to market on than any other outlet, he said.
Marketers also advertise for free on sites such as Twitter, Hofer-Shall said. The only cost there comes from training and paying staff and buying the technology, he said.
While social media sites are producing billions in revenue, questions nonetheless linger about their ability to take advertising to the next level.
"Why do they really need to innovate? Why is everyone so critical of a company making a billion dollars?" Hofer-Shall said of Facebook. "The whole promise of social is the exchange and the connectedness. It's not sexy [for a marketer] to just say, 'Look [at] all that money we made from buying an ad.'"
Number of social media users continues to grow
The Gartner study also predicts the number of social media users will continue to grow at a moderate pace. New forms of media and entertainment will keep users engaged and attract new ones, and competition between companies will lead to new forms of social media, the study said.
Some of these new users will probably spend money on games that appear on social sites. Social gaming revenue is expected to reach $6.2 billion in 2012, the study said. Social media sites will keep introducing games because of the opportunity to make money, and the sale of virtual accessories for these games -- such as new runners on Temple Run -- will remain the primary source of revenue, the study said.
Gartner also expects social gaming to grow because major console gaming publishers are entering the field, and because big social developers such as Zynga, GREE and DeNA have moved to an open-platform strategy that improves user convenience and choice. It is unknown if the Gartner study considered the market worries about Zynga and its recent loss of users.
Lastly, Gartner predicts limited success with premium subscription models on professional networks such as LinkedIn and Xing. More users will pay for accounts on these networks, but the sites are moving toward lower subscription fees and are also shifting focus to other forms of revenue -- including advertisement-based sales – after seeing a decline in their subscription to revenue ratios, the study said.