Behind the Money

Social Media Sites Are Big—But Not at Making Money

In the back of his report on Pandora, BTIG’s Rich Greenfield puts a list of questions the analyst would like to ask management.

“How many advertisers do you have in rotation per day in a given market?” asks Greenfield, who put a ‘sell’ rating on the stock Thursday. “With a personalized service that learns as you use it, it is annoying to keep getting Livingsocial ads every time you boot up Pandora, even if you have said no thanks 20 times before. We really, really do not need a cupcake coupon!”

Greenfield’s frustration exposes a problem every new media company going public this year will face: Will their advertising model allow for growth beyond a few other non-profitable players trying to make it in the same space?

“There are these symbiotic relationships,” said Paul Verna, a senior analyst for eMarketer. “A lot of Pandora’s ad income is coming from a company that’s not particularly relevant to its users. Unless Pandora can open up floodgates and get a new round of advertising from another source or sign up more premium users, it doesn’t seem like it’s going to lead to profitability.”

Shares of Pandora have plunged below the price of the initial public offering that took place earlier this week as investors and analysts question the long-term growth potential of its ad model. Shares of Linkedin have lost a third of their value since the professional social network went public in May.

Livingsocial, the group discount site that hocks those cupcake coupons on Pandora relentlessly, is considering a public offering soon, CNBC reported Friday.

The site has a revenue goal of $1 billion, according to the New York Times. However, its large relationship with Pandora may be a hindrance toward reaching that goal, let alone profitability, according to analysts, because it limits the company’s ability to target customers as well as bigger competitor Groupon.

“Pandora advertising feels more regional than hyper local,” said BTIG’s Greenfield, in his report. “We hear a lot of Livingsocial ads for Foxwoods when we listen to Pandora in New York City. We do not, however, hear anything like ‘Come down to Jim’s BMW’ or a local restaurant running a 2 for 1 special.”

To be sure, sheer subscriber growth won’t be a problem for Pandora. About 80 million Internet users will tune into online radio weekly this year, according to eMarketer. By 2015 that number will double to 158 million, according to the market intelligence firm.

The new media player everyone is waiting on – Twitter – will face a different kind of problem. Rates for its ‘promoted trends’ advertising are reportedly surging with big-name clients such as HBO and Jetblue signing on. However, will Twitter compromise its appeal as an uncensored soapbox for the populous as it grows this trend.

“Brands that are playing in that space have to have a calculated risk because Twitter is also the first place people go to complain about a brand,” points out eMarketer’s Verna.

Bottom line: Facebook, Twitter, Linkedin, Pandora, Groupon, Livingsocial have exploded onto the scene, sporting millions of users and causing investment bankers to lick their chops. But without a sustainable advertising model that expands beyond each other, the growth and profit margins demanded of public companies just won’t be there.

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