James L'Angelle
Univ of Nevada, Reno
Dr. Paromita Pain
Summer 2019
Disruptive Innovation and Social Media
Paradigms are meant to be replaced. The phenomenon known as "social media" may or may not be considered a paradigm in the strict sense of the word but it has made a major mark not just on the internet but on culture itself.
Within the confines of the social media universe, trends rise and fall depending on the demands made by consumers and demands developed by industry. Pressure from both of those demands creates an atmosphere where progress, often times radical, replaces inertia. That pressure in radical form is defined by Clayton Christensen of Harvard University as "disruptive innovation."
“Disruptive innovation” was outlined in the Jill Lepore 2014 article in The New Yorker titled “The Disruption Machine.” Citing one of her associates at Harvard, Clayton Christensen, she defined disruptive innovation as;
“The selling of a cheaper, poorer quality product that initially reaches less profitable customers but eventually takes over and devours an entire industry.” (Lepore, New Yorker)
Curiously, Lepore goes on to report that a company using the disruptive innovation paradigm will have to fail in order to succeed. She cites Morrison-Knudsen's effort for mass transit which resulted in total failure of the company.
"The basic venture capital system is structured so that there are built-in conflicts of interest between the VC and the entrepreneur," (Max Chafkin, inc.com)
The market for upstart social media networks in the days of Friendster survived in a narrow range and investors hedged their bets by spreading cash out across the board. Naturally, when a better platform surfaced, the money went there, and Friendster was relegated to the dustbin of history; the first disruptive innovation in social media had failed.
That, in fact, is the paradigm we are looking for in whether a social media endeavor, or social media itself, will survive in cyberspace, where survival of the fittest is the bottom line, and money is what fuels it.
Fast forward to the current status quo of the primary social media platform, Facebook (NYSE:FB). The company went public in May of 2012. It's current stock value is just under $200 a share. Its primary source of revenue is, not being liked by everyone posting pictures of their pets or trip to Paris, but advertising. By the 4th quarter of 2018, the revenue topped just over $16 billion, most of which were publishers from the United States. Facebook depends on its US advertising to survive, there is no diversification, a basic component to stay in business in America. (Statista)
"...despite Facebook’s advertising growth, its user growth rate slowed during the quarter. The social network only added 38 million new monthly active users during the quarter. " (Digital Commerce 360)
Now that we have set the stage for the crash, let's examine the mechanics. The above might be considered the hard scientific data on the current state of social media. We might call it a synthetic, or an inductive, interpretation. What about the analytical, or deductive interpretation? That's where we can see the weakness in the system, and it goes back to what happened to Friendster. The evolution from that site through the rise of Myspace to the eventual social media pinnacle established by Facebook is no matter of personal privacy, everybody knows about it. The difference was that Myspace never went public and was bought out by NewsCorp in 2005 (NAS:NWS);
"News had been looking for $100m but settled for $35m offer from advertising targeting firm Specific Media. The sale is believed to be mainly in stock and News Corp will retain a small holding." (The Guardian)
Of course, what else would the site be good for but to run ads, just like the rest of the social media platforms that have no diversified material products to sell. This brings us back to deducting just what the flow chart looks like to the eventual decline of Facebook itself. Consider two things, where the revenue is coming from to float its income and who are the venture capitalists behind the wall propping it up.
First, the graph shows half its income is in the US-Canada market, which makes sense because that's where the money is. That's who can afford to promote their favorite pet or trip to Paris video on mobile phones. The problem isn't how much Facebook rakes in on the successful market, but its limited returns in The Global South. The largest prospect for growth is there, as seen in the explosion of users from India; even though the prospect to find ad publishers is very limited. No matter how many people Facebook has coming into the site, if the money isn't there to support them, the stress will fall on the infrastructure. (Graph, Merch Today)
Footing the bill for the stock is Vanguard Group out of Pennsylvania, one of the largest funds in the world. Its portfolio is spread across a myriad of sectors but its top holdings fall into a limited category, with ten out of top twenty stocks on the Dow Jones Industrial Average of 30 stocks. Even though there is a strong tech presence in the top twenty, it all about drugs, and it always is. Three of those are on the Dow30, Proctor & Gamble (NYSE:PG), Johnson & Johnson (NYSE:JNJ) and Merck (NYSE:MRK). (Nasdaq) Keeping with the theory that venture capital spreads cash across the sector, betting big in hopes another Google (NAS:GOOG) will surface from the faces in the crowd, Vanguard is also the principal investor in Omnicom (NYSE:OMC). (Nasdaq) OMC is one of the largest ad agencies in the world and even though its venues are different, it stands in direct competition with Facebook for consolidating the worldwide advertising publishing market. They are on a collision course, in effect, a head-on train wreck.
When the crews clear the debris, it will be clear OMC survived due to a given number of basics, depending on global reach across a wide variety of venues, diversification in content, the ability to undercut the cost, and add to that the variability of clients it can attract for advertising. As FB revenues decline, Vanguard will opt to keep its particular portfolio in the sector balanced and the money will go not just to OMC but others who, as disruptive innovation requires, will emerge from the rubble. The timeline, as in any good deductive inquiry, is always up for speculation.
It depends on the market as a whole, global pressure on the survival of social media as a bona-fide cultural necessity, emergence of it in regions such as the poorer Global South and the ability of those in the sector to support the infrastructure required to keep it online. There are the other usual restrictions, such as political, as seen every time some general decides he wants to topple a Third World country in a coup and an internet blackout is ordered with surveillance and shutting down of social media to contain organizing and dissent. Can Facebook, Instagram, Twitter, all of the cars on the train survive the crash?
Works Cited:
Disruptive Innovation, Lepore, Jill, The Disruption Machine, 2014, https://www.newyorker.com/magazine/2014/06/23/the-disruption-machine
Chafkin, M., Friendster, How to Kill a Great Idea, https://www.inc.com/magazine/20070601/features-how-to-kill-a-great-idea.html
FB Revenue, https://www.statista.com/statistics/218701/largest-source-of-revenue-of-leading-tech-companies/
FB Growth, https://www.digitalcommerce360.com/2018/07/25/facebooks-ad-revenue-jumps-42-in-q2/
MySpace, https://www.theguardian.com/technology/2011/jun/30/myspace-sold-35-million-news
FB Revenue Graph, https://martechtoday.com/despite-ongoing-criticism-facebook-generates-16-6-billion-in-ad-revenue-during-q4-up-30-yoy-230261
Vanguard Top, https://www.nasdaq.com/quotes/institutional-portfolio/vanguard-group-inc-61322?sortname=sharesheld&sorttype=1
OMC Investors, https://www.nasdaq.com/symbol/omc/institutional-holdings
JOUR 304.3001
James L'Angelle
Univ of Nevada, Reno
Dr. Paromita Pain
Summer 2019