SOCIAL MEDIA: $1 Trillion Value Added or Tech Bubble 2.0?

According to a new study, the value and productivity waiting to be tapped through social media technologies could add more than $1 trillion annually to the economy. However, as the market has proved recently, this does not guarantee outstanding returns for shareholders of social media companies, or any returns for that matter.

Based on a lengthy in-depth analysis on usage in sectors that represent almost 20 percent of global industry sales, the McKinsey Global Institute, the business and economics research arm of McKinsey & Company, claims that social technologies can create value across business chains between $900 billion and $1.3 trillion. Although, to reach the maximum value estimate, all participants would have to fully implement the technologies to improve teamwork and reinvest the savings in the most productive ways.

The report explains, “Two-thirds of the value creation opportunity afforded by social technologies lies in improving communications and collaboration within and across enterprises. By adopting these organizational technologies, we estimate that companies could raise the productivity of knowledge workers by 20 to 25 percent. However, realizing such gains will require significant transformations in management practices and organizational behavior.” The firm defines “social technologies” as the products and services that enable social interactions in the digital realm, and thus allow users to connect and interact virtually.

With the Internet already in place, social media appeared to be a boom just waiting to be found by innovative minds. As McKinsey notes, “While it took commercial television 13 years to reach 50 million households and Internet service providers three years to sign their 50 millionth subscriber, it took Facebook (NASDAQ:FB) just a year to hit 50 million users. It took Twitter nine months.” It is estimated that around 80 percent of the world’s online population uses some form of social networking on a regular basis. Much like the previous tech bubble though, did investors get too caught up in socializing and initial public offerings?

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The inbox of trendy Internet companies that recently went public is quickly becoming a pile of junk. Earlier this week, Zynga (NASDAQ:ZNGA) reported second quarter earnings that fell well below estimates. The company posted a loss of $22.8 million, compared to a net gain of $1.4 million a year earlier. John Schappert, chief executive officer, said on the conference call, “Our users did not remain as engaged and did not come back as often.” Shares of Zynga plunged 37 percent on Thursday and reached a fresh all-time low of $2.97, a far cry from its $10 IPO price. Groupon (NASDAQ:GRPN) shares also declined nearly 9 percent and hit a record low of $6.55. Groupon’s IPO priced at $20 a share last November.

Going forward, it will become increasingly important for investors not to get caught up in the social media IPO hype. Furthermore, they should realize that just because a company has a social aspect, it does not provide value added for shareholders. Strong business models still matter. One of the few popular social names to trade higher than its IPO price is LinkedIn (NYSE:LNKD). While it still trades at an extreme valuation, the company brings professionals together to network and build careers, clearly more value added than managing a virtual farm. LinkedIn is also seeking to expand its business model by teaming up with Microsoft (NASDAQ:MSFT). It plans to integrate its service with Microsoft’s Outlook email client in order to connect contacts from the two companies. David Breger, a product manager at LinkedIn explained, “We know many of you spend a lot of your professional hours working in email and we believe the integrated Outlook Social Connector for the new Office will help you be even more efficient and productive.”

In the latest sign of investors getting too carried away with the social media craze, Facebook reported its earnings late Thursday. The company reported a net loss of $157 million, compared to a net gain of $240 million a year earlier. Facebook finished the quarter with 955 million monthly active users, but that has not translated into gains for retail investors. On Friday, shares of the social media giant plunged more than 15 percent to hit a new record low below $23, roughly 40 percent below its IPO price.

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