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Social media: History’s least profitable revolution

Facebook's ham-handed attempt to monetize Instagram demonstrates a fundamental challenge with social media: It is the first wildly popular trend in modern history that seems unable to generate profits in keeping with its widespread usage.

Facebook set off a storm of protest on Tuesday by claiming the right to sell, for its own profit, any photos uploaded by users on its Instagram site. Instagram users quickly vented their fury, arguing that the pictures they uploaded (primarily sunsets and perversely overloaded brunch plates) were their own property.

The Instagram cash grab was Facebook's latest attempt to turn users of its free services into cash. Despite its enormous popularity, the social media giant generated little more than a dollar of revenue for each of its billion users in the most recent quarter.

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Railways and automobiles are the only real precedents for economic transformations on the same scale as the Internet. Both of those earlier industries created massive wealth for Henry Ford and Canada's own Charles Hays, among hundreds of others. By comparison, social media has generated little in sustainable gains. While Facebook's IPO in May made its founder Mark Zuckerberg ridiculously rich, worries about the company's ability to expand its revenue and profits have dragged down the company's stock in recent months. Twitter, home of another social media revolution, remains a private company because it has yet to figure out how to turn its more than 200 million users into profits.

The Instagram announcement smacks of desperation. Mr. Zuckerberg has vowed that Facebook will always be a free service, but at this point a direct method of raising revenue – possibly by charging a modest subscription fee – may not be far off. The LinkedIn model, with a free basic service and for-pay premium package, stands out as a model worth considering, given that stock's strong recent performance.

Social media present a major challenge to conventional business strategy. To function well, a social media site requires a huge user base – and building that base is easier if the service is free. But if free service translates into low or no profits, the social media industry will inevitably hit a wall. The challenge is to figure out a way to turn users into money without driving them away. Business leaders in social media will have to show the same innovative spirit as the company's programmers to make the sector sustainably viable.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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