The Key To Unlocking Value For Social Media Companies [Facebook Inc, Twitter Inc, GrubHub Inc, Weibo Corp (ADR)]

social media etfsTara Clarke: So far in 2014, we’ve seen Facebook Inc (NASDAQ:FB) continue its dramatic share price rebound, Twitter Inc (NYSE:TWTR) plunge more than 40%, and two new social media IPOs debut -GrubHub (NYSE: GRUB) and Weibo (NASDAQ:WB) – but have you ever wondered, how do social media companies make money?

We asked Money Morning E-Commerce Director Bret Holmes to give us the scoop. Part of Holmes’ job is to utilize web advertising via social media platforms to best market Money Morning. As a result, he’s on top of what’s going on inside of today’s social media giants.

Holmes said the key to unlocking value for social media companies is successful advertising models.

“Social media companies are legitimate advertising websites, no different than, say, Google or Yahoo. The same way Google made its money is the same way Twitter and Facebook will make their money,” Holmes explained.

And web advertising via social media is a market that’s growing at a staggering rate.

A 2013 Nielsen report showed that 89% of advertisers use free social media advertising and 75% use paid social media advertising. The report also highlighted that 64% of advertisers expected they’d increase their paid social media advertising budgets over the course of 2013. On May 12, BIA/Kelsey released its U.S. Social Local Media report. The research firm projected that total U.S. social media advertising revenue will grow from $5.1 billion in 2013 to $15 billion in 2018, for a compound annual growth rate (CAGR) of 24%.

That means a lot of opportunity for social media companies to make major money.

The trick for social media companies looking to profit as ad platforms is to find the best way to insert advertising into the user’s experience without impacting the user in a negative way.

And that advertising methodology is hugely important to these companies’ revenue growth.

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