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The Economics & Money of Social Media

Exploring the impact of social media on lives, businesses and economies — as well as the cost of becoming an influencer.

2007 was the year that changed the world. Apple launched the iPhone, the GFC began, Facebook overtook MySpace and introduced the like button, and Season 1 of Keeping Up with the Kardashians aired. These separate events have since weaved through each other to shape daily lives and the world today. Almost 80% of us will check our phones within 15 minutes of waking up and will continue to check them every 12 minutes throughout the day. It’s time we talked about how social media is impacting our lives, businesses, economies, and while we’re at it let’s explore the cost of becoming an influencer.

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Consumer Level: The Personal Impacts

Social media platforms like Facebook, Instagram, Snapchat, Twitter etc. are powerful positive and enabling tools but like most things they have the potential for negative side effects when overused.

One of my close friends is what you might call a “nano-influencer”. Active on Instagram, engaging with content and creating her own. After a period of activating and deactivating her account she’s reduced her screen time from 5 hours to 2 hours and only uses her account for close friends, hobbies and genuine interests. The beauty bloggers and make-up vloggers are gone from her feed and the sense lifestyle competition has been replaced with a calmer happiness. Her journey through digital connectedness and its impacts on time and happiness is echoed throughout personal stories and research literature.

Our phones and social media are designed to be addictive. To get us hooked and reengaging for more content, likes or doom scrolling. The amount of information available to us is incredible. Social media can shape elections, change ideas, encourage more openness and social inclusion. However, algorithms in the platforms are programmed to reinforce ideals and give us more of the same content. This means we can get stuck in our own personal internet bubbles and receive constant reinforcement of single viewpoints or potential misinformation. This leaves us prone to confirmation bias and extreme viewpoints which drastically shape our shopping and voting behaviour.

Social media’s addictive properties shape our shopping behaviour in other ways too. If you follow a budget savvy influencer then maybe you’ll become more frugal and thrifty, but according to an Allianz Insurance survey 57% of millennials made unplanned purchases because of social media. Keeping up with friends, fear of missing out (FOMO — affects 55% of users) or trying to show off a particular image or lifestyle has seen 48% of young people overspend. Underpinning this is that 90% of young people believe social media makes it easier to compare their lifestyles with others. It’s no wonder businesses are spending billions on influencers.

But keeping up with friends and staying on trend isn’t everything social media is about. There’s also elements of knowing the influencer before they get big, being the person that knew them when they were small and cool. It’s like knowing the band before they got big and popular. There’s just something about being ahead of the curve. There’s also the luck and lottery that we might make it rich and famous too. A lure that’s constantly reinforced with stories of “how I made it as an influencer” or “how you can get rich on Instagram”.

Social media when used in balance can be powerful positive tool and like my nano-influencer friend I personally use social media for news, keeping up with the economics community, finance stories and what friends and family are doing. It helps me stay connected and during a crazy year, I’ve really valued that but it takes discipline to not go tumbling down the rabbit hole and to be honest — I wish I didn’t check my phone as much as I do.

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Commercial Level: The Business of Social Media

There’s a whole heap of money in digital platforms. Facebook’s market cap is around $789B, Snap Inc. $72B, Twitter $43B and TikTok is expected to be $180B. So just in company valuation there’s over $1 trillion dollars wrapped up, and that doesn’t include the billions in revenue the companies and influencers earn.

The psychological impacts of social media clearly shape our spending habits so we know businesses can win from the commercialisation of social platforms. The headline numbers make it clear that investors, shareholders, founders and financial markets are winning, but there’s also the influencers who are collectively bringing in billions of advertising dollars every year.

Business

Businesses are winners and losers from social media. For a lot of companies, using TikTok and Instagram really isn’t that different from advertising in old forms of media like Vogue, Cleo or Vanity Fair. Retailers in particular are spending money on advertising to get brand awareness and to promote new products. Social media has changed the marketing mix for retailers, and it’s shown the success of adaptability, but it hasn’t fundamentally disrupted them. With over $3.5K being spent on average by influencers starting out. The firms winning big from social media and aspiring influencers are the camera, tripod, lighting and editing manufacturers.

Surprisingly it’s boring businesses like banks, utilities and non-retailers that are being severely disrupted by social media. Our phone addictions have significant impacts on worker productivity. A recent study by R.Dell’anno et al. found that on aggregate social media has a significant negative impact on economic activity. The mental health impacts like addiction and shortened attention span or inability to focus create massive productivity drags. If we check our phones every 12 minutes through the day and it takes people on average 15 minutes to refocus to a task, then I guess a lot of people never really switch on to their day jobs.

Influencers

Influencers don’t have an issue switching onto their day jobs though, and we’re often reminded by the images of their opulent and luxurious high life that they share with us. With business spending big online and influencers as the beneficiaries it’s no wonder this field is exploding.

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The dream of making it rich as an influencer drives huge amounts of traffic onto platforms and has an obsession for people around the world. Stories of making $750K per post, travelling the world, living in luxury and owning multiple properties by doing nothing more than posting on social media. It’s tantalising fantastic and anyone can do it.

Becoming an influencer is incredibly hard work, expensive and comes at huge opportunity costs. Viral Nation, a “global influencer marketing agency” highlights that influencers are more likely to succeed if they are already wealthy or privileged as influencers can easily spend upwards of $200K on trying to build presence and brand. According to Fashionista, influencers spend more than $30K per year just to “maintain the standards of physical beauty represented daily in our Instagram feeds” and yet approximately 70% of Instagram posts don’t get seen.

Making money through social media is about visibility, providing a service and supply and demand. It’s basic business but there’s only a tiny percentage of people that will be successful. Company’s advertising online want to get the most bang for their buck. They want to spend on influencers that have high levels of user engagement because user engagement translates into sales.

This is where two economic principles come into focus. First is the composition of the influencer market and the supply of influencers versus the demand of companies. The second is the principle of marginal returns and diminishing returns.

  1. The Influencer Market
    In recent years the number of businesses wanting to advertise on social media way outpaced the number of monetising influencers with social reach. Because of this imbalance and a lack of competition the early influencers managed to reap the rewards. However, given the low barriers to entry the number of influencers is rising and as the number of influencers increases their relative value decreases. As the number of influencers increases the opportunity costs and financial costs of becoming an influencer also increase. The big cost is time, how much of your life is dedicated to creating content and being on camera. With higher volumes of influencers companies can be more selective, they can choose who and how they’ll advertise, and they’ll pay less because there’s more and more people willing to offer their services in order to become an influencer.
  2. Return on Investment and Diminishing Returns
    The most valuable influencers to companies looking to sell products aren’t the Cristiano Ronaldo’s or Kim Kardashians’ of the world but the micro and nano-influencers. These smaller influencers have higher user engagement and consequently higher returns on the advertising spend for companies. As users, we are more likely to trust the recommendations and reviews from peers and people that have fewer followers. This means that follower growth is only useful to a certain point and then it becomes harmful. Those with millions of followers often have very low levels of engagement. The follower pie is carved in such a way that 52% of profiles have less than 1K followers, 37% have between 1K-10K, 8% have 10K-50K, 1% have 50K-100K and 0.32% have more than 100K followers. So, although more followers means higher fees and more celebrity status, it also means jobs are more infrequent and are usually as part of a larger campaign or to sell self-branded products.
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Macro Level: A Global Economy and The World Around Us

It’s obvious now that social media is changing our habits, how we spend, the wealth distribution in our society and how we perform at work. When we multiply all these little decisions and impacts across the world then we have huge changes underway. Influencers don’t just sway how we shop or what experiences we look for, they actually influence innovation and the flow of capital.

Many of us won’t use our phones for anything other than phone calls, messages, emails, and social media (that includes YouTube). The demand for mobile phones and internet enabled technology driven by the scale of these platforms has shaped multi-billion-dollar investments in lithium, mining, manufacturing and retail.

Deloitte claims that Facebook alone has created almost 5 million jobs around the world in development, marketing, advertising etc. However, what Deloitte fails to explain is that there’re also millions of jobs that have been displaced or lost by the rise of these platforms and in the process of creative destruction we’ve become more efficient at reaching our audiences. Yes, influencers are employing photographers, editors, make-up artists and the rest, but 96% of YouTubers don’t make enough annual revenue to reach the US federal poverty line.

Although influencers are generating huge incomes in advertising revenue almost 2/3 business have experienced influencer fraud and 52% of millennials don’t trust influencers anymore. The hyper-commercialisation of social media makes the platforms highly extractive and reduces the genuine experience or connection user are looking for. They extract wealth from the user base to consolidate it among investors and influencers.

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The addictive nature of phones and social media are having terrible effects on our youth.

Suicide rates among 10–14 year olds are up 13% since 2007 and former Facebook employees liken the business to Big Tobacco. What’s scarier is that these are kids, the youth of today that are being harmed. They hold the world in their hands and the future is there’s to own. From a humanitarian perspective this is devastating.

From an economic viewpoint these platforms are destroying innovation, ideas, future productivity and creation.

There’s also the consumerism, manufacturing and waste that goes alongside the increased prevalence of social media. The more we buy to keep up with our friends and trends the more that needs to be produced and eventually disposed of.

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The challenge we are all faced with is how do we make our social platforms social. How do we make them a positive influence on our lives and the lives of others? It’s not the platforms or the technology that’s creating and consuming the content — it’s us. As my nano-influencer friend will now tell you it’s about minimising your attachment to your phone, connecting with content that means something to you and enriches your life or gives you a feeling of joy. If you’re competing with another person you’ve never met, or worried about what they think of you then ask yourself — would you let this person in your home? If you wouldn’t let them in your house then why are you letting them in your head.

I hope you’ve found this article insightful and interesting. In the highly secretive world of social media gathering the data and insights to write this article was a challenge. Here’s Simon Sinek in an informative and humorous 4min video on the addictive nature of social media and technology.

Sources

Wink Models, Vox, Elsevier, Business of Apps, NBC News, NCBI, CNN, Influencer Marketing Hub, Viral Nation, The National News, Inside Higher Ed, DOI, The Guardian, Charles Schwab, Allianz Insurance, Fast Company

If you have any questions then please feel free to comment, and if there is anything you’d like to see analysis on or read about in the future then let me know.

Also, please note that this article does not represent financial advice or the views of any organization; it is only the opinion and analysis of the writer.

Thank you for reading.

Yours,
Chris Leeson

Bringing finance and economics to you with a focus on in-depth analysis and everyday life.

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