Supply, Demand & Social Media Investing

"The check is in the mail" isn't a Facebook post (Nasdaq: FB) or Groupon deal (Nasdaq: GRPN) that investors have been hearing lately, and with Facebook shares trading down 53% from their initial offering price and Groupon sliding from $31 to $4, they might not want to hold their breath.

The McKinsey Global Institute (MGI), the business and economics think tank arm of privately held consulting giant McKinsey and Company, doesn't appear to have gotten that status update, however. In a breathtakingly bullish report issued in late July, MGI "estimate[s] that between $900 billion and $1.3 trillion in value can be unlocked through the use of social technologies in the sectors we examined." A discrepancy that would facilitate the throughput of a truck, as the consultants might say.

The Potential of Social Media

Companies have an opportunity to raise the productivity of employees
including managers and professionals by 20% to 25%.

To understand whether McKinsey's exuberant optimism could best be categorized as irrational or insightful, I read all the way through the 184-page report, the research for which was entirely underwritten by McKinsey partners without relying on a dime of vested-interest industry funding. I had three agendas other than watching my black printer cartridge fade to 50 shades of gray:

• As someone whose day job involves consulting in the social media field, I really, truly wanted to absorb the strategic, global perspective of the report's findings.
  
• I wanted to understand how McKinsey would address the profound gap between its positive assessment of industry potential and the disappointing stock performance we've seen for social media stocks so far.
  
• Most important, I was looking for useful investment direction, including any social media trends or new business models that would appear to be bright spots in an industry whose promises of ROI have been, shall we say, inflated?

I came away impressed on all three scores. The report combines analysis of social media in the abstract with absorbing mini-case-studies of groundbreaking real-life social media success stories to identify, not only social media trends so far, but what to look for as the industry matures. If you have two hours and want to get 75% of the value of a marketing MBA for free without leaving home, read this report. Then, if you have two more hours, read it again.

The first thing you'll come to understand is why Facebook has been such an investor disappointment and why still-private companies such as Pinterest should be approached with caution. It isn't because they've missed the boat on mobile apps or failed to target their advertising: It's because they are technology-driven rather than consumer needs-driven.

They're like the sword-brandishing Bedouin in Raiders of the Lost Ark, full of impressive visual moves but powerless when Indiana Jones simply takes out his pistol and fells him with a single shot. The takeaway here? The marketplace is so easily bedazzled by new technology that it postpones asking the most important question until the novelty wears off: Once the whiz-bang factor has run its course, will a social media application or platform enrich and improve people's daily lives?

So, the McKinsey study takes a different tack, by moving its recommendations away from specific companies or technology platforms to identify broad future sources of social media value. This reasoning leads to a "Top 10 List" of social media strengths:

1. User co-creation of new products
2. Demand forecasting
3. Distributed business processes
4. Market research and consumer insight
5. Marketing communication and interaction
6. Lead generation
7. Social commerce
8. Customer care
9. Collaborative communication
10. Sourcing talent within an organization and matching it to roles

And what industries are positioned to become what McKinsey calls "Enterprise 2.0" and uniquely profit from social media technology and marketing leadership? There are five:

1. Consumer packaged goods, not only in terms of product development but user community development and social shopping as well. A prime example of this is Kraft's creation of the South Beach Diet community.
   
2. Consumer financial services, in many different ways including networked support (Farmers Insurance agents), novel products (Friendsurance, a German company, which allows groups to save money by applying for insurance together), internal social networks (TD Bank), and community assistance (American Express Open small business network).
   
3. Advanced manufacturing, particularly insemiconductors, automotive, and aerospace. Intel, a leader in predicting demand via social interactions, the social launch of the Ford Fiesta, and Local Motors' crowdsourced creation of a combat-ready vehicle in five weeks make for riveting case study reading.
   
4. Social sector, including not-for-profits and NGOs. Here the social and financial impact is potentially huge, including using social media to predict social unrest, creation of ground crisis-mapping software, crowdsourcing the provision and mobilization of resources, and support of mission through fundraising.
   
5. Social technology providers, the most important of which is social media as a source and analytical tool for big-data. For example, use of Twitter to assess public moods has already improved the accuracy of one DJIA stock market predictive model from 46.7% to 86.7%.

The McKinsey report doesn't remove the uncertainty from social media investing but it provides a lot of clarity. It reminded me that no matter what bells and whistles technology may attach to the value proposition, there will never be a substitute for meeting consumer demand. If you build it just to build it, they might not come.