Social Tech: Intangible Product and Unimaginable Scale

One of the most amazing concepts about social media is that as a business, it operates at an unimaginable scale with what is essentially an intangible product. By “intangible product” I mean that a company like Snapchat, Twitter, Instagram or Facebook doesn’t actually have a product that uses traditional distribution methods since it’s online, and you can’t physically touch what arises from it (contrary to Amazon).

Thus, the use of servers end up becoming the company’s main cost if the product successfully scales to thousands, or in the best case, millions. 

One of the best examples of the one-of-a-kind scaling nature of social media is the rise of Instagram. It launched in October 2010, and within three months, had 1 million users. In February 2011, the company received $7 million in Series A funding from Benchmark Capital. About a year later in April 2012, Instagram was valued at $500 million after securing an even bigger round of funding, $50 million, from Sequoia Capital.

All Instagram allowed you to do was share photographs with your friends and other people you know. It doesn’t sound like anything revolutionary, but when it exists within a instantaneous medium, it ultimately changes how people communicate. So at first, even if the idea doesn’t seem world altering, its value is actually greater than one would expect. Similar to how the telephone and telegram revolutionized mass communication, new age companies like Instagram, Twitter and Facebook have certainly restyled the way in which people interact.

The real issue for these businesses is making legitimate revenue. Since their product isn’t actually built to sell, the main way they make money is through striking advertising deals. So in the early stages when these companies don’t have ads running, investors bet massive sums of money based on user growth. The logic is, once ads sell to a huge user base, the company will then be worth all those dollar bills.

According to TechCrunch, Snap Inc. was projected to amass near $1 billion in revenue in 2017, but through Q1, it notched only $149.6 million, and at the Q2 close, it hit $181.6 million. These numbers have steadily increased over the years, as you can see from the graph below of the 2015 quarterly revenues. From $4 million of revenue in Q1 to $33 million in Q4, the growth of revenue was obvious in 2015 because the user growth was still flying high.

Since user growth has slowed in 2017 for Snap, the revenues haven’t been going up at such quick of a rate. With this trend happening, it appears Snap is trying its best to convince advertisers to use the app, releasing an Ad Manager platform in June that helps to optimize ads for appearance on the app.

Fifty years ago, most of what I’m talking about in relation to technology didn’t exist. And people would’ve thought building a billion dollar company, while making little to no revenue, was impossible. But now, the ever increasing use of mobile technology has opened up a market for intangible products, whether or not the actual money being earned measures up to the product’s hype.

Housing Vacancy Rates

The economic indicator of housing vacancies and homeownership delves into the overall status of homeowners and renters, particularly the vacant rates. Rental and homeowner vacancy rates are obtainable for U.S. regions, states and for the 75 largest Metropolitan Statistical Areas (MSAs), and information about geographies are accessible both quarterly and annually, according to census.gov.

The real question is, how do we decipher these rates in the short term (the past few years) and in the long term (a decade or longer)? What does an understanding of these rates tell us about housing issues in the United States?

As of July 27, 2017, the rental vacancy rate was 7.3 percent, and the homeowner vacancy rate was 1.5 percent. These numbers have noticeably improved (decreased) since 2010. In fact, from 1995 to 2017, the rental vacancy rate hit its highest number in 2010, a 10.23 percent average in all four quarters. The homeowner vacancy rate was usually around 1.5 percent over that time span, but it obviously rose when the U.S. economy entered a recession in late 2007 and spiked close to 3 percent.

Since 1995, the rental and homeowner vacancy rates are able to stay more or less intact even though the median asking rent has continuously increased, while the median asking sales price for vacant houses can increase and decrease in somewhat of a cyclical fashion, falling when the prices get too high and outweigh demand. Via information from the United States Census Bureau, the median asking sales prices for vacant units climbed up to around $200,000 but began a steep decline once the 2007 recession arrived.

After leveling out for a few years, the median asking sales price has begun the upward trend again and, measured at $177,200 in the second quarter of 2017, is on pace to eclipse $200,000. Rental and homeowner vacancy rates can continue to stay low, but if the numbers compiled on the graphs of recent years tell us something, it’s that troughs follow peaks, even if skyrocketing prices and lower unemployment rates make the economy seem like it’s booming.

Rental and homeowner vacancy rates help describe important characteristics which define value in a marketplace: supply and demand. If more and more people are buying and renting houses, you’d expect the vacancy rates to be lower. In this case, the supply of housing is getting less and less, and the demand for housing is likely higher. Therefore, rental and home sales prices should increase, making the housing market unkind to a significant portion of regular people.

“The irony of the modern housing market is that the places where we are seeing wage growth are places where people can’t live because they are too un-affordable,” said Nela Richardson, chief economist at real estate brokerage Redfin, per Forbes.

Now, economists must deal with the possibility of housing prices becoming overinflated, as they hope for the market to stay stable over the next decade or two.