Social media is on the cusp of profound change - and the biggest players will have to adapt or be left behind.
In the European Union, regulation is looming, while in the US long-dormant concerns about privacy and security are becoming increasingly visible. Elon Musk's chaotic takeover of Twitter, now X, has put the sector even further in the spotlight.
European privacy and security regulations - led by the European Digital Services Act, which is currently being applied in phases - have become a built-in risk for Meta (META) and its competitors.
"What's going on with Meta in Europe... could potentially impact our Facebook, Instagram and all its various subsidiaries," Matthew Crain, a professor at the University of Miami, told Yahoo Finance.
Meta, which saw its shares rise 184% over the course of 2023, is well positioned as changes loom: the company has moved past Apple's jarring privacy changes and has started rolling out options to meet the EU market , such as an ad-free subscription.
Meanwhile, lagging competitors like Snap (SNAP), which have struggled to recover from Apple's App Tracking Transparency, have updated their advertising efforts to, for example, limit advertising to minors in Europe.
Snap shares are up more than 90% in 2023, though the stock is still less than a quarter of its September 2021 record high.
These shifts in Meta and Snap's advertising belie a deeper reality: that the traditional model is no longer enough, says Hussein Fazal, co-founder and CEO of Super.
"Basically, social media companies that rely on pure advertising are difficult," says Fazal. "I think if there are ways to increase revenue, that will be beneficial for them as businesses because it gives them more flexibility."
One potential diversification is e-commerce. For example, TikTok launched "TikTok Shop" in September, with 200,000 sellers at the time.
The feature brings shoppable videos directly to users' feeds, provides fulfillment services to sellers, and allows users to make purchases through a brand's profile or a TikTok marketplace.
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According to the company and Insider Intelligence, more than 5 million new customers made purchases through TikTok over Black Friday and Cyber Monday.
Meta first introduced Shops for Instagram and Facebook in May 2020, as the pandemic shut down brick-and-mortar retail. In November, it partnered with Amazon to let users who click on ads buy the product through Amazon while staying in Meta Apps.
E-commerce was the biggest contributor to the increase in advertising revenue, Meta CFO Susan Li said in October. By hosting the entire shopping journey, social media companies get their own data on how well ads convert into purchases, a capability that was limited by Apple's "Ask App Not to Track" feature.
Snap has linked its augmented reality capabilities to e-commerce in recent years, with ties to brands like sneaker maker Puma and eyewear company Zenni Optical.
Elon Musk's X, formerly Twitter, has also proven to be a focal point. The microblogging platform has focused heavily on a subscription model - something that other social media companies have tried with varying degrees of success.
Data from Apptopia and reported by TechCrunch shows that X downloads fell by about 30% in the first two months after the company's rebrand. In November, Apptopia data showed that X's subscription offering generated $6.2 million, which is the highest monthly subscription revenue for the company to date.
However, its 2023 ad sales are down to $2.5 billion, a massive drop from the $4.5 billion it achieved in 2021, before Musk's takeover.
The billionaire's hope, as he has often said, is to evolve the subscription strategy and create an "everything app." It's a tactic that's unlikely to succeed in the U.S., Fazal said.
"I believe we won't have a super app like WeChat here in the US," Fazal said. "WeChat in China emerged from a very specific time, set of government regulations and circumstances, creating one app to chat with your friends, pay government bills, book travel and do just about everything else."
Unlike WeChat, which launched in January 2011, US apps compete in a crowded market, where user preferences are varied and functions such as messaging, travel booking and rides already have dedicated apps with their own audiences.
Profit, privacy and security
There is a core tension within social media companies as they currently exist: the best targeted advertising requires access to users' data. That access, by its very nature, makes privacy complicated or impossible, and can quickly erode trust.
Providing benefits to the users, and not just the companies, can be a way to maintain trust. For example, Microsoft-owned LinkedIn (MSFT) says its business model is no growth at all costs.
"Our goal is for you to come here and get something out of LinkedIn that is useful to you: knowledge, a job, a connection," Daniel Roth, editor-in-chief and vice president of LinkedIn, told Yahoo Finance. "We're very focused on what the economic outcome is of something you did on LinkedIn."
Vero, a social media startup focused on high-quality media content and connecting creators with users, is trying to differentiate itself by eschewing ads and algorithmic feeds. It reportedly has 6 million users and plans to launch a subscription service next year.
"We consider our users as our customers, we build a platform for them, not for anyone else," co-founder and CEO Ayman Hariri told Yahoo Finance. "We have no other agenda. We want them to be happy."
To date, there are more than 900 million users on LinkedIn, although the company does not disclose how many of those are monthly or daily active users.
By comparison, Meta has over 3 billion monthly active users for Facebook and nearly 4 billion monthly active users across its family of apps, according to its Q3 report. But the unlimited growth strategy can also be a problem.
For example, the Wall Street Journal has extensively reported on Meta's problems in ensuring the safety of children on its platforms.
Going forward, social media companies will need to solve the subscription and e-commerce puzzle while addressing concerns about invasive and harmful practices.
And the landscape, with all its problems, is also ripe for disruption. Security solutions will come from further up the Silicon Valley food chain, says Hari Ravichandran, founder and CEO of Aura, a personal cybersecurity app.
"If you take a platform and look at the biggest problems it faces, I would venture to guess that there would be a lot of small startups, a lot of smart people who are community-oriented, who have a lot of technical knowledge and start working on solutions for that platform " said Ravichandran.
Allie GarfinkleClick here for the latest technology news that will impact the stock market. Read the latest financial and business news from Yahoo Finance is a Senior Tech Reporter at Yahoo Finance. Follow her on X, formerly Twitter, at and further LinkedIn.
