This article has been adapted from our sister site across the pond, Fool U.K.
The rise and rise of social media has been one of the hottest investing stories of the year. But despite the multi-billion dollar valuations, many people still have major doubts as to how the likes of LinkedIn (NYSE: LNKD ) will eventually make the large profits required to justify their enormous price tags.
A tie-up between the drinks giant Diageo (NYSE: DEO ) and privately-held Facebook may provide a clue to the answer. The two companies have just announced they will "step-up their multi-million dollar strategic partnership."
Diageo has been running the numbers, and an initial study of five of its key brands in the U.S. (Smirnoff, Captain Morgan, Baileys, Jose Cuervo Margaritas, and Crown Royal) has shown a 20% increase in sales due to Facebook activity.
What's more, Diageo's "Friend" count on Facebook has increased from 3.5 million to 12 million over the past year, and it claims that Smirnoff is "the number one beverage alcohol brand on Facebook worldwide." In the U.K., Smirnoff has over 600,000 followers, and it's just relaunched its Nightlife Exchange Project with the help of Madonna, who is looking for a dancer to join her next tour.
Nearly a thousand Diageo marketers have now attended Facebook "boot camps," so that they can better understand the ins and outs of online brand building. (I wonder if they teach you how to understand Facebook's privacy settings?)
Successful social media campaigns are notoriously difficult to create, and it seems there is often a large element of luck involved in any campaign that goes viral. Many people will also feel promoting alcoholic drinks in this manner is a step too far. But it's no surprise that big brand owners like Diageo are pushing the boundaries here. It's in good company, too. Facebook's ad team also works closely with Procter & Gamble, American Express, and Wal-Mart.
I suspect this deal is better news for Diageo than Facebook. While you wouldn't expect anything like a 20% sales increase across the board, even a few percent would be significant for its bottom line. Although we don't know how many millions this deal involves, Facebook's current valuation is reckoned to be in the region of $80 billion, and there aren't many big brand owners like Diageo to go around.
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