Business Models for Social Networks: Monetizing Social Capital, The Long Tail of Cool, & The Friends List.

Q: Social Networks still Sexy? 

Or is the Thrill Gone?

well, what's new folks... turns out Teh Sexy depends on CASH MONEY, G. 

which means we probably need to do more work on social network monetization & business models.

many folks rip on Facebook & MySpace for having weak business models (including me, see previous post on Facebook Monetization). which is probably why MySpace is opening up their platform and launching a new "hyper-targeting" ad service, and also why Facebook recently hired Sheryl Sandberg... both companies are trying hard to figure out how to make [more] money, both for themselves and also for their platform partners / participants.

Don't get me wrong here -- FB & MyS are both viable entities with their current monetization, but they'd be a hell of a lot more interesting if they could prove customers are worth tens or hundreds of dollars per year, instead of just pennies or single dollars.  Similarly, VCs would probably show a lot more interest in putting money into more SNS categories & niche verticals if any of the current ones can demonstrate traction in $, not just users & page views.  RockYou & SocialMedia & Lookery & VideoEgg claim to have solved the crappy monetization, and each of them has shown some potential for creating a lot more value for publishers / app developers (and those guys are a lot smarter than i am, so more power to you folks -- keep sending those checks to developers, they need it!)

But i think it's gonna be an uphill battle for most SNS, because currently most users of broad-based social networks aren't exhibiting targeted/-ing or commercial behavior.  They're just hanging out.  They're browsing.  They're playing games.  They're socializing & communicating.  They're looking at pictures & listening to music & watching videos.  And of course, they're poking each other.  All these activities are social, however they're not very focused on actions leading to high-value transactions which can be translated into more cash money, G.  so for now, they gotta make it up in volume.

Now there are exceptions, such as LinkedIn (which i think is making good money on 1/100th of the FB/MyS userbase).  And there are also category verticals aligned with social behavior, such as music apps (iLike), movie apps (Flixster), or book apps (iRead, Virtual Bookshelf), and other sport- and fashion- apps.  And category verticals will have higher CPMs, and those apps could very reasonably collect millions of users & monetize well.  Jeremy Liew from Lightspeed wrote a great post on business models for Facebook Apps last fall that summarizes # page views / installs might be required to generate minimal amounts of sustainable revenue.

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But for the most part people come to MySpace & Facebook to have fun, and not to perform search-focused behavior, commercial transactions, or other productivity-focused behavior. again, LinkedIn is the current exception for broad-use social network where people are generally doing "productive" actions with high potential txn value... altho nowhere near as frequent usage as other SNS.   Personally it's not clear to me whether there are other broad-based social networks that could monetize well, however i do think there's plenty of room for a parent-focused SNS that could be very widely adopted, and could be the hub for a lot of productive / transactional behavior.  But until that comes to pass, we mostly have a lot of people throwing sheep at each other.  Ahem.

So how do these big SNS juggernauts make more samoleons?  I've mentioned a few of these before, plus a few new ones:

1. Integrate Apps, Pages, & Advertising (enable apps to share users with fan pages)
   
2. Offer Targeted Social Search & Commerce Features (on platform, coming soon)
3. Monetize The Long Tail of Cool (rev-share with influential micro-celebrities)
4. Accelerate Off-Platform Transactional Behavior (use profile data & friend lists to increase conversion / commerce)

Let's take a look at each of these in turn.

I. Integrate Apps, Pages, & Ads = Auto-Match [Geeks + Advertisers]

This one is really quite obvious, and i'm surprised it hasn't already happened.  In fact, it's a bit frustrating that Developers and Advertisers aren't being connected directly on Facebook.  FB seems to have punted on it for now, and is apparently leaving it to startups like RockYou, SocialMedia & others to figure out how to monetize "app-vertising".  while i understand Facebook wanting to let the market take care of solving some platform ecosystem issues, this one seems too important to outsource.   

Isn't it better to get this engine humming, & drive more value for everyone?

I think this is what we've seen with AdWords over the years.  Google figured out a great way to match advertisers with a very high volume of users doing keyword searches, and made it super easy for those advertisers to "turn on the faucet" thru a self-service approach to buying search traffic that monetized quite nicely.  KA-CHING: instant money machine.  Aggregate users by keywords, let them click on stuff, and then direct the traffic to the highest bidder (actually, direct traffic to the best combination of ad copy CTR & keyword costing, and optimize for cash generated).

I'm not sure Facebook has done a great job with SocialAds yet, but regardless users executing lots of searches isn't quite what FB is famous for (yet).  You have to use what you got, and right now FB isn't a search destination (see next point about integrating more search & e-commerce).  However, it IS a pretty amazing place for viral distribution & app installation / usage. 

So how could FB take more advantage of monetizing virality & app distribution?

I would offer 2 very basic observations:

Observation #1: Developers build apps that acquire lots of users.  They want money.

Observation #2: Advertisers want to acquire users.  They have money.

Hmm... what's missing here?  How about a marketplace for Advertisers to set open bids on per-user acquisition costs? How about enabling apps to share users with Facebook [non-people] Fan Pages that represent Companies, Products, & Brands?  Let's call it Adwords for Apps.  Come on Facebook... turn SocialAds into this, and your developers will LOVE YOU.  so will Advertisers.  In fact, this kind of relationship is already happening in the market, but requires contracts & negotiations and TOO MUCH FRICTION to develop without more automation.  Seems too important to leave to the market, and we need the platform economy to grow faster... buy one of the appvertisers if you need to, but help accelerate matching by automating the process.

Not clear what MySpace is planning in this area just yet, but hopefully they will be creating similar opportunities, and connecting developers with media & entertainment advertisers on their platform.

II. Offer Targeted Social Search & Commerce Features

So if your users aren't demonstrating targeted or transactional behavior, why not introduce more opportunities for them to conduct that type of behavior?

I'm not going to do a deep dive on this one, since it will probably rollout on Facebook pretty soon.  FB is already rumored to be working with developers on a Commerce / Payment API beta, and Ben Ling mentioned it publicly for the first time at Graphing Social Patterns West and i'd guess that means it's not far from release.  wouldn't be surprised to see it sometime in next few months, possibly at the upcoming Facebook F8 2008 event.  FB could also integrate / enhance search functionality by adding social recommendation features that will increase targeting behavior, and perhaps increase their advertising & sponsor $$$.  Either / both of these developments will likely expand monetization opportunities quite a bit, for both Facebook and/or app developers.

MySpace already has a searchbox and some commercial options for entertainment & movies, and even has some more productivity-focused stuff like MySpace Jobs, powered by my old employer SimplyHired.com (disclosure: i'm still an advisor & investor... keep up the good work guys :)  Not sure if they just need to do more to share rev with their nascent platform developers, but there's certainly room here for them to develop better economics and grow the market.  I also don't get why more bands don't embed PayPal buttons on their profile pages so people could just buy their songs directly (is this against MySpace TOS?  isn't this mind-bogglingly simple?  what am i missing here?)

III. Monetize the Long Tail of Cool (= rev share on recommendations, social capital)

I've mentioned this idea before of enabling social network "micro-celebrities" to monetize their social capital by various means, perhaps through some kind of rev-share on news feed messages that other users click on (aka "FeedSense" ?), or via clicks on their profile or invitations, or via other rev-share modifications to the Beacon feature.  Not sure of the mechanism here, but pretty sure a rev-share makes sense somewhere (but a rev-share on what?  oh yeah, back to making money again.)

Definitely the students in our Facebook class at Stanford noticed that certain users drove a much more substantial amount of app adoption / distribution than others, and it's not unreasonable to assume that there are millions of micro-VIPs in online local groups that represent the Paul Revere or Tiger Woods or Michael Jordan for their local virtual community.  These folks that push the tipping point of a new meme, or amplify an existing one, are the people that create/add value in social networks.  And the really cool thing is that Facebook & MySpace know EXACTLY who these people are, and could choose to highlight & reward them for their efforts.  Fame & Fortune await for thousands of mini-Tigers out there.

Of course, any monetization of social capital runs the risk of cheapening the currency, and people who burn up their good name / fame by spreading crappy brands or services will get demoted, and/or their currency will be devalued.  However, on the flip side, the average nobody who keeps sharing great stuff and helping their friends discover it could be rewarded handsomely with fame, if not fortune.  I know i'm already motivated to share cool stuff into my feed, and i appreciate others who do the same -- i just wish there was a feedback loop for me to know when i suck and when i don't with the stuff i share.  Again, this is something Facebook or MySpace could easily do by monitoring & measuring internal distribution of content & apps, and providing feedback on what items are being amplified / damped, and perhaps even using that feedback to reward people financially.  What's cool about this stuff is it takes advantage of proprietary assets these SNS have created in viral distribution.

IV.  Accelerate Off-Platform Transactions (It's the Friend List, Stupid.)

I'll leave this one for a bit later... still working on summarizing the concepts.  But let's just that for anyone who is aggregating user data profiles & friend lists, this stuff could be a LOT more valuable off-platform where transactional behavior is already occurring.  Enabling viral distribution on the normal Internets is the key to increasing value / monetization, but requires a few key steps to achieve.  One of these is enabling login off-platform.  Note that this isn't limited to just SNS like Facebook & MySpace, but will likely also include large providers of email, IM, and SMS messaging services -- namely Microsoft, Yahoo, AOL, & Google.  Perhaps also eBay & Amazon & a few others as well.  More on this later.

Okay, so what did i miss?  Any other cool ideas for monetizing social networks?  Comments, please.

Comments

[deepak(internet marketing expert)]

Productive Internet marketing depends upon a reasonable budget. There actually is a good deal of truth to the old adage that you have to spend money to make money. By budgeting wisely, you will be able to get the greatest advantage from the money you do spend on marketing and promotion.

[Greg Berry]

Alex,

Thanks for the great thoughts. I know there is infinite interest in the monetization of the SuperNets, but I really think the business will be done in vertical markets (like the Dogster example, above).

I believe that all the high-level monetization schemes at the SuperNets will end up alienating many of the users.

This, plus natural evolution, will drive users into more naturally arranged vertical or affinity social networks. These VertNets will have a simpler monetization path, because it will be clearer for affinities to have more value per user, high-level sponsorships to take place and more relevance for the user, especially given the hyper-commercial experience in the SuperNets.

At the elite end of the curve, membership fees become feasable and relevance will increase the CPM of ads into a manageable range.

[TKA]

Interesting....

OK, so how would one create a profit using pre-built platforms such as Ning to build a social platform? They even offer a way to monetize off the ads in your network for $20/month.

[dave mcclure]

thanks alex, appreciate the feedback.

altho to some extent the insanity of my presentation & blogging style -- some might call it the "Ransom Note / Kidnapper Font" -- is intentional. or at least, part of my brand differentiation ;)

i'm sure there are many strategic & tactical changes i could make to appeal to readers more, however for the most part i write for my own enjoyment. for my readers, i admit i'm probably an acquired or tolerated taste.

occasionally i do go overboard with it, altho again that's kind of an expression of my personality & character... one that i kind of like, even if it's not for everyone.

that said, i'm always interested in hearing reactions. you never know, maybe i'll change it up.

[Alex Hammer]

Dave, you are (of course) brilliant, and this post is a good illustration of that.

From my writing experience (publishing and journalism) I can tell you that you will profit even more if you format, structure and highlight your writing better. As a few examples:

You use highlighted color to draw attention to important points, but there is so much in one post that it can easilyl become information overload without increased formatting. You have headlines, but I would make them more discrete and more often to give readers breaks. Also, you can divide up your long posts into series. Stick to one smaller theme in each post, perhaps, leading to the next and that will generate more anticipation and overal interest also.

Also, your posts are cluttered. Use more white space. A clean UI sure hasn't hurt Google etc.

And give summaries or clues at the beginning in terms of the structure of the content to come. Then people can navigate better and won't feel lost.

Thanks.

[Alex Nesbitt]

Dave,

Good question. The obsession with advertising being the biz model for everything should be re-examined. It's killer for Google, but that's because people are looking for stuff.

The question that we should be asking is what do people want when they go to a social network.

It seems to me they want to be social, they want to be entertained and they want to play. So perhaps a biz model more focused on making money from entertainment and less focused on advertising to people who aren't interested would be a better way to go.

Here's a podcast we produced about a social network that is making money and a service which is making money off Facebook. I followed up with him because the advertising crowd at Graphing Social didn't give him enough air time.

Here's the post:
http://www.digitalpodcast.com/podcastnews/2008/03/17/digital-podcast-45-how-to-make-social-networking-profitable/

Best,

Alex
Digital Podcast
http://www.digitalpodcast.com

[Laurel Papworth]

It might be worth noting that social networks that rely heavily on advertising don't do well. MySpace makes $2.17 per YEAR per member.

Those that have other revenue streams and NO classic advertising fare much better. Sulake's Habbo (87 million accounts, 8 million uniques per month) for example makes $17 per member per MONTH from sponsorship and pixel products. Even South Korea's Cyworld with its 50+ million members makes many times more than MySpace per head - and that's again, with NO advertising but virtual goods and sponsorships.

I wrote a blog post on it if anyone is interested Revenue streams in social networks

[Kevin]

That was an excellent summary of issues. Maybe we'll see on May 2nd at the New Media Tastemakers Summit (http://www.NewMediaTastemakers.com), which goes more into lifestyle, business models and web 2.0/video 2.0 topics

[Albert Aimers]

Very interesting...I would like to get your Communities thought on a new financial social network that we just launched that pays it users/members for consuming content.

Below is a short video

http://my.wallst.net/referral/AlbertAimers/JoinForm

[BabySpot.com]

Dave,

Great post. Timing is amazing. I just moderated a panel on Web 2.0 - Social Networking and it's impact on today's business world at the a Microsoft Sponsored event at Florida International University, in Miami, Florida. Our panelists were all CEOs for social media companies and one of the questions I asked was in regard to monetizing these great communities. The general consensus was that if advertisers truly want a great return on their marketing efforts with social networks they have to move away from traditional ads and move towards integrated product placements, review, and branding in partnership with the users. CafeMom.com, which has been able to capitalize moms online has done a great job of creating campaigns for companies in this view. For us, at BabySpot.com, as a social network for new parents, we have finalized deals with companies that wish to target this demographic group with campaigns that integrate the advertiser and the user. Overall, I agree with Ted's post above - if the right focus is placed on sales and an emphasis on integrate the user and advertiser as partners there are ample opportunities.

Great Post

Zameer Upadhya
CEO and Co-Founder
BabySpot.com

[Ted Rheingold]

David, while I whole heartedly agree with your feeling that it's time to face the revenue music, I respectfully disagree that new and exotic methods will bring any quick results.

If these sites simply buckled down and worked as hard at selling advertising as prime-time broadcast television shows did, they'd be profitable by now.

Engineers would rather invent a new revenue system or get bought out than actually do the business-side of running a business.

At Dogster/Catster we've been able to consistently surpass a $5 ARPU because of doing direct ad sales. To anyone that might think "but Dogster, your audience is so highly targeted, it's different for you," I'd say "it doesn't get much better than having an audience of tens of million of Americans age 16-35."

At Dogster, Inc. we're going to hit $4M in revenue this year and we only have 700,000 members and 15 employees. We'll break $10M in '09. It's simply a matter of building a sustainable business from the get go. You simply have to execute on the sales side as hard as you do the product side.

[Srinagesh Eranki]

Very comprehensive.

My take is the focus is all wrong. Facebook seems too focussed on advertisers. Millions of users are regarded merely as consumers of ads. LinkedIn seems to get that balance right.

Facebook need to make it as painless as possible for users to contribute to the Facebook coffers. Rather than focusing on overt actions by the user (e.g. clicking on an ad), with millions of users, all that "noise" is got to be worth something. Things like Beacon need more modification and fine-tuning.