Selling Social Networks
Posted 10/02/2006 12:53:00 PM |
In the BarCamp session, 5 main concepts of monetizing social networks were introduced by the moderator. Looking at social networks as a truly new media, it made sense to explore my take on each of these concepts, one at a time. Towards the end I'll introduce some other opportunities that I feel exist.
1) Ads - or, the interestingness problem
The poor state of advertising in social networks is widely reported. Users don't click through ads, rates are depressed - obviously something is amiss. The problem, as it happens, is in the nature of the medium.
We click on ads for a number of reasons; one of the predominant reasons is distraction. As we transverse the web and encounter different content, advertising often serves as a contextual escape. We grow tired with content, we exhaustively explore a topic - so we then click on ads. The problem with social networks is that the users of social networks fail to tire of the content.
A social network is largely based around actions (responding to messages, posting to walls, managing friendships) and experience (browsing and finding new people and content). In the state of action, it is hard to distract us - the management of our friend networks is vastly more valuable than time spent exploring advertisements. In the state of experience, we are exploring peer-produced content - which proves to be almost exhaustively interesting.
When we experience this content, we are learning about people, exploring networks, bringing more richness into our online and offline experiences. In this state, it is again extremely difficult to distract us with advertising. Put simply, the content we're experiencing is too interesting - we don't get distracted.
2) Product affiliation groups - or, the non-scalability of affiliation
If we aren't going to be distracted by contextual ads, advertisers will leverage our consumer culture to let us "befriend" products. The logic here makes sense - all people, especially young people, ascribe a remarkable part of their identity construction to their possessions.
Our possessions - things we want and things we own - are part of our identity. The theory behind befriending products is it lets us explicitly state our brand affiliations. You may not know what type of jeans I wear, but if I befriend Levis, you can see my affiliation with the brand. The problem with affiliation is in its lack of scalability.
Indeed, part of our consumption behavior is the consumption of identity goods - but the majority of our purchases are must more pedestrian. The food we eat, the toiletries we use, the tires we put on our car - we don't derive a large part of our identity from these goods. It is unlikely, then, that many people will care to befriend Listerine or Goodyear tires.
That affiliation is non-scalable doesn't mean it can't be profitable - sites that target a demographic can niche in to that demographic's product desires. It can even be less explicit - when you friend Kanye West or Dane Cook on Myspace, you're joining that product affiliation group, the only problem is Myspace isn't getting part of the cut.
3) Partnership Opportunities - or, limitations of partnership
Social networks, especially those like Facebook and LinkedIn, have very targeted demographics. As a result, it makes sense for companies interested in these demographics to partner with them. For example, Apple's iTunes partnered with Facebook, while Simply Hired partnered with LinkedIn.
These partnerships make a lot of sense, but with very targeted demographics, partnerships work to the exclusion of the rest of the market. Will Microsoft's Zune attempt to make inroads in Facebook now that Apple is a partner? Would a competitor of Simply Hired be excluded from LinkedIn? These partnerships make a lot of sense for the partnering companies, because it is the established partner that wields power. Nevertheless, partnerships, successfully implemented, do seem to be a solid monetization platform for social networks.
4) Micropayments - or, the selling of value
Micropayments are an interesting take on monetizing social networks. The general idea behind micropayments is that a social network's userbase will pay small amounts of money for things that make their experience better. For example, someone might pay 15 or 25 cents to purchase an upgrade to their site. Considering the marginal cost of such upgrades are virtually zero, micropayments could be very lucrative at scale.
We've already seen micropayments implemented in Cyworld. However, one must proceed very carefully with micropayments. Cyworld is truly an outlier example of a social network - it is a cultural phenomenon equivalent to Myspace. Designers of upstart social networks that are attempting to monetize on micropayments do not get to play by the same rules as Cyworld.
So how do you effectively implement micropayments? First, you must be sure that the micropayment infrastructure doesn't bound the network or limit use. To do this, you must give the user a rich experience from the beginning - no giving the user a bare-bones site and expecting them to micropay from the beginning. Give the user lots of addons, and as they progress as a user of the site they will start buying other add-ons. For example, when offering upgrades via micropayments, always offer a free upgrade as well as the paid upgrades. This gets the user in the mindset of purchasing - and once they see that everyone else has the free upgrade, they will want to express their individuality by purchasing upgrades.
The user must also feel like they are getting value from the micropayments. To do this, the service must acknowledge the simple economics of micropayments - that marginal cost is virtually zero. This means that the micropayment offerings must have value and not only appear to be pay-to-play obstructions in the site. When I pay money I want to get something - your users sense this at the very core of their being, so it is wise to acknowledge it and design value into the system. Finally, don't expect micropayments to cover all the bills.
Cyworld gets to make a big part of its revenue from micropayments because it is a cultural phenomenon - the scale is very large. You should only expect the vanguard 10% of users to participate in micropayments for a long time - until your site mainstreams more effectively.
5) User payments/gatekeeping fees - or, the virtual country club
It only makes sense that some social networks will introduce fees for participation. Of course, this flies in the conventional logic of network effects, but for some it is a valid strategy. Thinking broadly about social networks, there are networks that we have economic incentive to participate in.
Specialty information sites, prestige networks - there are lots of social networks we pay to access in the real world, so it only makes sense that we'll buy into this in the virtual world. However, doing this properly is a real challenge - and it requires a significant leap of faith. If social networks can target specialty networks, users will pay to keep the service online, because the service has real value.
Now, lets explore some other potential ways to monetize social networks.
1) Exogenous or alternative markets
In Second Life and a number of gaming applications, there are real-world markets for the selling of virtual goods. Some of these goods can command substantial fees - real estate in Second Life sells for thousands of dollars. Obviously, there is a substantial opportunity for networks to mediate these transactions (like ebay) or for the social networks themselves to take tax-like transaction fees. Implemented properly, this could be a substantial revenue-bearing micropayment-like infrastructure.
2) Brokering of trust
The notion of monetizing expert advice is nothing new - but unfortunately it doesn't scale. Our network models can easily spot global experts, but regional and local experts are much harder to define. A social network that introduces logic of trust can broker access to these experts. We're already doing this - looking at the blogosphere as a social network, we see people who list their phone number for consultancy calls. Its one thing for me to want to speak to a social media expert in Los Angeles or Silicon Valley, but what if I want to speak to a social media expert in Falls Church or Toledo? A social network that could reasonably identify experts on a wide range of topics could prove very useful.
3) The negotiation of community
Facebook has show us the value of situationally relevant social needs. As we move through our lives, our social needs are constantly in-flux, and we aren't comfortable with using global social networks to satisfy those needs. Social networks that address particular needs can probe to be very useful and valuable - and perfect for monetization. For our global internet, we are made up of small networks that have needs - needs that can be addressed by complimentary social networks.
Social networks are difficult to monetize because they are a new and distinct form of media. While they exist inside the structural framework of the web, users of the sites look at them differently and experience them differently. Therefore, monetizing these networks are challenging and are benefitted by building monetization in to the site as oppose to bootstrapping monetization on at a later date after users are comfortable with the site. I hope this guide has proven useful to you - it was fun to write.
Update: This post has been Dugg - if you'd like to digg it as well, here is the link.
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11 Comments: (Post a Comment)
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At October 02, 2006 5:38 PM,
Joe Suh said...
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You've got to wonder how long our postmodern culture will keep befriending Wendy's hamburgers or Levis jeans on Myspace. I'm still waiting for that backlash to happen when people realize they're being bombarded with ads.
Such is the nature when social networks are used merely as hangout joints. The advertisers follow and "hang out". After a while, the playground becomes too commercialized and the teenagers grow cynical. It'll be interesting when and if this happens - what will the next monetization channels look like? The 3 you gave are good examples... -
At October 02, 2006 9:07 PM,
leafar said...
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Brilliant as usual.
I really like the
"In the state of experience, we are exploring peer-produced content - which proves to be almost exhaustively interesting. When we experience this content, we are learning about people, exploring networks, bringing more richness into our online and offline experiences."
Identity 2.0 will probably be published in 48h.... if you have any critics.
For example for the title.
Thks -
At October 03, 2006 3:59 AM,
Cem Sertoglu said...
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The product affiliations, micropayments and secondary markets are where my bets would be.
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At October 03, 2006 4:13 AM,
Daniel R said...
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Fred,
Great blog. At Search Engine Strategies 2006 in San Jose, an attendee did ask Tim Meyer, Director of Product Management at Yahoo, asked directly about the "interestingness" issue. Meyer said, disappointingly, that he did not have enough data to comment on this issue.
My vote is with Cem Sertoglu.
It'll be interesting to see how Wallop does. -
At October 03, 2006 9:06 AM,
Fred Stutzman said...
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Daniel - thanks for that link. Wallop will be interesting because it is built towards monetization - which I think is key. However, they mustn't be stingy with content...let people get used to the idea of participating in a micropay economy, and let them buy in over time. I think making money from micropayments is a long-term strategy if anything.
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At October 03, 2006 3:06 PM,
said...
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Great job Fred. A very intelligent look at the nature of social networks as they evolve with business.
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At October 03, 2006 3:07 PM,
said...
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Great job Fred. A very intelligent look at the nature of social networks as they evolve with business.
- Dan Blank -
At October 04, 2006 11:04 AM,
Alexander Mouldovan said...
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Very useful!
My company creates private label social networks. I'm looking for analysis of this type of course since many of my prospects are wrestling with these questions right now, I'll be referring clients and prospects to your piece.
Thanks! -
At October 10, 2006 2:02 AM,
sstave said...
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Good points.
There is another reason that soc nets are hard to monetize - and that is because users are currently demanding free services
we ahve seen that the real value of information is very very small on an individual scale. but en mass it is highly valuable - or "socailly valuable".
the same can be said for media such as movies, people pirate movies and music. We see the "cost" of a movie being say $10 - but thats not the "value"
if that were the value, then people wouldnt pirate it. The value is what the masses are willing to pay - and that obviously changes with each group.
there is a convergence coming, not only in the world of social nets - but their content and utility.
obviously social networks have become nothing more than a check-box feature/tech that a site should/will have - but we are seeing where the next evolution will come.
I think there is some moores law of social network evolution that could be applied here - I jsut havent found the right words yet... -
At October 12, 2006 1:49 PM,
alice said...
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Fred, I work for Wallop-- did you know that?
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At December 20, 2006 5:09 PM,
Ryan Bastien said...
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How about Mega payments? ;)
While Weblo is built primariy around micropayments (1-2 dollars for a property, most cities are 5$ etc.) we have had things sold that would never be classified as micro, Virtual California selling for $53,000 being the prime example.
Of course we can charge these prices because we promise somethign in return, the possiblity of making back your investment and then some.
Ryan
