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For Social Networks, 2007 is about MONEY

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The most important market challenge for social networks in 2007 can be summarized in three words: monetization, monetization, and monetization.

Regardless of whether social networks will splinter into niches and verticals (e.g. sports, pets, moms, teenage girls, etc.), regardless of whether social networks adopt interoperability (e.g. OpenID), regardless of whether individual profile pages morph into widgetized and personalized start-pages, regardless of whether 2007 will be the year that social networking goes mobile… all such market development activities will prove secondary to a much more fundamental issue.

And that issue is whether social networks can innovate on the revenue generation side of its business model sufficiently to pull its average ad rates out of “junk” status into “premium” rate levels (e.g. from today’s $0.50 CPMs into something closer to $10 CPMs).

Towards such ends, there are four critical success factors that any innovation in monetization scheme for social networks must adhere to:

  • Social networks, and online communities in general, are terrible platforms for advertising formats designed for any type of call to action. As such, Google Adwords-type direct-response PPC ads have proven highly ineffective. On the contrary, the significant opportunity for social networks is to become highly-efficient branding vehicles. In fact, it is my prediction that social networks will prove themselves to be the most effective brand communication platforms on the Internet.
  • As we all know by now, social networks are a new media for self-expression and communications. And since the core revolves around people (not products), it is vital that any innovation in brand communication include the active and explicit participation of those people within the process itself. In other words, people themselves are the platforms, capable of message amplification and network effects, and they should be treated as brand re-communicators, not just end-receivers. So just don’t advertise at them, advertise with and through them.
  • Given the extreme pressure to monetize with low CPMs, many of today’s social networks are way too cluttered with ads. Virtually every pageview that is generated carries an ad. This is highly wasteful and counterproductive, for both users and advertisers. Instead, improved methods of monetization yielding higher CPMs, must correspond with a reduction in the volume of ads. To some extent, old-fashioned artificial scarcity must be imposed on available ad inventory in order to achieve improved performance and satisfaction for all parties involved.
  • Scalability is key; therefore, automation is critical. Google represents the best comp here. Every scale-enabling innovation that has been built into their Adwords & Adsense platform, from Do-It-Yourself purchasing to auction-based pricing to placement by performance, even the fact that they take credit cards, are all key reference points for anyone seeking to optimize monetization within social networks. The need for scalability also implies the capability to service the needs of smaller advertisers, alongside the big Madison Ave spenders.
  • The bottom line of all this for anyone running a social network already, or if you are in the process of building a new one… make sure that everything you do is designed to maximize monetization, as the difference between success and failure will rest on this metric. For instance, if you are creating a niche social network, do so in order to fetch high CPMs. If you are going to widgetize profiles, make sure it results in an enhanced path to monetization. 2005 and 2006 were years that proved that social networks were not a passing fad, but superior monetization is what will prove key for social networks in 2007. Consequently, it’s likely that M&A activity will also accrue towards those who are able to crack this nut.

    25 Responses to “For Social Networks, 2007 is about MONEY”

    1. Check out my new site ® it is a network of pop culture enthusiasts. As a FREE MEMBER you make a profile, AND fan pages, friends and maybe even someone special to date! The “Fan” pages can be for your favorite people, places or things! You can create them FAST with pictures, sounds, MP3s, MIDI music, videos, games, custom layouts and more!

    2. There are a couple of crucial steps before squeezing the joints for money and interrupting the conversation. People who don’t grasp that are in for a surprise. Money can be made, but monetization? Purlease. That’s so dot com boom. Try and be useful first.

    3. Clearly Social Networking sites will need to explore other options, I suggest that they launch a unified social networking platform, and attach a “premium” account type to it. Just $10 from each user would allow sites to host larger files, more content, and would remove the need for advertising.

      Users who are teens now might very well be willing to join a pay site if they could do so with their mobile phone, something to consider instead of relying in credit cards and PayPal.

    4. I agree with Robert , however monotization is very hard for social networks that start with the only intention of Ad based revenue , as one of the users commented earlier , most early adapters dont like ads , and myspace folks only want free stuff . I guess vertical markets are still open, social networks moving into enterprise collobration , corporate directories , entertainemnet portals etc are some examples. Where social networks is the front end for B2C interaction with a business proces centric backend

    5. Right on, Robert! I realized this a while back and thus we’re working on something to do exactly that!

      I think the main thing that advertisers miss in my humble opinion is that they still think in terms of impressions, not relevance (you can’t share meaning without sharing context, so forget recommending based on past user action, it never reveals intent and you’re back to the impressions equation).

      Interestingly though, while connections within the networks themselves are only about relevance (meaning to me). I’m very much looking fwd to see what startups in this space come up with in ’07…

    6. charlie federman

      While I, and it seems most of the community agree with your post, let me auger that the law of large markets will apply to social networks. When markets get large enough they splinter. Such splintering applies not only to the target customer sought, but also to the revenue models pursued.

      Just as MSFT, AOL, Yahoo and other large players (not sure about GooG), pursue ad and transaction based revenue, some social networks will look to pursue commerce based transaction revenue. An early example of this may be evident in the rejuvinated ‘ask an expert’ category where sites, such as Bitwine, look poised to take a cut of each transaction coming from networks of like minded folk looking for paid advice.

      You already see this in the B2B space with such successful companies such as Nitron Advisors or Gerson Lehrman.

    7. To Sramana… very nice post! I agree with you completely. That’s exactly the kind of innovation I’m talking about.

      And Kingsley… interesting you would bring up the data/RDF/semantic web implications. I’ve actually been thinking about the potential for all that data to drive a new generation of intelligent agents with SNS. I’ll probably write a post about it.

    8. Paul Morphy

      Great insights..I think 2007 will be a bust cycle for social networking start-ups, but not on the scale of the last bubble burst. It will simply be a culling of poor business plans and/or those that didn’t get acquired before the acquisition frenzy disappears. Let’s face it..a business plan to create buzz and get acquired is only a bad one if you don’t get acquired. A lot of smart $$ is chasing social networking will happen in 2007.

    9. This is a very nice post! A great insight into a problem that is addressed at the often overlooked layer called the Data Model.

      Most social networking services do not sit atop a compatible data model. By this I mean: most social networking solutions are tagged as Web 2.0 from the community and tagging perspectives without an appreciation of the data model that best serves the paradigm.

      I recall from the early Relational DBMS market days that many applications were written using DBMS products (Engines and 4GLs) that has nothing relational about them. Naturally, these solutions ended up being unsustainable (technically or commercially).

      Social-Networking is suffering from the same problem. The solutions and the underlying Data Models are out of whack!

      This is a job for the Graph Data Model (a special application of the Relational Data Model). And guess what? RDF, the cornerstone of the Semantic Web is just that, a Graph Data Model :-)

    10. Excellent advice. I wanted to try and present my social network as a case-in-point on brand communication, but I didn’t want to shamelessly self-plug :)

      On the endemics vs demographics point, it seems to me like they’re tradeoffs. An endemic ad base fetches higher CPM’s, but a demographic is easier to galvanize. Teens or Stay-at-home moms have reason and incentive to network. But would car-enthusiasts or wine-afficienados join a new social network when message boards already suffice?

      I believe purely interest-based social networks are little more than Forum 2.0. And I believe current forum software can easily evolve to be more social (member profiles, adding friends, etc)

      Fred Stutzman pointed out some challenges for SNS that want to compete with forums. It will be tough, but some will pull it off (ex. Flixster, Dogster). And I think it will be because of the theme of your post – forums aren’t highly monetizable, but social nets provide a dimension of brand communication that can be lucrative/marketable.

      CPM’s are sooo Forum 1.0…

    11. I agree with your sentiments on this one Robert, though in response to Jeremy’s comment: There is obviously a low threshold to sub $1 CPMs vs. number of page views that are required to still be profitable. If your site offers incredibly rich media content, say like YouTube, such a low CPM could never cover the cost of bandwidth.

    12. I doubt it. The ‘meaning’ of Social Networks has not been defined yet. If anything, the exchange value within the social network models will not be money but defered value, such as collaborative working and networked manufacturing, both utilised for the attention economy by brands. Thus, Social Networks will be about Product Development, not the cash exchange.

    13. Social networks are the web3.0 reincarnation of the ASP of web1.0. This time application being a branding, distribution, communication, real time analytics, trading, etc. virtual business platform. The real opportunity seems to be the backend transaction provider/clearing house/arbitrator of transactions amongst users because clearly each affinity group/social network is not going to build, host and maintain the actual hardware and/or manage it. Google probably could create the social groups by simply creating affinity type communities right now purely based on the data they have on their users…they already serve customized ads on gmail msgs which is an indication their platform can support all sorts of marketing trickery. Google and a handful of others are the only ones with the scale to enable something like the ‘XYZ Company’s San Jose soccer league social network’ to even have an online network presence. The resources required to build, manage, maintain and innovate upon the hardware and software that would be necessary to support such platforms are far too great to for traditional user supported social networks like the adult soccer leagues, water ski clubs, golf clubs, etc to support on their own. Salesforce and Amazon appear to being doing well with their enabling platforms, Apex and AWS, and their knowledge of and access to we users and eyeballs becomes increasingly valuable to advertisers and strengthens the positions of infrastructure owner(who is basically scanning your data and serving ads like goog does on gmail) as time progresses.

    14. I think there are two approaches to monetization, volume and pricing.

      Volume based approaches come from the “classic” social networks like MySpace and FaceBook – its OK to get sub $1 CPMs if you have billions of pageviews a month! I think the widget models will have some variation on thise

      Pricing based approaches come from finding content verticals with endemic advertising (not demographics – but endemics!) so you can get the $10-25 cpms. So its local, movies, cars, travel etc rather than latinos, teens, moms etc. Social networks can then form the incentive mechanisms to get the superusers to contribute high quality content that many others can find useful (ie high read:write ratio).

      I talk about some of this in more detail on my list of 2007 predictions – if you’re interested follow the link on my name

    15. I’m glad I read this. I do believe however that before money, true usefulness must be acheived. Social networks do bring together lots of people but not for the purpose of monetization. Widgets are great, communities are great. But so what?

      Everyone who is building all of these massive connectors seems to forget the basics.
      1. early adopters who stretch and pull the web generally HATE ads.
      2. The MySpace crowd likes stuff that is FREE.

      I’d really hate to see companies charging premium prices for simple services to cover the cost of some “sure-thing” social network acquisition or connection service. bulding with a sound business plan is basic business sense, but what about building a sound business that will actually bring value to the market?

      If creators focused on building value and purpose of use first, monetization would not be a concern.

    16. It’s about using the bees to build the honey, and then watching the bears come running to eat it.

      Each social network, becomes a branded consumer base(the Hive)!
      So each consumer brand(the Bear)will then come running for the honey (the consumer’s money)
      Money…is Honey :p

    17. Excellent predictions Robert! I am surprised that social networks took so long to realize the value of generating money. Since 2004, most startups have been focused on exit strategies through quick buy outs rather than sustained growth through ad revenues. However, now that the market is diluted with countless startups, exit strategies no longer offer a viable means of monetizing a site. 2007 will mark the beginning of startups with meaningful business plans.

      A business is a business is a business.
      – Jawad Shuaib

    18. I also totally agree. I believe I said it in another comment, but 2007 will be the year where web 2.0 purges itself of duplicative, non-innovative copycats whose only business model is “build to be acquired.”