Monetizing social media

This week I spoke at a panel in Silicon Valley organized by TiE's special interest group focusing on Consumer Internet. The subject was how to monetize social media properties on the Internet (social networks, blogs, start pages, etc).

Social media properties are the fastest growing sites on the Web. All of the top-ten websites in the U.S., measured by traffic growth rate, are social media properties. Walled-garden destinations are rapidly giving way to social media sites both in terms of traffic and time-spent by users. Additionally, social media is driving increase in users' total daily media consumption online by bringing new users to the Web and encouraging more time spent online by the current Web users.

Reason for the above trend is simple: users want to control their online media consumption. The explosion in online content is creating chaos and confusion. Personalization is the buzz word. Widgets and social networking applications are users' tools to personalize their online experience. More than 30% of global Internet users and almost 50% of those in North America are already using widgets. Programmable Web - a Web where the majority online media consumption is individually programmed by each user, has arrived. I believe this trend, though first started on the Internet, will continue to all the other platforms (wireless, TV, possibly print).

There is no doubt that the Internet is the future of advertising. It's the fastest growing channel for advertising dollar spend in the U.S. (compared to TV, mail, print, radio and outdoor). The monetization potential of social media properties, where most of the eyeballs are shifting on the Web, therefore becomes an extremely important subject to evaluate.

Unfortunately, nobody has yet figured out the winning formula for monetizing social media.

Let's look into social networking - the most popular category within social media. While Facebook and MySpace dominate this category in terms of traffic and engagement, both are still searching for the best approach to make money from their massive user bases.

Brand advertisers have all along been concerned about associating their brand identity with potentially damaging user generated content found on social networks. Even as users get smarter and brand advertisers become more comfortable with these unpredictable environments, other challenges still remain.

Banner and search advertising have shown to perform poorly within social networks. By some accounts, both Google and Microsoft are loosing money, given their minimum revenue guarantees, with their exclusive ad deals with MySpace and Facebook respectively. Facebook continues to try new ad models (ads in user's News Feeds, e-commerce), after its failure with Beacon. The problem is, users invest a lot of time & effort in their online identity in the communities they choose to participate in, and as a result, they consider these environment too personal to tolerate any advertising. Any successful commercialization of users' activity within a community will only happen with their explicit approval taken in a totally transparent manner (main lesson from Beacon's failure).

User's privacy concern is a monetization challenge that social networks definitely need to overcome. Such concerns are heightened in the online environment, given the ease with which private data can be shared and exploited on the Web. In the offline world, users have been willingly granting potentially much more damaging rights to their data (while filling credit card applications, signing up for coupons/promotions, etc.). Educating users and building trust with them is therefore going to be critical for social networks in order to devise a successful business model that will leverage users' data.

Despite these challenges, the business euphoria around popular social networks remains intact. No other online property has as much rich demographic and psychographic data about their users as that possessed by social networks (Facebook provides application developers feeds with over a dozen attributes about users using these applications). Users in online communities are not only willing to provide a lot of useful information about themselves in the identity they create, they are also willing to invest their valuable time on a regular basis in order to promote that identity. The theoretical promise of social networks leveraging users' rich profile for targeted advertising at ultra high CPMs has always existed. It is this promise that has driven a ridiculously rich $15Bn valuation for Facebook. That is a 100x multiple on Facebook's $150MM revenue in 2007. Even Google, with its proven business model & leadership in the lucrative online search advertising market, trades at a ~10x revenue multiple.

An alternate monetization approach for social networks may be to make money outside of their communities. Facebook already has the scale to potentially leverage the data on its 67MM active users in providing behavioral targeting to 3rd party publishers whose sites Facebook users visit. E.g., a Facebook user with a stated interest in "running" can be shown an ad for Nike's latest running shoes when he/she visits a site whose publisher is using Facebook's behavioral targeting service. I bet Nike will pay top CPM to reach this audience. Such targeted segmentations by products/categories are possible within Facebook due to the richness of its data. Behavioral targeting that leverages explicit, user-provided data will be more accurate compared to the current behavioral targeting approach in which user preferences are interpreted using their general Web surfing activity as a proxy. This assumes users always represent themselves honestly on their community profiles, but that is a topic for discussion on another day. Additionally, registration data (from Facebook) is far less volatile compared to the cookie-based approach currently used (almost a third of online users regularly clean their cookies).

Lastly, I'd like to comment on the future of companies which are building businesses on top of social networks. Widget firms like Slide and RockYou have build massive user bases by leveraging their ability to build viral applications for social media properties. These firms will find even more difficult to monetize their traffic. As discussed earlier, it's a very risky strategy to build a business that is 100% reliant on other firms which are still trying to figure out their business model. Facebook's Terms of Services provides it too much power to copy and/or create an advantageous situation for itself should Slide or RockYou come up with a killer monetization idea.

That has not stopped investors from valuing Slide at north of half a billion dollars. I believe that would translate into Slide's current revenue multiple that may be even higher than Facebook's 100x. Maybe these investors know some tricks about monetizing social media that most of us do not.