May 23, 2008

Future trends for social platforms

I spoke at a panel on the future of social platforms during the TiEcon conference in Silicon Valley last week. Social networks constitute the biggest share of the audience in the exploding social media category, the fastest growing segment on the Internet in terms of traffic. However, the future of social networks as profitable ventures and their ability to garner advertising dollars commensurate with their traffic is still uncertain.

I covered monetization challenges of social networks in an earlier post. While those with heavy traffic struggle to figure out how to monetize their audience, others, in my opinion, will not even get the threshold traffic needed to justify keeping the lights on while the industry tries to crack its business model. eMarketer last week reduced its 2008 estimate of advertising spend on social networks in the U.S. from $1.6B to $1.4B. MySpace and Facebook will take in over $1.0B of that, leaving just $400M for everyone else.

I'd categorize social networks into two categories: large, general purpose communities and niche networks based on specific interests and purpose (e.g., pets, sports, mothers, car enthusiasts, etc.).

Social networks, like instant messaging (IM) platforms, are a scale business - you want to join the network on which most of your friends hang out. As in IM, where four companies (AOL, Yahoo, Microsoft and ICQ) cover majority of the global chat users, there is room for only a handful of general purpose social networks, which are essentially highly effective social communication platforms. I put Facebook, MySpace, Hi5, Bebo, etc, in this category. These networks will continue to explore their sustainable business model as discussed earlier. As these large communities mature, interoperability will however become critical for their continued traffic growth and engagement. IM platforms resisted interoperability for the longest time, but they're now opening up and allowing users from one network to chat with those from other networks without having to open a new account on those other networks.

In contrast, niche social networks should find it relatively easier to monetize their audience. These are essentially self-selected, contextual communities which can be targeted as a whole by relevant advertisers. But there is very little user patience for creating and maintaining multiple profiles on multiple networks. Open standards and data portability will therefore be key for niche communities if they have to attract a large enough user base that will provide scale for advertisers.

Users, ultimately, will want to control where they can and cannot take their data which they invest a lot of effort entering into and maintaining within social networks. Communities which do not provide users this choice will not survive. We have therefore seen a race amongst big players to prove that they are more open than their competitors. Over the last two weeks, MySpace (Data Availability), Facebook (Facebook Connect) and Google (Friend Connect) have announced their new products to enable data portability. The fight is to become the preferred "data destination" for users where they can store and maintain all of their data, and take some of it to additional sites where users may also want to spend time on.

When Facebook opened their platform for 3rd party developers last May, its goal was to create an incentive for developers to build engaging applications on its platform, thus making Facebook the single default destination for most, if not all, user activity. While it did unleash tremendous creativity and developer enthusiasm, 26 thousand applications and twelve months later, the myth of the Facebook economy has been broken. Unless you've an existing property with a vertical expertise and require additional inventory, or you're a student trying to build up your resume, you 're advised not to waste time on developing Facebook applications. Facebook Connect is also an admission on behalf of Facebook that users are not going to spend majority of their time on one single platform. The company is now promoting enterprise application development.

In the meantime, some social networks have started failing. Earlier this year Conde Nast shut down Flip, its social network for teen girls. It realized that all those teen girls were already hanging out at Facebook, so it converted Flip into a Facebook application. recently reported trouble with its personal networking community site Tickle, for which it paid $94M in May 2004. This is just the beginning of the clearing out process that should remove the past couple of years of excess within this space.

May 17, 2008

TiEcon 2008

I'm currently attending TiEcon 2008. TiEcon, the annual conference of the TiE's founding chapter in Silicon Valley, has become the world's largest conference for entrepreneurs. In its 16th edition this year, the conference was attended by over 4,000 attendees. TiE, as an organization, has also grown exponentially, boasting of 49 chapters in 11 countries.

I spoke at a panel this afternoon on the future of social platforms. More on that in a later post.

Between my meetings, I was able to attend a few keynote speeches. The two that I sat through till the end, and hence found interesting were:

Elon Musk, CEO of SpaceX, Chairman of Tesla Motors and SolarCity, co-founder of PayPal

Elon, 37, is an exciting serial entrepreneur. The diversity of his achievements in such a small period of time is truly amazing. Internet, space travel and
clean energy were the three areas that Elon, as a teenager, felt needed special attention. Internet was his first focus. He co-founded PayPal, and sold it to eBay for $1.5B. Elon was the largest shareholder of PayPal at the time of its sale.

His second major venture involves making space rockets. The goal of
SpaceX is to significantly reduce the cost of space travel through re-usable rockets. Its Falcon 9 rocket is currently under development. In a major endorsement of SpaceX, NASA awarded it a $278M contract in 2006 for its International Space station project. Finally, Tesla, Elon's third venture, recently launched its all-electric stylish roadster to rave reviews in Los Angeles. For his TiEcon interview entry, he drove in his Tesla to the stage. Elon feels hybrid vehicles are merely an industry red herring, and the true solution for eliminating dependence on fossil fuel and reducing global warming is going 100% electric.

That is three on three for Elon, an entrepreneur who's not afraid to think big, really big.

Chirs Anderson. Editor-In-Chief, Wired Magazine

Under Chris' tenure, Wired has retained its edge and editorial supremacy amongst all technology magazines in an environment where the print business otherwise has struggled against the onslaught of digital media. He coined the phrase The Long Tail in a Wired article, and later on wrote a seminal book on the same subject - why the future of business is selling less of more.

Chris is at it again. He's writing a book on the economics of free - expanding on his Wired article in the March '08 edition of the magazine. "Free" may mean either $0.00 or too cheap to bother measuring. The concept has existed since early 1900, when Gillette first introduced it - give away free razors (useless by itself), and make money during its lifetime through replaceable blades. Many other industries have since emulated it successfully - subsidized/free cell phones, and earn profit with air-time charged during the life of the plan; subsidized/free media (newspapers, magazines, broadcast television), and make money through advertising.

In today's age of technology, where computer processing power, bandwidth and storage have almost become free, the notion of free has taken a new meaning. Instead of cross subsidizing the free product by charging extra for the companion product, the cost of the product itself is falling sharply to almost zero. Economics 101 says that in a perfectly competitive market, the marginal cost of a product (incremental cost of producing one new unit) equals its market price. What happens when the marginal cost becomes zero? As is the case with the three main factors of production in the digital economy: processing power, bandwidth and storage.

This gives rise to new business models like "freemium" - basic service is free, but there is a charge for the premium service. In an environment of almost zero cost, the 99/1 principal applies to most Web businesses - 99% of total customers opting for the free basic service will be supported by 1% customers who pay for the premium version. With the scale of Web, distributing fixed costs amongst a lot of users makes the 99/1 model work.

Chris highlights two other concepts: the "waste economy" and the "gift economy."

The concept of "waste economy" explores the process to unleash innovation. Chris argues that engineers are brilliant in coming up with revolutionary scientific breakthroughs, but are usually horrible in judging their day-to-day applications by common users. The main goal of engineers should therefore be to drive down the cost of new technologies to a level where it can be "wasted" by entrepreneurs and consumers, who, uninhibited by any cost pressure, will find innovative products and services made possible by the underlying technology.

Lastly, "gift economy" is the engine behind Wikipedia, Craig's List, open source software, etc. Money is not the sole motivator in this economy. Altruism, making a difference, sharing are the human values which have always existed. The "free" global distribution through the Internet and Web 2.0 technologies have now allowed the contribution of a few to benefit thousands and millions of consumers - totally free of cost.

Just to make sure, these trends do not imply that digital businesses cannot make make profit in this age of "free." The product/service may be free to consumers, but some one else in the whole value chain will pay for it. E.g., Google's products (Search, Gmail, etc.) are free to users, but Google still makes a ton of money from advertisers.