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. Monster.com 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.