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.
Showing posts with label MySpace. Show all posts
Showing posts with label MySpace. Show all posts
May 23, 2008
March 7, 2008
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.
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.
November 2, 2007
Open social networks - Google's OpenSocial API
This happened faster than I expected - a common set of APIs to build social applications across multiple websites (social networks). The goal is to tear down the walls which keep hubs of users & their activities locked within each social network.
Facebook's astronomical growth with its closed, proprietary platform played a key role in expediting a wide cooperation, led by Google, amongst players on the other side of the line. These players, in addition to doing the right thing, also want to quickly stunt the user growth on the Facebook island - as users deepen their time/effort investment on Facebook, their switching "cost" out of its platform increases. Facebook traffic has almost doubled in the past five months since it opened its platform on May 24th (from 27M monthly uniques to 51M).
Google has created a partner ecosystem to release OpenSocial APIs which can be used by developers to create applications that will work on any of the host social networking sites in the ecosystem. There are already 27 partners in the ecosystem (MySpace, Bebo, Hi5, Ning, LinkedIn, Plaxo, Salesforce.com, etc.). Marc Andreessen, Founder of Ning, has a good explanation of benefits to participating partners on his blog. APIs are built on Google's Gadget technology.
Google has historically gone solo in creating new standards. What changed this time around?
With Facebook's expected launch of its own advertising network that promises to effectively leverage user data for targeted advertising (e.g., thru News Feeds), it'll be interesting to see a showdown with OpenSocial, as advertising dollars continue to shift online, and brand advertisers play a bigger role in this shift.
Meanwhile, OpenSocial participants will be busy stabilizing the new standard and fixing its bugs. The first OpenSocial application was hacked within 45 minutes after its launch.
Facebook's astronomical growth with its closed, proprietary platform played a key role in expediting a wide cooperation, led by Google, amongst players on the other side of the line. These players, in addition to doing the right thing, also want to quickly stunt the user growth on the Facebook island - as users deepen their time/effort investment on Facebook, their switching "cost" out of its platform increases. Facebook traffic has almost doubled in the past five months since it opened its platform on May 24th (from 27M monthly uniques to 51M).
Google has created a partner ecosystem to release OpenSocial APIs which can be used by developers to create applications that will work on any of the host social networking sites in the ecosystem. There are already 27 partners in the ecosystem (MySpace, Bebo, Hi5, Ning, LinkedIn, Plaxo, Salesforce.com, etc.). Marc Andreessen, Founder of Ning, has a good explanation of benefits to participating partners on his blog. APIs are built on Google's Gadget technology.
Google has historically gone solo in creating new standards. What changed this time around?
- Orkut, Google's social networking product, never really took off like MySpace or Facebook. It's therefore a defensive move by Google in order to not allow one of these sites to become the default destination for users' social activity on the Web. By lining up partners that have a strong desire to participate in open standards that give them access to more applications and by providing users an easier way to mange their information across social networks, Google has created a very compelling value proposition that benefits everyone - participating social networks, the end user, applications developers, and, above all, Google.
- The promised holy grail with social networking is to leverage rich user data for high-CPM, targeted advertising. Google has a proven leadership in this game. But it needs access to that data. Even though questions still remain about ownership of user data on applications built using OpenSocial APIs and distributed on several social networks, common standards is a step in the right direction. It's a matter of time before data ownership, profit sharing, and related questions get answered.
- OpenSocial will streamline the ability to feed Google ads into applications/widgets. Googles, thru its AdSense program, has the biggest network of advertisers on the planet. No other company is therefore better positioned to leverage the vast amount of advertising inventory that is being created by an explosion in the number of widgets/gadgets/applications on the Web. It also gives developers and marketers of applications, especially small- and mid-size firms, one channel to reach multiple audiences.
With Facebook's expected launch of its own advertising network that promises to effectively leverage user data for targeted advertising (e.g., thru News Feeds), it'll be interesting to see a showdown with OpenSocial, as advertising dollars continue to shift online, and brand advertisers play a bigger role in this shift.
Meanwhile, OpenSocial participants will be busy stabilizing the new standard and fixing its bugs. The first OpenSocial application was hacked within 45 minutes after its launch.
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