Title: The future monetization model in online social networks and social software in general will be based upon adding value to the core functionalities of the system by leveraging every single social interaction and serving real-time semantic responses to the user in form of advertising or recommendations.
Research Question: How can online social networks bet be monetized without interfering with the users privacy and adding the most value to the core functionality and purpose of the social network ?
Word Count: 3866
Abstract
The aim of this essay is to examine the current state of affairs in the social software monetization area. This is done, by firstly analyzing current monetization models on the web, and analyzing their suitability for the social web. What is shown, is that current advertising paradigms, cannot seamlessly be applied, therefore new models need to be developed.
What is also discussed is the question of why the monetization of the social web is actually important and why it has not been done so. The importance of social networking as an utility to communicate and making communication more efficient by merging existing services such as email, address book etc. demonstrates the power of this medium. The monetization of social networks is of key importance because only so, it can result in a viable business platform that prospers and make global communication more seamless, cheaper and more efficient.
Finally a concept is presented realising the theoretical approach into a product that can be seamlessly integrated into most social web environments aiding in the monetization of the system.
Contents
p. 5 Introduction
p. 6 From Netscape to Yahoo and the emergence of the Social Web
p. 8 Facebook and Myspace
p. 10 Current search advertising paradigm
p. 12 Google / Myspace advertising deal
p. 14 Social Graph
p. 15 Monetization Concept
p. 18 Conclusion
p. 19 Bibliography
The future monetization model in online social networks and social software in general will be based upon adding value to the core functionalities of the system by leveraging every single social interaction and serving real-time semantic responses to the user in form of advertising or recommendations.
“The web as we know it is only 5,000 days old” said Kevin Kelly exec editor at Wired Magazine at a conference in December 2007. This comment underlines the massive dynamics of the web/internet. In the past 5,000 days it has disrupted industries that have been built in the decades before, such as the telecoms industry, the advertising industry, the retail industry and several more. But what has made the internet so powerful? Former CEO of AMD Hector Ruiz puts it like this “We do not believe the Internet is the Killer App.. “We believe that the Internet frankly is a connection of people and ideas”. This is what makes the internet so powerful. It is a utility that every human being with a pc and an internet connection can run and thereby tap into the brainpower of billions. The fact that the content available on the internet is in digital form adds to this dynamic by ensuring that the replication of once created information or products is virtually free. The end user can thereby share, trade and off course author his or her own content or others people content. Pieces of knowledge flow freely trough fiber optic cables making a pool of global knowledge freely accessible.
Before diving deeper into the matter, it is necessary to make a few distinctions. The internet and the web which are oftentimes classified into the same category are two very different systems. The internet as developed in the 1960`s originally named the ARPANET is the global backbone, consisting of hard and software. The web on the other hand side is a service built on top of the internet infrastructure. This is of key importance to this essay, because it demonstrates the platform capabilities of both the web and the internet thereby enabling innovation and open communication.
The consumer web as we know it and use it everyday was enabled by the Netscape browser. The first version of the Netscape browser was released on October 13, 1994 and was capable of visualizing data that was stored on servers around the globe. This data came in the form of “html” and other basic programming scripts and included hyperlinks leading to other WebPages. Not only did the success of Netscape lead to a boom in investment into Silicon Valley startups, which ultimately led to the dotcom boom, but also it led to an overinvestment in fiber optic cable. This overinvestment in fiber optic cable, led to traffic being sent over the internet by the web becoming virtually free, simply because there was exponentially more supply than demand. This again fuelled the pace of innovation in the Silicon Valley and global startup-scene, because it allowed for web services being built on top of existing infrastructure at a cost that was at a small scale negligible. This global ip-infrastructure provided at virtually no cost, enabled a plug and play revolution. Everyone with a pc and an internet connection could connect to the web and access the ever growing number of WebPages. Two entrepreneurs saw the potential of the consumer web and started a company named Yahoo from their garage. Incorporated on March 1, 1995 Yahoo is the most trafficked website world wide. Yahoo was a pioneering online portal. It was on March 8 1997 when Yahoo acquired the service Rocketmail which became Yahoo email. In the year 1999 Yahoo acquired eGroups and Geo cities. These were the first web services run by Yahoo that allowed users create content and publish it.
When looking at both the web and the internet, it is necessary to realize that both systems are essentially made up of servers, fiber optic cables and data. The virtual component of both systems is stored on physical components spread throughout the world. Essentially the consumer web is a huge cluster of visualized data. From the first version of the Netscape browser until now, however the quantity and the quality of this data have changed. While back in 1995 when David Filo and Jerry Yang launched Yahoo, it was only possible to launch a web destination for computer geeks, that preferably studied at Stanford, over time this process became easier and easier allowing more people to publish their own content on the web and not only view the content of a Portal such as Yahoo. Even though it is not the purpose of this essay to examine the ranges of web services built on top of the web infrastructure, it is necessary to look at the development of the way the web was utilized to save and supply data that became more complex. Web services were created that allowed for every day users to publish their thoughts, photos, videos, music etc. An example would be Yahoo`s Geocities, which allows for users to upload their files and display them on a webpage. When breaking all of the services down in their functionality that emerged from 1995 to around 2000, it becomes obvious that their functionality was very basic. Data was moved from A to B, where on B it could then be accessed by anyone in the form of a webpage. To summarize the early days of the web it can be said that the data available was very linear and impersonal. However, in the coming years entrepreneurs saw a market for a more personal approach to a webpage. Social Networks (SN`s) were born, on which a user could create a webpage displaying himself and connect with his friends. What this did, was merge existing services such as Instant Messaging, Email (This merge, added tremendous value to SN`s, giving users an one and only destination to sign up and a webpage builder into one product, allowing a more complex and personal approach to the address book). Before the invention of social networks and or social software in general the web, was largely a very anonymous and impersonal place. Social software helps to leverage the potential of the web bringing people together and creating or maintaining digital relationships. By merging highlight downside. The first services of this kind emerged 1997.
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Graphic: Schofield, Jack. SNS Timeline [An overview of social networking sites]. Digital image.
In the western world however two social networks both launched in the year 2005 eventually overruled the existing platforms such as friendster (add more names of social networks). Namely, the two social networks are Myspace and Facebook. Both have around 100 million users spread across the globe. However, a high percentage of the users are based in the U.S.A. and the western world. India, China, Japan and many other Asian countries have their own social networks. However, what can be said is that the global user base of social networks is not only massive, but is also growing exponentially, as more people utilize this form of communication. With current generations growing up, seeing the internet as a natural piece in their everyday environment, rather than a service or an object, the importance of social networks and online communication will naturally rise. We can conclude that social networking is among the top revolutions of our time and should therefore be looked at carefully to understand its implications.
The information above is incrementally important to understand the scale of social
networks globally and the importance of them for their users. Considering the fact, that social networks such as Facebook, Myspace etc. merge various utilities such as an address book, instant messaging, email with the users social life, that is frankly of key importance to the users, it becomes obvious that the business side of social networking is very tough. This is the case, due to two massive developments. On the one hand side, did social network builders/owners in contrast to the telecommunication industry do not charge for their services (an exception are business social networks) therefore are dependant on ad revenue. On the other hand side, most users of the web automatically imply that services on the web are free. While social networks have millions of unique users logging on to their services daily and billions of page views, they fail (at least most social networks) to monetize this potential, because their users do not only not wish to see ads beside their friends pictures, simply because it is such a private space, seemingly exploited by the social networks. The only exception to this are social networks targeting the business user. This is the case, because the users pull out an advantage that is business related, hence there is a potential to earn money, so they are willing to pay a monthly fee. Examples of this are U.S based linked in and Hamburg based Xing, which has just released their newest financial results which show a highly profitably company.
The above paragraphs were meant as a brief introduction into the world of social networks and social software. However, the focus of this essay clearly lies on the monetization of social networks /social software and the business aspects of an industry that has emerged roughly in the last decade. To understand the situation in which most social networks are today, it is necessary to understand the people, namely the entrepreneurs, the way they are financed (mostly by venture funds) and the markets in which they operate. This mix creates the platform in which a social network company can operate. In the last decade, entrepreneurs around the world have seen the success of social networks. This led to the assumption that the market was open for social networks with a different focus or a plain clone. In many cases this worked out fine. However, this led to a stiff competition on the market (there are x amount of startups out there) each and every single one craving for users. Also considering that most of these newly launched social networks is and or was a start-up, the companies had to use their resources wisely. In most cases the money secured in the rounds of financing was used to build out the product and the team. Most Venture Capitalists supporting social networks, also claim that it is more important to get to a fair amount of users, before thinking about the business aspect on monetizing the traffic. This has caused many social networks to emerge in many fields of interest, however very few of them have found a way to monetize the traffic. Now, however comes the time when the networks have reached a huge amount of users, but are not sustainable businesses. But why is it important that a way is found to monetize social networks and social software in general? It is important, because a viable business model is required to make it an industry being able to sustain its own. No monetization would lead to a stop of investment therefore a stop in innovation and this utility called Social Networks would not survive. Simply imagine telephone companies would have not charged for their services. Most probably this way of communication, that has transformed or world into a much connected system, would not have survived, and not developed to what it is today. The infrastructure would not be in place to accommodate as many customers and to send data. Therefore the question of monetization is of key importance for the web and social network industry.
What comes to mind when thinking about the web and our daily use of it, is that apart from the monthly broadband bill it is mostly free. Have you ever paid to use Google ? Have you ever paid to use a website ? Most of the services on the web are free. However, they produce costs. Costs in the form of human work, servers, bandwidth and electricity. While some private websites will not do as follows, most commercial websites earn money by placing advertising on their websites. As technology processes, these ads are getting more and more relevant to the content and the demographics of the readers. The plan was to do the same with social networks. Considering the amount of private data users placed on their profile, it seemed easy to place relevant ads next to the profile pages. While the ads may be highly relevant, they aren’t clicked on. This is the case, because of a simple advertising paradigm being used with social networks that initially emerged out of the search business.
At the beginning of the century a web company, namely Google, faced the same challenge as many social networks do today. How to best monetize their technology. A bright employee developed the adsense product, which allowed Google to place context relevant ads on webpages in the network and of course beside their search listings. Searching for an ipod on Google or visiting a webpage about ipods which is a member of the adsense network will therefore result in ipod ads being shown. This advertising paradigm is very successful for search, because the users interest at exactly this moment is known. However, this advertising paradigm does not work for social networks. This has been proven by the Google / Myspace deal. In August 2006 Google agreed to pay 900 Million $ to be able to put Google ads on Myspace for consecutive three years. As Google Co-Founder Sergey Brin said on the Google Q4 2007 Earnings Call:
“We don’t talk about individual partners’ performance or anything like that. Now I do want to highlight though, we have had a challenge in Q4 with social networking inventory as a whole and some of the monetization work we were doing there didn’t pan out as well as we had hoped. “
This proves that the current Google approach to monetizing social networks in a way that only can be applied to search and maybe static webpages, does not work sufficiently. But why does it not work ? There are many reasons, however the most significant reason is that simply putting conventional ads on profile pages, does not suit the purpose of social networks. The purpose of social networks is to stay in touch with your friends and or colleagues, and communicate with the people around you. The biggest social network with 138 Million unique active users in the month of July 2008 puts its purpose like this: “Facebook is a social utility that connects you with the people around you”. When looking at web advertising models, it can be said that the most successful ones, such as Google ads beside their search listings, which has resulted in over 4.2 Billion $ in net income in the year 2007, are in fact ad systems that add value to the core product. If search ads would not be helpful to people and really leading to conversions and sale , then the Google system would not work because advertisers would not be willing to spend their advertising money on the system. Therefore the question must be asked if ads beside your friends photos really aides the core product of staying in touch with your friends and adds value to the core product. Clearly not. Apart from the fact, that it does not add value, it also interferes with the users privacy. Exposing your personal interests to your friends should not lead to advertisers being able to target these. The reasons why conventional ads do not work is, because, it is not a transparent system and it does not add value to the core product. It is not transparent, because it interferes with the users privacy. If an advertiser can target certain details about an user that he exposes on his profile such as age, gender, location, personal interests, books he reads etc. then this is an interference with privacy restrictions.
In the contrary, recent studies and articles have emerged, that highlight users getting frustrated with social networks. Such is the case with a business week article titles “Generation myspace is getting fed up”. “But the forecasts for torrid growth may prove unrealistic. Besides the slowing user growth and declining time spent on these sites, users appear to be growing less responsive to ads, according to several advertisers and online placement forms. If advertisers cannot figure out how to reverse these trends, social networking could end up as a niche market in the online ad world, smashing hopes and valuations across Silicon Valley”. Even though there may be some dramatic individual stories in regards to social networks, the upwards trend is still in place. While “the HYPERLINK “http://www.crn.com/encyclopedia/defineterm.jhtml?term=social networking&x=&y=”social networking trend first took off in North America, it is beginning to reach a point of maturity in the region,” said Jack Flanagan, comscore executive vice president. However recent comscore numbers have also shown that the “Middle East-Africa region, Latin America, Europe and Asia Pacific, all of which have grown more than 20 percent since July of 2007.” In Europe the number of social network users (when looking at the timeframe July 07-July 08) grew by 35 % to 165 Million users.
But now, what is the most efficient way to monetize a social network ? As proven above and by recent numbers the Google search advertising paradigm does not work. The main principle of this process always has to be, finding a way of adding value to the core functionality of the product and at the same time monetizing this. When looking at these options, another major consideration has to be made. The location of the user and the type of social network. Due to the large differences in culture, language and mentality between the western and the Asian social networks, this part will focus on western social networks, simply to reduce complexity of the issue. There is no one solution for all social networks, globally. By saying the focus will lie on western social networks means that the concept will be feasible for sites like facebook, myspace, friendster etc.
When looking at a social network, it firstly has to be taken into account that it is in digital form. It is a representation of a social graph. A social graph is shown below.
Both visualizations above have been created with the TouchGraph program.
By adding people to our friends list, these social graphs automatically are created. (Whether the quality of the friendships becomes more superficial if people in the friends list are friends at all, will not be discussed because it is not the purpose of this essay). The social graph lies at the heart of every social network. The social graph visualizes the connections of one user to his friends and the connections amongst them. What most people will find, however is that many friends know each other as well. While the end user does not see the social graph as shown above it can be generated with an application giving a feeling for the complexity of the system. What comes to mind when looking at the two images above is that the complexity made up by the various connections, is similar to a chain wheel. When members of the social graph interact with each other, the chain wheel also moves. This is exactly the core functionality of a social network. As said before this part has to be monetized to add value to the product while at the same time enabling a viable business model. Hence, when clicking on someone’s name, normally a profile page such as the one below will appear.(Profile page image courtesy of FaceBook)
Graphic: Facebook Profile Page
To make the interaction amongst the user even more practical and efficient, a simple phone or sms button could be integrated. Utilizing the Jajah Api, this would outsource the infrastructure to Voice over Ip provider Jajah and return revenue to the social network. Considering that Voice over Ip is a cheap model it would also add value for the user. Another option would be the option to expand the idea of birthdays. Considering the fact, that most profile pages include birth dates, a simple link would let you order your friend a birthday gift ahead of time. Most users have their favored books and tv shows on their profile pages, so the semantic engine which is explained below, would send you to the right retailer matching up the right gift.
However, this should not be the only fundamental approach. Monetizing of the social graph should be combined with a semantic engine that provides real-time responses to user behavior. Semantics is crucial, to fully comprehend what a user is talking about at the very instance. A possible area of integration would be the status updates which are available on most social networks. If someone for example updates his status saying that he is planning to go eat dinner in an unknown city. Then immediate response would show restaurants in that city. Off course this tool, implies artificial intelligence scanning the users output, therefore the user would have to opt-in into the system to ensure high levels of privacy control.
In order to reach the maximum monetization potential of any social network, the system has to fulfill a very basic principle. Real-time response-time. This principle is key to not only grabbing the users attention, but also delivering maximum relevance. While the search engine advertising paradigm does not work on social networks, the principle of real-time responses is included. A search on Google and or Yahoo will result in Ads displayed on the side. The reason why these are so successful in the search space is because they are not only relevant, but they also appear at the same time the search results appear, therefore making them almost as useful as organic search results. Considering that communication is a timely good, the real-time aspect of a potential system for social networks gets even more important.
While the technology has not yet been developed to visualize friendships in their full complexity, rather than a very linear you are now friends approach, this will surely be developed in the coming years.
To conclude it can be said, that the right path to monetization for social networks can differ heavily, depending on the user base. However, social networks should utilize the chain-wheel made up of social interactions, thereby adding value. The makers of social networks have not yet fully grasped the potential of their systems and the scale of the revolution in which they are amidst. Building utilities that build hubs merging existing services to communicate with the people around you.
Primary Sources:
Ante,Spencer E., and Catherine Holahan. “Generation Myspace is Getting Fed Up.” Business Week. 7 Feb. 2008. 17 Aug. 2008 <http://www.businessweek.com/magazine/content/08_07/b4071054390809.htm>.
Kelly, Kevin. “Predicting the next 5,000 days of the web.” EG Conference. Monterey Conference Center, Monterey. 15 Aug. 2008. TED. July 2008. 15 Aug. 2008 <http://www.ted.com>.
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Images:
Schofield, Jack. SNS Timeline [An overview of social networking sites]. Digital image. Guardian.co.uk. 18 Nov. 2007. 15 Aug. 2008 <http://blogs.guardian.co.uk/technology/2007/11/18/friend_trends_an_overview_of_social_networking_sites.html>.
Software:
TouchGraph. Computer software. TouchGraph. 17 Aug. 2008 HYPERLINK “http://www.touchgraph.com/” http://www.touchgraph.com/
FaceBook. Computer software. FaceBook. 17 Aug. 2008 <http://www.facebook.com/>
Kelly, Kevin. “Predicting the next 5,000 days of the web.”
Ruiz, Hector. “The power to connect the world.”
“Yahoo!” Wikipedia, the free encyclopedia.
Kirkpatrick, Marshall. “Fox: $1 billion Search Deal with Google.”
Brin, Sergey. “Google Q4 2007 Earnings Call Transcript.” Seeking Alpha.
Ante,Spencer E., and Catherine Holahan. “Generation Myspace is Getting Fed Up.”
Ante,Spencer E., and Catherine Holahan. “Generation Myspace is Getting Fed Up.”
Kraemer, Brian. “Social Networking Sees Worldwide Growth.”
TouchGraph. Computer software. TouchGraph. 17 Aug. 2008 <http://www.touchgraph.com/>
FaceBook. Computer software. FaceBook. 17 Aug. 2008 <http://www.facebook.com/>
FaceBook. Computer software. FaceBook. 17 Aug. 2008 <http://www.facebook.com/>