yellow brick road and the prize is clearly a big one. But they may end up back in Kansas. Down the other road, lies a future of being the primary repository for your connections (aka the social graph), but with this data available via open APIs to anybody who needs it. That is a utility type model, and as with any utility, it can be hugely valuable at scale.Social networking is at a major fork in the road. Down one road is adding more features to a walled garden and opening up just enough, so that users seldom need to leave. Most sites are going down this
Deciding which path to take is a real decision. A botched choice will likely end in failure, albeit via a long, slow decline.
The problem with the first road is that it relies upon a revenue model that is native to social media. What revenue model works for social media? The assumption is advertising, but CPM comes from traditional mass media and CPC is ideally suited to search. Where is the ad model that is native to social media? At the moment we are force-fitting CPM and CPC into social media for want of anything better.
Some might argue that there is no ad model for social media. We don't have an ad model for telephones, afterall, and that's a two-way communication medium like social media. Ominously, we didn't have an effective ad model for email, which is the earliest form of social media, until Google treated email as just more search fodder for CPC.
If social media is not funded by advertising, it must be funded by subscriptions or transactions. Neither is easy.
Social media is fundamentally different - it is few to few, not one to one like telephone or one to many like traditional media. There is also a fundamental problem for advertisers. We are focused on communicating with each other, not looking at content with some hopefully relatively relevant ads attached. Any advertising in that context is an annoying interruption, unless we learn to tune out the ads so effectively that it becomes useless to advertisers.
The lack of a native ad model is holding back any serious monetization of social networking. All we are seeing today is weak CPM and CPC rates. The overall numbers look OK because the audience is so large and the cost of audience acquisition is so low. But at some stage, social media has to move from the cool technology/promising opportunity phase to a fundamental new business type.
Lets look at a few attempts at a native revenue model for social media:
- The one idea that clearly failed was getting people to sell to their friends in a glorified Amway scheme - that was called Beacon (some RWW coverage here and here).
- In tightly controlled professional networking sites such as Sermo (for doctors only), the business model can best be described as "authorized lurking" - pharma companies are authorized to listen in to hear how they might improve their products. That seems a tad murky and I cannot see consumer companies paying to listen to dorm room chat, anyway.
- Group buying has some possibilities. It at least fits the peer ethos, and it could be popular in a recession. To date, though, this is only a theory as far as I know. If I had to pick one sustainable revenue model, this would be the one. But the spark of innovation that turns this from a promising idea to a $100m plus revenue line is still missing.
What new models have I missed? This Google search for "revenue model for social media" has a number of people asking the question, which is a good start, but if the equivalent of CPC for search is lurking out there, it is very well hidden.
Here is my take on which road the big social networking sites could take:
- MySpace could potentially get away with the walled garden approach for a pretty large mainstream market, using music as the fundamental draw and later leading into other arts and entertainment. This makes MySpace less age-dependent than Facebook. Everybody loves music, art and entertainment, from pre-schoolers on up to grandparents. News Corp. is a media company through and through, so this route is in their DNA.
- Facebook will have to become a utility for the world or a niche walled garden for college kids. Their DNA is too young to predict which way they will go. Both are viable, but neither will justify a $15 billion valuation, so they won't make this decision until new management steps in following a crisis. They cannot become a walled garden for the world, because their core community - college kids - will move into the world of work where they have to communicate in the wider world of the Internet. Once they have left college, their only connection to each other is as alumni and that ends up being a relatively weak connection as we grow older (despite what every generation believes when they are at college).
- LinkedIn has a shot at becoming a mainstream, but work-centric, walled garden since the working world is constrained enough and follows well-defined conventions. LinkedIn is the network I use regularly and I have written about it before many times. They have now reached the stage where if they offered webmail that was as good as Gmail (and obviously as open as any standard webmail), it could become the default hangout for biz types. "Suits" could gradually stop talking about "living in Outlook" and talk about "living in LinkedIn." Add in some simple RSS-based startpage-like functionality and LinkedIn would be the place to start and end the workday. Biz people will pay a reasonable subscription fee - say less than $100 a year - for a package like that without any advertising. That is a bit of a stretch from where LinkedIn is today, but fundamentally viable in my opinion.
Clearly, any venture that succeeds in building a mainstream walled garden will become hugely valuable. They will effectively become the Internet for millions, which might even justify a $15 billion type valuation. The problem is that it is a very, very hard road to navigate successfully.
The mass-market utility model could also be hugely valuable at scale. My simplest description of this would be "social graph + communication tools." The communication tools could be email, SMS, VOIP, poking, walls, vampires, whatever turns people on. The social graph is the spam controller and way to make connections. The obvious players here are the vendors with big email networks - Google, Yahoo!, and Microsoft (GYM). This is the background story to all the M&A "sturm und drang."
The one company that most needs to make this strategic decision - Facebook - is the one that is most constrained by that paper valuation of $15 billion. Neither route - niche walled garden for college kids or mass-market utility going up against GYM - will justify $15 billion. So they have to pretend that mass-market walled garden is viable, even though nobody believes that anymore. That is one nasty dilemma. Do you think Microsoft knew that they were giving Facebook that nasty dilemma when they agreed to a $15 billion valuation? Gates and Ballmer are smart enough, in my humble opinion.
The mass-market utility model will win out in the end for 3 reasons:
- The social graph is so closely linked to communications, which has always been a utility model.
- The ownership issues around the social graph are murky. A utility skates past that problem, saying "you own, we manage." AT&T does not own your Rolodex, or insert ads when you are calling Mom because they own your connection to Mom.
- The social graph has to be monetized in creative ways and the best way to make that happen is make it available to all the entrepreneurs and established businesses, on clear and simple terms.
The mass-market utility model will work through an API. That sounds similar to what is already out there, but with one big difference. The current APIs are all about getting your apps INTO a walled garden, or two or three walled gardens. The utility API will be about accessing the social graph, getting the social graph OUT of the utility and into your application, for some pre-defined cost. What you do after that is entirely up to you.
Image via Leo Reynolds.