Monetising the Social Network

First published 19 June 2006.

Or, Raining All Over Renewed Dot-Com Exuberance.

A few weeks ago I saw a post (“The Wayne’s World Business Model“) on the Recruiting Animal‘s blog that touted the benefits of viral marketing and social networking sites (such as LinkedIn and MySpace) for business purposes.  I am a thorough skeptic of any attempt to make serious coin from social networking.  Why?  Well the concept’s been tried before, many many times.  And it does make money, for a while — until the next big thing comes along.

A BRIEF HISTORY OF SOCIAL NETWORKING

In the early 80s we had telephone “party lines” where eager young teens could call up a central chat line service, create a cutesy little audible profile, and make new friends — realtime — with dozens of other like-minded teens from the same city (or across North America) talking about billowing hairspray-dos, tiger-striped pants, and Queen Street rock bars.

In the late 80s and early 90s we had multi-line bulletin board services like Metropolis and Canada Remote Systems, where angst-ridden young teens could dial in with a 1200-baud modem, create a lengthy personal profile, and make new friends — realtime — with dozens of other angst-ridden teens from the same city (or across North America) typing about unkempt hair, grunge rock and Queen Street goth bars.

In the mid-to-late 90s we had personal web pages and internet relay chat, where you could create a lengthy personal profile, link to all of your interests and pop-culture icons, and make new friends — realtime — reminiscing with people in the same city (or across the world) about the bygone days of tiger stripe pants, grunge rock, and Queen-Street-goth-bars-turned-Starbucks-outlets.

Now we’ve got MySpace, where you can create an intricate personal presence on the web (in 1995-style backgrounds and layout), link to all of your interests and pop-culture icons, and locate — realtime — new friends who share the same interests and possibly geography.

SHOW ME THE MONEY

All of these ventures, of course, incur some major capital costs at startup, not to mention the ongoing month-to-month expenses.  Somebody has to pay for the hardware to store all of the data.  Somebody has to pay for the bandwidth to link all of these people together and keep lag times low.  Chat lines and BBSes permitted a limited amount of free access, and then you had to pay for your time online.  Personal homepage and IRC costs are built into your ISP’s monthly charge.  But what about MySpace?

The Globe and Mail‘s business columnist Mathew Ingram penned this little gem back in May.  Mr. Ingram expressed some well-founded skepticism about the wisdom of Rupert Murdoch’s News Corporation shelling out USD $649 million to acquire the web’s current media darling, MySpace.  According to an April 23rd article in the New York Times, the gamble might pay off, but it’s far form certain.  MySpace’s advertising revenue is at present almost entirely derived from that hoary old standby of the 90s-web, banner ads.  Ad costs on MySpace ($0.10 CPM, or a dime for every thousand viewers) are far lower than the industry average (around $1.00 CPM), but as one blogger has pointed out, the site features a lot of unnecessary clicks and thus their audience metrics can legitimately be debated.

THE AUDIENCE IS FICKLE

One big problem is that these things never stay hot for very long.  In an e-mail conversation with the Recruiting Animal, I said the advertising revenue scheme is viable up to a point — and then you hit the wall.  YouTube, for instance, burns a million bucks a month in bandwidth costs — not including all the other capital expenses and fixed overhead.  Right now advertisers might be willing to pony up big bucks because services like YouTube are “hot” and have a big (but fickle and short-lived) audience.   But does that audience actually buy anything advertised in YouTube’s 15-second intro ads?

I liken these ad-funded website phenoms to new nightclubs in the Entertainment District.  When a new nightclub opens, everybody is dying to pay the 20 buck cover charge and wait in line a half hour to get in.  Then after a couple visits the novelty wears off, people get tired of being overcharged for drinks, and then they stop showing up.  Eventually their lifestyle changes completely — they meet a guy or girl and settle down, and stop hitting the clubs entirely.  Poof goes the audience.

The target demographic for these “hot” web spaces just doesn’t hang around long enough to generate a lot of revenue.  They’ll be hot for a year or two, then as the suits get involved more regulation and service changes happen, a different audience will start to show up, alienating the “old guard”, and that particular audience segment goes elsewhere.  It has been the story of social networking, particularly the electronic version, before the net existed — back when we dialed in to multi-line bulletin board systems on 300 baud modems.  This changing of the core clientele could threaten LinkedIn, for instance.

I’m a lot more sanguine about LinkedIn, since it caters to a business clientele who is no stranger to spending money.  It is also more exclusive, requiring an invite from an existing member, and is especially attractive to recruiters who do executive placement.  Still, as it gains users it will become less and less useful, since not all of the new arrivals will be “high quality” additions — CEOs or VPs of successful, well-known firms.  Its usefulness to its own user community is directly related to its exclusivity.  Once you start letting in the bozo middle managers with fluffed-up resumes, or the stellar failures with a dozen Chapter 11’s left off their resumes, it’s the beginning of the end.

Likewise, sooner or later the guys paying for the ads on MySpace and YouTube will realise that they aren’t pushing any more product than usual, and put less priority on placing ads with these sites.  Ad prices will go down even further, revenue will decline, and gradually these sites will no longer be able to provide the free services they used to.  Just like it did the first time around in the late 90s.  Eventually the moonshine wears off and ad execs start asking whether the banner ads are building any brand recognition; any AIDA or DAGMAR-measurable marketing metrics?  Heck you can test this stuff yourself.  Does anyone even remember the last banner ad they saw on MySpace, or the last 15-second intro ad they saw on YouTube?

THE BOTTOM LINE

If the 1990s dot-bomb combustion taught us anything, it is that the revenue model — not audience share — determines success in the marketplace.  If you’re giving away a free show, like MySpace and YouTube, then of course people will stop and gawk at the proceedings.  Getting them to open their wallet and shell out on a regular basis is another matter entirely.

Category: Industria, Web/Tech
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