What it Will Take for Social Network Profitability

The revenue model for social networks, thus far, has mainly been advertisement.  LinkedIn is the only profitable social network and much of this is to attribute to healthy subscription revenue.

When was the last time you clicked through on an internet advertisement?  For that matter, when was the last time you consciously noticed an internet ad?  When click-through rates are measured in decimal points of a percent, does this define a winning campaign? 

Ad initiatives on the internet are an old-school media mentality (TV, publications, etc.) and they are trying to parlay this to an audience that has different behaviors and motivations.  Social Media Marketing MUST be about delivering true customer value – not throwing a million ads up and relying on 100s of  looks; not analysis of usage patterns and then uninvited spamming; not streaming ads that drive away users as reported by David Kaplan. (Streaming Ads Driving Users Away From Content: Report, By David Kaplan – Mon 21 Jan 2008 07:07 PM PST).

Internet ad challenges are even more prevalent on social networks than on other websites.  When users are on the internet, they typically seek information.  When users are on social networks, they are typically there to, well, socialize.  Thus the awareness of ads is even lower on social networks than other internet browsing scenarios.

JP Morgan has a study out called “Nothing But Net – 2009 Investment Guide” which paints a bleak picture for social network profitability.  They stated that social networks could not drive sufficient revenue from an ad-based model to grow profits. Furthermore, they did not expect broad adoption of advertising on social networking sites by large advertisers.  They summarized that for the near to medium term, several significant challenges remained to the ad-based revenue model for social networks. (JP MORGAN Global Equity Research, “Nothing But Net – 2009 Internet Investment Guide,” January 05, 2009. p.10.)

Google has struggled with how to make money through advertising on MySpace and other social sites.  Facebook’s “Beacon Program” met substantial backfire.  Many social network users are disenchanted with advertising practices.  They feel they are being spoofed, spied on, and spammed.  There is an unwritten law of social networks – equal benefit to all players.  Thus there is a need for parallel value for users and brands.

Monetization of social networks has failed thus far for one simple reason … vendors are focused on “what they do” and how to exploit “what they do” on a platform that serves masses (social networks).  Everyone wants to cash in, but they are failing to address simple marketing rules we learned back in Business Administration 101 – deliver value to customers.  This means:

1) Understanding the target market of customers served – Social networks gained adoption because it was a technological innovation that allows individuals with similar interests and backgrounds to connect and exchange “data”.  The two parties (or more) exchanged information without any side looking to have an “advantage”.  All parties are “serviced” equally.  Brands and advertisers now have a large pool of potential customers to market to, IF interest and demographics match.

2) Understanding how and why social networks are used – Many users are disenchanted by the possibility of being advertised and/or spammed to, based on “analysis” as is the case with behavior target (BT) advertisement.  So does this mean that social networks are still fertile ground for vendors and advertisers to reap success – ABSOLUTELY.  But one must understand how and why individuals use social networks.  They use it to socialize.   Attention to advertisements at a time of socializing is minimal, at best.

3) What can be delivered to the target market to give them incremental value that is distinguishable from what others offer – There needs to be a business model that continues to deliver on the unwritten law of social networks – equal benefit to all – users and brands.  A business model that delivers the highest ROI ever experienced and reduces sales close rates dramatically.  All while delivering unparalleled value to users.

 “Appropriating the model of consumer profiling from social networks might be an interesting path to take.  It gives the user true ownership of the process rather than management of the process, which is where we are now. Imagine a system in which consumers decide how to present themselves to the universe of marketers, much as they do on Facebook.  This is what I need you, the marketer, to know. This is what I want. Make it worth my while, and you can follow me!” (Steve Smith, “Is Opt-in The New Opt-Out?,” http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=102126.)

There is a model for fair collaboration between users and brands.  One where users can get what they want, retain privacy, and where brands have the highest targeted market.  I have defined a social network monetization model that addresses the challenges mentioned here and I am sure that I am not the only one.  It is just a matter of willingness of social networks and advertisers to play by user’s rules … understanding their behavior and catering to it as opposed to delivering a program that is not attractive to the target market.

Social Steve