I've thought a bit about how social networks can monetize and this post is an attempt at ordering some of those thoughts.
Clearly there are several high-level ways to monetize:
1) Subscriptions/services
2) Virtual goods/transactions
3) Advertising
(Here I am exclusively referring to ways of directly monetizing consumers. There are a few other possibilities, involving other parties, that I am ignoring for now, e.g., developer fees, selling aggregated data and analytics, etc.)
1) Subscriptions/services are the least common nowadays, although they could make a comeback. In the context of Facebook it is the least likely as most users are young consumers that are there for entertainment purposes and are unlikely to pay. LinkedIn however has charged a subscription fee for certain additional services/capabilities, which makes sense given its business bent. I have no idea how much money they make off this and what adoption is.
2) Virtual goods/transactions are fairly straightforward. Virtual goods are the subject of a lot of attention nowadays, and even though its still a small market in absolute terms it is growing quickly. This post by Jeremy Liew talks about Facebook's virtual gifts and has an estimate of revenue. He has also written several other interesting posts on the different types of virtual goods. Monetizing virtual goods can be tricky given the ability to easily copy them, but there are scenarios where they may work.
3) Advertising is where most people are focusing nowadays and probably the area that is seeing the most activity. Here I see 3 different potential efforts:
- Advertising on the social network's own inventory - This is the most obvious and easiest to implement. Facebook and MySpace have deals with Microsoft and Google respectively and are also implementing their own programs (e.g., Facebook's social ads). The huge amount of inventory makes these attractive but the reality is that they are not converting well - probably because people are not in a buying/ad-clicking mindset when browsing these pages.
- Advertising on 3rd party inventory - I am somewhat surprised Facebook hasn't yet implemented their own advertising network (i.e., "Facebook AdSense"). Facebook has a ton of demographic and behavioral data on millions of users. Why not use this data to serve ads on a network of sites across the Internet? This is a way to take all that data on users (that is not monetizing particularly well on-site) and
leverage it across a much broader spectrum of inventory, including scenarios where the user mindset is different and more conducive to ad-clicking. This isn't a Google size opportunity (after all it won't be search inventory and they will have TAC), but it should be pretty sizeable. If a company like Glam can build up a large network, I don't see why Facebook cannot do the same.
- Monetizing influence - Per my last post, there is huge potential in harnessing the inherent influence effects that exist in a social network. I can't say I know yet how this can be done or whether its even possible to do consistently. By its very nature it may not be. I do know that friends' activities on Facebook have caused me to click on articles, apps, groups, products, etc. and even buy things. However none of the value created goes to Facebook today. Its clear there will be a lot of experimentation in this area (Facebook's News Feed being a first step, and Beacon being a somewhat unsuccessful second step). Other startups will also attack this problem, both inside Facebook (as apps) and outside (e.g., FriendFeed).
In any case, the point of this post is two make two points:
1) I think Facebook should do its own version of AdSense
2) There is a lot of opportunity in understanding how influence occurs in social networks and in capturing some of the value it creates
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