The Changing Face of Social Media

‘Another hottest Web 2.0 startup remains unprofitable.’ This is the kind of news that we hear often these days. One of the greatest challenges of our times has been monetizing user-generated content. This at a time when socializing digitally has become an integral part of our lives.

Innovate or Make Way for Others

Companies that once revolutionized and dominated new industries – like Yahoo!, a Web 2.0 start-up, has seen its profits dwindle and its dominance decrease over the years as others like Google made it run for its money, putting the company up for grabs for the likes of Redmond-based Microsoft – make way for newer ones. Yahoo!, which had long been the No. 2 search engine, behind Google, has been overtaken by YouTube in the United States. YouTube searches grew 114% year over year from November 2007 to November 2008.

Friendster had a great initial vision, and sparked the social networking revolution by allowing friends to hook up with others. The company had an amazing lead and potential. Then MySpace came along and beat it at its own game. But we should not write Friendster’s obituary, just yet. It is seeing a revival of sorts, only this time in Asia. Friendster is now the leading social network in Asia, with over 55 million registered users.

On the other hand, early birds in Social Networking like SixDegrees.com, LiveJournal, AsianAvenue, BlackPlanet, etc. are nowhere on the horizon. What they lacked were self-sustaining business models.


Critical Mass Does Not Translate into High Monetization

We are expected to have more than one billion Social Media users in three years time. We, today, have social networking sites, with millions of users, that lack self-sustaining revenue streams. Social Media participants indulging in high-value transactions that translate into cash money would be any promoter’s dream.

Facebook and MySpace have over 200 million users each. But what they lack are robust revenue streams since they are primarily dependant on advertising monies. Twitter, the darling of the Web 2.0 fraternity, hasn't made any real money and has been surviving on Venture Funding. Digg is still losing money on its pitiful revenue numbers. The central point here is that monetization is not happening despite high adoption.


Challenges Associated with Advertising in an Environment of User-Created Content

Companies are now realizing that their erstwhile revenue stream i.e. online advertising is failing to make the business grow. Players are now ready to experiment and this could not have come at a better time. As per eMarketer, increase in online advertising spend on social networking sites in the US (the largest social networking market) is expected to slow down to 10.2% in 2009 as compared to 33.8% in 2008. A Universal McCann Study in 2008 found that only 14% of users trust advertising, whereas 78% trust recommendations of other consumers.

The likes of P&G are becoming averse to advertising on social networking sites and are now concentrating on engaging their consumers through the launch of their own social networking Websites, running Digital Media promotions on other social networking sites, etc.

"I have a reaction to [Facebook] as a consumer advocate and an advertiser: What in heaven's name made you think you could monetize the real estate in which somebody is breaking up with their girlfriend?”, Ted McConnell, Procter & Gamble's GM for Interactive Marketing and Innovation.


Alternate Ways of Monetizing Are Here to Stay

eMarketer predicts that Facebook and MySpace are expected to enhance their self-serve advertising systems to allow consumers and businesses to buy and sell real-world goods and services in 2009. MySpace is even trying to monetize video content.

Google’s own YouTube, which relies heavily on user-generated content, remains a costly experiment in the high-traffic, low-revenue advertisement business. Google is now expected to try its hand at monetizing this content. Video search already represents 26% of Google’s total search volume.

LinkedIn turned cash-flow positive in 2006, in its third year of operations. As of January 2007, the average LinkedIn user was 39 years old and made $139,000 a year. Of the total user-base, 89,000 were Chief Executive Officers. About 45% of LinkedIn's revenue comes from the monthly subscriptions corporations need to pay to send a meaningful amount of messages as they try to plug into other people's networks of contacts.

Some East-Asian players are also bucking the trend. QQ (from China) had $523 million in revenues in 2007 and an operating profit of $224 million. Only 13% of this came from advertising. The Chinese online advertising market is not as developed as the American one and this induces the players to look for revenue streams other than advertising. It also shows that even in developing markets like China, users are ready to pay for services. This model can be implemented in other markets.


Emergence of New Business Models

Gone are the days of relying on just online advertising. Online players are tweaking their revenue models and launching application platforms. Facebook’s platform, first launched in 2007, now has tens of thousands of applications. MySpace, which mostly relies on Google’s OpenSocial platform, has 4,500 apps available to users, and 211 million applications have been installed. The iPhone, which launched its App Store in July 2008 has more than 15,000 applications, and they’ve been downloaded more than 300 million times. But none has a direct payments platform to let applications collect micropayments from users.

A look at the big news from recent industry shows, like DEMOfall and TechCrunch 5.0, reveals emerging trends that will drive technology innovation next year. Those trends include cloud computing, open mobile platforms and semantic search.

The mobile platform is also expected to be a reliable revenue generator. A case in point is INQ1 – the world’s first social networking mobile phone and has online services like Facebook, Windows Live Messenger, Skype and Last.fm integrated into the phone's operating system, allowing a user to, for example, access their Facebook contacts from the phone’s address book and see a friend's profile picture when they call.

Some players are trying to capture the crowdsourced pools of knowledge floating across the Internet and use them for commercial customer service. Salesforce.com’s recently launched customer service application ‘Service Cloud’ is trying to do just that.

Way Forward

In these challenging times it remains to be seen as to how ready Web 2.0 Start-ups will experiment with newer technologies. Going by the numbers alone, 2009 does seem to be an interesting year. According to Nielson Online, Twitter is growing phenomenally and their number of unique visitors was up 422% in 12 months (August 2008 data for the US). Facebook is expected to have 300 million active users by the end of this year. The numbers are there but what is required now is monetizing user-generated content.

Apart from the new and upcoming models, I would stick my neck out and propose a subscription-based business model. It does seem to be a model worth exploring. It will reduce the number of participants, but will bring in much-needed revenues for the players.

By Navneet S.Aujla