Wither Web 2.0 Social Networking? and My 2 Cents.

Michael Fitzgerald's MIT Tech Review column Are Social Networks Sinking? summarizes the inevitable deflation (though not all-out devastation) of the Web 2.0 Social Networking market (not to be mixed with the Enterprise 2.0 market - which is growing more steadily in-the-wake-of, rather than in-step-with, the Web 2.0 market) bubble.

A recent article by Jessica Vasscellaros, OMG, We're Not BFF's Anymore?, in the WSJ, talks about reactions to being "unfriended." But in the context of Fitzgeralds column, a greater fear than losing relationships willy nilly via the click of an "unfriend" button is the possibility that your whole entire social network goes poof overnight.

Some Social Networks Get Bit, others Bite the Dust

While bringing to our attention to greater than 10% staff reductions at Hi5 (the third largest social network) and LinkedIn, Fitzgerald's more stinging reminder of danger to come details the shut-down of Pownce, a once-popular micro-blogging service and Values of n services Stikkit and I Want Sandy.

With the fall of these services, entire social networks and information collections fall into a big black hole - leaving no trail of the internet dark matter which includes lost social network content and broken links galore. And for netizens, countless time is lost along with a chunk of their online persona.

When my 2.5 year old son hit "Replay" about 128 times in two weeks on the "Little Red Caboose" video (video formerly found here) hosted at Brightcove, I could easily predict the demise of their video hosting service. How could they possibly make money? As of this month, their site reports "Sorry, Brightcove.TV is Off the Air" with a euphemistic eulogistic subtext "We have shut down the Brightcove video showcase so we can focus all of our energy on the Brightcove platform."

While the profit issues for Brightcove were clear (nothing on that caboose page was making them any money - certainly not from my son's pocket), the issues are, perhaps murkier at other sites that are more popular and appear to be stable.

Google may not have promised that Lively, where you can create an avatar and chat with friends in virtual worlds you design, would stay alive forever, but when Google offers a service, netizens tend to trust it stick around in some form. Google announced that Lively will shut down December 31st, 2008.

While Facebook and Myspace seem trustworthy, and will likely withstand the test of time, their scale may just magnify the pain that comes with offering a service for free - then trying to figure out how to make a revenue model work. Bryant Urstadt's feature story, Social Networking Is Not a Business*, in the MIT Tech Review's July/August 2008 edition says "Facebook is likely to lose $150 million this year." With 33.9 Million unique users in January 2008 (as reported by the article), its not an issue of scale that could be in their way.

So what's the problem? Urstadt's article gives us a clue: ads were selling for as little as $0.13 CPM. Also reported, MySpace dropped their minimum from a CPM of $3.25 to $2 and they missed revenue targets by $100M. By comparison, other sites the article references earn CPM of $7 (for Mashable) to $70 (for the Tech Review). That article was written in the summer. The world looks different today. Inasmuch as the promise of context relevant advertising makes sense, it doesn't earn as much as targeting based on search results (when users are actively looking for something) or based on destination sites like the Tech Review with "Clearly defined audiences of executives and technologies who purchase corporate products and services."

Twitter, the most popular micro-blogging service so far, has shunted the ad model. Rather, they've shunted any revenue model since they were founded in July 2007 and grown incredibly large. That's about to change as says their CEO in a speech this month that only gave a clue about the timing (Q1 2009) but not the model for generating revenue.

The problem with turning on a new revenue model is that you just as quickly turn off your users.

Urstadt's article outlines the failure of Facebook's Beacon program in November 2007. User's got upset when, for example, they went to "the Blockbuster site and rented a movie, (and) that information was automatically sent to everyone in her Facebook network." While building relationships with their friends, User's also build a relationship with a service.

But when that relationship is changed, be it by a broadcast to a Facebook network or an ad in a Twitter streams, trust is broken and the relationship is damaged. So, it's just as hard to make revenue on a free service as it is "easy" to build up the user base. Aidan Henry at ReadWriteWeb offers his two cents on the Ultimate Twitter Revenue Model. The every-20th-tweet-is-an-ad-model is an obvious move that would surely generate revenue, but could disaffect users, especially when sponsored tweets start showing up as SMS messages.

My Two Cents for Web 2.0 Social Networking

Get between users and ways to spend money.

So many sites rely entirely on advertising dollars alone, when other great options exist. The ad approach is passive and is victim to resources that are ultimitely finite: available advertising dollars and user's online time. As the web and social networking are still young, number of users and the time they spend on the net is quickly increasing and ad spending has kept apace. However, forecasts for ad spending in 2009 are (per two accounts at Gawker) somewhere between much less growth for internet ads and modest decline for all other categories and a 40% death spiral. The latter scenario could quickly shut the doors on any service whose primary costs are based server infrastructure and bandwidth that can't be cut (without destructive effects on the social network) as easily as office buildings and jobs.

A quick look at what I consider to be two of the earliest and most successful social networks provides some good perspective on revenue generating options. Monster.com generated a billion dollars in revenue and $96 Million in Net Income in the 9 months ending September 2008. And in the same period, EBay generated $6.5 billion dollars in revenue and $1.4 billion in Net Income. In many ways these services resemble social networks. They have user profiles, some form of match making, following or notification, rating, and so on.

The difference between these services and "modern" social networking sites like MySpace and Facebook is that they are oriented entirely around a set of goals (hiring and selling, respectively) that are worth tangible dollars that their users spend to utilize the site or conduct commerce on it. So, eBay gets between the buyer and their need to spend money with a seller who has good ratings. And Monster gets between employers (who are hiring and thus have money in hand) and a pool of potential personnel.

Over at Facebook, networks are organized around organic friendships, affinities, ethnicities, religions, clubs and school classes. Users wouldn't have flocked to Facebook if it hadn't been free (especially since the initial users were College students). But they do have dollars to spend - the questions is on what type of transaction that's relevant in this type of network?

Marry something like E-Vite with something like Google Checkout - to allow groups to charge for and manage dues, event registrations, and scholarship fundraising. There are all kinds of ways that the sorts of groups that congregate on Facebook would seek to exchange dollars. Adding a cash register to Facebook would make their ad model look like a distracting mistake in the road to much greater things.

On a similar basis, If I were at Twitter I may take a play out of Amazon's book and offer 1-tweet-checkout to buy goods and services that could be posted on paid-for corporate (or club) twitter sites. Twitter also has avenues to pursue in revenue share deals with cell phone operators and could (carefully) pursue an advertising model.

Soon, hopefully tomorrow, I will contrast this with the implications for Enterprise 2.0 Social Networking, where the value equation is about value capture from collaborative activities than about eyeballs and ad dollars.