Bernard Lunn has written a good post on the (lack of) a social media business model. He writes about the difficulties for social networks to monetize using advertisement. Although he builds his storyline a bit different from me, he is saying a lot of things I believe too. A few days ago I wrote about the same subject in a post called “Advertisement holds web 2.0 in a death grip”. A nice quote from Bernard’s post:
If social media is not funded by advertising, it must be funded by subscriptions or transactions. Neither is easy.
Social media is fundamentally different – it is few to few, not one to one like telephone or one to many like traditional media. There is also a fundamental problem for advertisers. We are focused on communicating with each other, not looking at content with some hopefully relatively relevant ads attached. Any advertising in that context is an annoying interruption, unless we learn to tune out the ads so effectively that it becomes useless to advertisers.
Bernard analyzes what three major social networking sites could do. They all have 2 options, remain a walled garden, or open up and become a utility. Both paths, or fork in a road as he calls it, could lead to value creation. But if a social network remains closed it will become a niche. Bernard’s preference (as is mine):
The mass-market utility model will win out in the end for 3 reasons:
- The social graph is so closely linked to communications, which has always been a utility model.
- The ownership issues around the social graph are murky. A utility skates past that problem, saying “you own, we manage.” AT&T does not own your Rolodex, or insert ads when you are calling Mom because they own your connection to Mom.
- The social graph has to be monetized in creative ways and the best way to make that happen is make it available to all the entrepreneurs and established businesses, on clear and simple terms.
I believe that Bernard nails it. Social interaction is something of all times. It is the most vital element of our on-line experience. Content creation and consumption isn’t nearly as interesting if there isn’t interaction. The interaction itself shouldn’t be supported by advertisement. Advertisement trespasses when I’m having interaction with my friends. I once, jokingly, said I started a countdown for the downfall of Facebook. The reason for this countdown is that they are executing a wrong business model. They aren’t near that downfall yet, but if they choose to remain closed then the slow decline as Bernard also calls it will happen. They just don’t own enough of the Internet to make that work. They have a walled garden of 100M users, Google works on a walled garden of the entire Web population. They are different measures.
We have seen already one example of a very successful social interaction utility. Unfortunately this example is not a great example for a successful utility business model. It’s Twitter of course! Twitter has commoditised the 140 char message more effectively than anyone could ever dream of. It has the capability to become mainstream due to its addictiveness, interactiveness, fun. But it also has serious operational problems (which I don’t want to emphasize, they are really hard working on it and I wish them all the best). But to me Twitter is also the example of a missed opportunity for a social utility business model.
Twitter should have taken its popularity and become a social utility service other social networks could implement. By doing that they would not only have become the standard for short social communication messages in any social network, but they would also be able to execute an Amazon-S3 type of business model. There would also be opportunities to charge users for the utility they use. Maybe not in the web domain (although I could see premium and freemium services appear), but definitely in the mobile domain. That is where the growth of Twitter should lie. That is where the money is! And if they can think of a way to stop cluttering the inbox of a GSM, then they could make the crossover to mobile and become one of the most successful paid mobile services. They have taken the immense popular SMS (100 BLN revenues in 2007), and socialized it using the Twitter service. An incredible opportunity, missed by a long shot.
I sure hope that the utility model thinking will gain momentum in VC land. I also hope Twitter will make a turnaround in terms of operations and business model. I would hate to lose that service. I want it to become successful as a social utility business model. It will help us create the User Centric Web.