PRINT THIS PAGE Monetising social networks
12/03/2008. Source:IVCJ (Israel Venture Capital & Private Equity Journal). Ofir Doron, Danny Lev, Ernst & Young Israel
Mega deals, such as Google’s purchase of YouTube for $1.6bn, continue to spark massive interest from entrepreneurs, investors, media conglomerates and online giants in social networks. In this IVCJ article Ofir Doron and Danny Lev of Ernst & Young Israel/Business Advisory Services discuss the issues of monetising social networks and their potential to be profitable. Social networks (SNs) are Web sites that allow users to communicate and interact with people of similar interests. Some social networking Web sites have a specific and narrow content focus (e.g. Beatles fans), while others serve as a platform for more general content and information (such as MySpace). In either case, SNs rely heavily on usergenerated content.
According to Nielson/NetRatings, SNs comprised five of the top 10 fastest growing Web brands in 2006. The wide acceptance of this new mass but interpersonal medium has essentially transformed Internet users from passive recipients of information to active participants in the generation of content across communities of all sizes and interests. This has changed the way users obtain information, create online content and make purchase decisions.
Despite climbing traffic rates and corresponding eyeball counts, capitalizing financially on SNs remains a tricky task. There should be a way to turn all of this virtual befriending into cash, but operators have yet to find the winning formula for identifying viable, sustainable business models and revenue sources.
When trying to assess significant SN revenue sources, one must examine the value they offer to the links in its value chain:
- Users get a chance to interact with a limitless array of people with common interests, needs and wishes. Whether part of a heated discussion regarding the ending of the latest Harry Potter book or watching the world go round, every user can find a satisfying niche in which to interact – actively or passively.
- Advertisers get a new avenue for advertising, brand interaction, information retrieval and more. Serving as a giant focus group, advertisers have identified this uncharted territory as an unprecedented opportunity to target, examine, engage or contact a group of consumers who have clearly affiliated themselves with specific interest groups. For example, a book club network would be ideal for libraries and bookshops.
- Retailers and other suppliers embrace SNs as an effective marketing tool to improve existing customer loyalty and boost customer acquisition by providing efficient viral tools promoting company brands, services and products.
- Other media. Broadcasting and media-related entities seek out every way possible to keep their viewers within their grasp. In response to declining viewership in traditional media channels such as TV or print, and increasing Web activity, non-online media has gained an understanding of the role of social networking in facilitating sharing and discovery of content.
The value that SNs add to each link raises the possibility of commercialization. Looking at the current SN ecosystem, several new types of assets and consequent revenue sources emerge. Once these are identified, it is necessary to determine who would be willing to pay for them and how much.
SN demographics and commercial exposure
SN audiences are large and varied. According to Marketing Evolution, SN users in the US represent over 70 percent of 15- to 34-year olds.
Apart from conventional banners, sponsorships and search-based advertising, SNs offer a new advertising format that may prove to be the most effective ever: interpersonal PR. Never before possible on a large scale, end consumers can now maintain online relationships with companies and brands. Such relationships may take place via three principal forms:
- An open dialog in which the company interacts with its consumers directly and openly (e.g. by opening a designated profile). This type of company-consumer relationship may achieve increased market acceptance, since users benefit from special offers and other motivational activities. Recent market research quoted a user expressing a preference to be a company’s ‘friend’ rather than ‘just a person they advertise to.’ According to Forrester Research, “SN users actually welcome interactions with their preferred brands...Once users become actively engaged with the brand, they become brand advocates”.
- Viral marketing in which companies provide promotional benefits that can be passed from one user to the next via email, instant messaging, etc. According to a Marketing Evolution study, over 70 percent of the marketing value created by SN marketing campaigns resulted from this “momentum effect.” For example, a company issues a coupon to its targeted network. This coupon may be sent onwards to the members’ friends, reaching a large number of consumers.
- ‘Undercover agents’ in which private people insert recommendations and other relevant word-of-mouth data regarding specific brands without quoting sources and motivations. Although this form of SN promotion has become increasingly popular, market experts maintain that the more (direct) the commercial presence on SNs, the more influence it will have. It will be trusted and listened to.
SNs as leverage for ‘offline’ businesses
In addition to direct revenue sources that may derive from strictly online operations, there are innovative approaches toward SN value creation, whereby SNs may leverage online presence as a base for various offline activities. In such a scenario, the overall revenue potential is based on external factors that are related to the specific nature of the extended offline activities. Potential offline revenues are not necessarily linked to the SN online business. An interesting example is Aniboom, an Israel-based company that has established a user-generated animation venture. By operating diversified SN tools, Aniboom can identify successful animated content with potential commercialization value – far beyond the Internet medium.
By creating offline businesses as potential extensions of online businesses, operators can benefit from new business models with revenue potential that may significantly outpace the online revenue potential alone. Data analysis As discussed, SNs feature an abundance of consumer-originated information. This is especially true for the wider platforms, which aggregate a larger scope of shared opinions, feelings, needs and wishes. By leveraging this massive source of information, SNs can:
- provide advertisers, suppliers and content providers with relevant information originated from target customers. Such information may include an account of ever-changing consumer tastes, trends, product/ campaign/ other service success rates, and offer real-time indications of market drivers and trends.
- provide support to the delivery of user-centric, targeted information. For example, guidance towards advertising, which will be shown to an attentive, open audience, may significantly improve success rates of promotional activities. Likewise, an advertisement for a book will be more effective if advertised to a book club audience than to other audiences.
Cross-platform exploitation
A predominant SN characteristic is the tendency of members to return on a weekly, daily and even hourly basis. Even though the wireless Internet has come quite far in recent years, it still does not completely satisfy the frequent and heavy user need to remain updated at all times. Therefore, the online success of SNs has spilled over into other forms of media, forming a growing opportunity for cross-media exploitation. To illustrate, mobile SN applications are considered the next generation of SNs, providing ubiquitous connectivity, communication and alert services anytime, anywhere. Mobile’s viral capabilities combined with the ability to purchase via the mobile phone directly are forecast to create an even more attractive opportunity than the current online form of SNs. In such a case, the expansion of SNs into another medium impacts seemingly unrelated market participants, such as mobile carriers, that may benefit greatly from a surge in traffic and m-commerce.
“Defensive” values
One of the key drivers of the SN market is the increasing number of M&A transactions and strategic alliances. Major players in the marketplace – both online giants (e.g. Google, Yahoo, MSN, etc.) and traditional media conglomerates – are acquiring leading SN sites at soaring values. Often, market values can hardly be explained by the direct economic value of the acquired target. Rather, they reflect the acquirer’s interest to protect its own business, audience and existing customer base. For example, one of the key reasons for the Google/MySpace long-term alliance was Google’s need to preserve traffic that originated from MySpace. By forming this alliance, Google insured that this traffic would not be diverted to one of its competitors.
As shown above, SNs have come a long way in revolutionizing the media market, blurring the line between mass and interpersonal communications, edited and user-generated content and active and passive content consumption. However, the SN industry has yet to demonstrate firm business models and solid, long term revenue sources.
The emerging product examples outlined above have shown tremendous potential, although still in nascent stages of trial and error. As these products mature with time, SN and related activities are forecast to grow in size and frequency, revealing winning players, methods and strategies. Regardless of the search for steady revenue streams, it is believed that SNs will continue to be assessed and purchased with huge valuations, offering the intangible, ever-sought image of the cool, state-of-the-art hub of the virtual sphere.
This article first appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com---------
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