Venture Capitalist at Theory

About / Categories / Subscribe / Twitter

4 minute read / May 15, 2013 /

Social Network Alchemy: The Five Ways of Turning Users Into Gold

Derek Powazek questions the intrinsic economic viability social networks in his post “What If Social Networks Just Aren’t Profitable?”. It’s a logical question to pose in the aftermath of the Digg sale and the wobbly Facebook IPO.

There is one clear lesson from Digg’s sale: the technology that powered a once-massive social network is worth about $500,000.

The Big Digg Lesson

The Atlantic summed up the essence of social networks' business models brilliantly. It’s not the technology that’s intrinisically valuable, but the activity on the network that attracts users and advertisers and produces a data by-product. Once users commit to a network, the network must develop a revenue model based upon the content created by the users. In so doing, social networks can generate huge revenues quite profitably.

But these networks don’t all go to market the same way. Below is a draft taxonomy of social network revenue models. Comments welcome.

Media Social Networks (MySpace, Facebook, Twitter, Pinterest) - Media networks' primary insert ads into the experiences of potential customers. MySpace generated hundreds of millions of dollars by selling home page take overs and remnant ads. Facebook generates billions by providing more granular targeting across a much larger user base. Leafing through the pages of history, this is no different from the business of phone books: create a listing of people’s name and contact details and businesses will soon follow paying for inclusion. To date, ad dollars have formed the largest fraction of social network revenue dollars. Pinterest is a bit different in that advertisers will be able to drive transactions directly from whatever advertisement or sponsorship products Pinterest builds. But this is still a media business, just with a performance oriented advertiser base.

Data By-Product Social Networks (LinkedIn, PatientsLikeMe) - Data by-product social networks offer free services to the main user base but sell some data product to a different customer set. LinkedIn and PatientsLikeMe have cultivated vibrant communication networks. To generate revenue, they collect, filter, serve and sell the data users create to interested parties: recruiters and professional networkers in the first case and pharmaceutical companies in the second case.

Premium Subscription Social Networks (Yammer, AxialMarket, Gerson Lehrman Group, XBox Live, World of Warcraft, Dating Sites) - Sometimes access the community is valuable enough to the end user to warrant charging a monthly subscription. Yammer charges for secure, managed enterprise social networks. Axial collects fees from financial professionals to access user created deal flow. GLG collects fees to access subject matter experts. Gaming networks like XBox Live and World of Warcraft offer matchmaking and game hosting services. Dating sites offer access to a network of candidates for a fee and often will charge for relevant digital goods or rights to communicate with other members.

Pro Bono Social Networks (Chat, Email) - Email hasn’t generated much revenue since the days of dial-up when a subscription to Aol included an email address and chat account. Email and chat have since become commodified and are operated at or near a loss, ideally winning user loyalty on behalf of adjacent properties. If you use GMail, you’ll likely use more often.

Freemium Social Networks: (Line) It’s hard to argue with Line’s strategy of virtual goods and stickers. Line’s 150M users spent nearly $60M on these goods in Q1. By leveraging a network effect and capitalizing on its users' desires to express emotion and individuality, Line has grown tremendously.

To Be Determined Social Networks (FourSquare, Tumblr, Quora, Instagram) - For many of the newest social networks, revenue models are still nascent. Discovering the most natural form of monetization within a community is challenging. Some networks never need to find it (Instagram). Others spend years searching for it. Perhaps this group’s revenue models will fall into the above categories. Or perhaps they will create a new form of revenue model.

Social networks have only existed for about 7 years. In that time, we have witnessed the growth of a few hegemonies and scores of niche players. We have retrofitted revenue models from previous eras of Internet businesses. But the data quality and density found in social networks are unlike most other computer systems. Networks are still exploring the alchemy of converting social media data to gold. One day, it will be a science.

Read More:

Your Startup’s API Could be Its Disruptor