Social networks need a new revenue approach beyond advertising
Facebook, MySpace, LinkedIn, Beebo, Plaxo, Orkut, and MSN Spaces are the biggest well known social network spaces. But what about the 800 other sites scrambling for audiences in the social network space? Can they generate $1M in advertising revenue per month? Will they ever be profitable?
USA Today says "Social Network Sites Work To Turn Users Into Profits" and summarizes the problem with this quote;
"Short of striking it rich with online ads or creating a new revenue stream, how can so many sites leverage their vast audiences? In many respects, it is the same query that dogged portal companies in the mid-1990s and search engines in the early '90s. Some were sold. Some went public. Some went belly up.
The ongoing challenge is to concoct a potion - be it through banner ads, premium subscriptions or licensing agreements - that no one has perfected. Facebook, crown jewel of the field, is valued at $15 billion but barely turns a profit."
CPM versus CPC - Big audiences are great but how you monetize them is the key to financial success. Google and the search companies are able to sell Cost Per Click (CPC) ads and command very high rates. Content sites and social networks don't have a search term to key off so they charge Cost Per Thousand (Mil) or CPM rates. In some cases it can take 1,000 page views to generate the same revenue as one click on an ad.
A penny for your thoughts? I talked to a Facebook App developer at the ReMix conference a few weeks ago. He told me his app is generating 300 million page views per month. Wow! Then I asked what kind of CPM (Cost Per Thousand) ad rates he was getting. He shrugged and said somewhere between $0.02 and $0.05 per thousand. That pencils out to between $6K and $15K of advertising revenue per month for those 300 million page views.
How much traffic is needed to generate $1M in ad revenue? It all depends on how well you can target your audience and how much you can charge for CPM rates. But, based on a survey of social network sites let's assume an average CPM of $0.40. You would need 2.5 Billion page views per month to earn $1M in ad revenues. That is 2,500,000,000 page views...and how many sites can sell out all their page view inventory?
A New Revenue Model? - Google revolutionized the search business by banning display ads sold on a CPM basis, and instead offering text based ads where you only pay when someone clicks on the ad, what we now refer to as CPC.
It will probably take a new revenue approach to make many Social Networks profitable. From the USA Today story;
"Facebook's ambitious plan to reshape advertising - via a new approach to social marketing, called Beacon - was a bust. The idea was to inform friends whenever a Facebook member purchased something from online retailers. When consumers protested its invasion of privacy, Facebook CEO Mark Zuckerberg acknowledged the miscue and promptly apologized.
Even Google, as close to a money mint as anything online, has struggled. Google has a deal with Rupert Murdoch's News Corp. to place ads on MySpace, and owns Orkut, which flopped in the USA. Co-founder Sergey Brin recently admitted the "monetization work we were doing there didn't pan out as well as we had hoped."
Which new model will work? No one knows at this point, but there will be billions of dollars for whoever figures it out.
Beacon was innovative, but privacy concerns killed it. We are often influenced by what our friends buy, maybe just a slightly different approach will work.
Social recommendations are very powerful. Back in the early days of the web there were several attempts to consolidate buyers into groups to get better prices. Could social networks do something similar?
Businesses and advertisers are anxious to tap into the power of social networks. The social networks are building huge audiences but can't figure out how to monetize them. When they learn how to connect effectively the benefits will be amazing for everyone involved.
This is a business problem, not a technology problem. The answer will be simple and obvious. In fact, it has probably already been considered and rejected several times. Someone will come along and put a slightly different twist on it and...Eureka!!! Don't you just love business? How do you think this will play out?