The Future Of Social Networking - Consolidation or Mass Customization?

The Future Of Social Networking was the topic of a panel at Microsoft's ReMIX Silicon Valley. Will social networks consolidate into a few big players like Facebook and MySpace, or will it splinter into thousands of special interest social networks? The opinion of the panel and audience was split.

What about the financial success of social networks? FastCompany published a timely article about Ning raising $60M at a $500M valuation. Beebo recently sold to AOL for $850M. Facebook recently raised more money at a $15 Billion valuation. Valuations are one thing...profits are another. Sometimes the correlation between the two requires creative math.

The future of social networks is an interesting, and potentially very lucrative, question to ponder. Will there be a few giant networks or thousands, even millions, of special interest social networks? It is interesting to note that Facebook started out as just a network for Harvard students and alumni. Mark Zuckerberg quickly discovered that other schools wanted a Facebook too. Schools were added slowly and you had to have an email address with the school domain name in order to join that Facebook network. It was a cozy social network for college students and alums to stay in contact...and express themselves. You know the rest of the story. Facebook allowed a few companies to have social networks, then opened the floodgates and let anybody in.

Ning, and others, believe there will be millions of smaller social networks based on special interests. Ning reportedly has 230,000 social networks on its service. Other social network players include Microsoft Spaces, Beebo, MySpace, iMeem, and even services like Flickr, Seesmic, Twitter, and various blog networks.

Do page views equal profits? It seems clear that both big social networks and small special interest networks will continue to grow. The distinction may be that only the big social networks will gain the "critical mass" and "audience demographics" to be financially successful. Not all page views have the same financial value for advertisers.

A penny for your thoughts? I talked to a Facebook App developer at the ReMix conference. 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. Pretty good for a couple of young hacker/coders with very low overhead, but not the kind of business that  commands million/billion dollar valuations.

Other industry insiders at the conference said they see CPM rates of between 10 cents and 50 cents per thousand for social networks, but it can go much higher ($2.00 to $5.00) for highly targeted demographics.

Is Web 2.0 financially viable? A small moderately successful software company can generate $12M in annual revenues by focusing on a narrow niche market. What would it take for an advertising based Web 2.0 company to generate the same revenues? Lets assume a $2.50 CPM rate. To generate $1M in monthly ad revenue you would need 400,000,000 monthly page views. Hmmm...how many web sites or services generate that kind of traffic?

So, what does the future hold? Social networks are clearly a hot area. We are in the early stages of evolution. Facebook is here to stay, but other approaches and models may emerge and be even more successful. The monetization of social networks is also in the early stages. Will the current valuations prove out? Remember a few years ago when some people thought paying $580M for MySpace was insane? It looks like a pretty good deal now. Friendster is an example of an early leader that went in the other direction.

What do you think? What are your favorite social networks and Web 2.0 services? Who do you think will be the winners? Leave a comment and join the discussion.

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Comments

[jeremy]

im not sure whether its a niche network or the type of network.

we interact differently across facebook, linkedin, twitter, etc.

do i need to belong to multiple niche services that are built off of the same platform? im not sure.

i will say that they are using the proven penny model. im not sure if all of their networks have a lot of users, but if you aggregate everything it adds up.

[kayvaan]

i think that's a false choice. if we can create a decentralized identity and authentication infrastructure, we can have centralized individual control and management of personal social graph while still participating in multiple, federated niche networks.

[Paul]

I proposed a social network with a unique revenue stream (well, actually, not unique in the sense revenues are based on advertising, but it's HOW to build that revenue that was unique) to several VC friends I have, they all loved the SN itself because it's wasn't being done, it had a GREAT .com name, and the market it served was EVERYONE (hey! it's still available!)... but none of them believed like I did, that the revenue model could literally turn the network into a Billion dollar business. They all though in terms of what your post is talking about here - generalized CPM's... nothing wrong with those other than, there's really no money in them.

I've just been holding on to the idea. And the domain.

[Frank Feather]

As a business futurist, I have studied the evolution and direction of old and new media. In my opinion, the large social network groups will defragment or desegment the market, around special interests, or they will fail. The era of "mass" and product "push" will soon be over. All media must be multimedia where individual users can access ("pull") mass-customized information, where they can more easily network with communities of interest, and where advertisers can reach those communities on a 1:1 opt-in basis. The mega-networks utterly fail these crucial criteria. They will adapt, or people will abandon them in droves in favor of niche multimedia networks focused around areas of community interest. At least, that's how I "see" this particular future. Cheers! Frank Feather (Business Futurist & Strategy Consultant)

[Paul Chaney]

I'll speak to your first question. I believe it will be both/and, though my preference is to aim for the niches. What's happening at Ning cannot be overlooked. 1,000+ new socnets per day...it's the kind of meteoric rise we saw with blogs. Though many of these will likely be little used, the activity is substantial enough to suggest a trend.

[Don Dodge]

Thanks for all the comments...keep them coming.

Kayvaan, you used a lot of big words and seem to have a strong point, but honestly, it is over my head. Can you give me a real world example of your theory?

Frank and Paul, I agree with you on the direction. The question is will these social networks be financialy viable? Growth is great, but monetizing those page views is a challenge.

It seems logical that the big social networks have the scale to be profitable, and the small niche networks have the target demographics to charge much higher CPMs and be profitable. I think it is the vast number of soc/nets in the middle that will have trouble making the numbers work.

[kayvaan]

damn, you called my bluff. :) There was a bit of hot air in there. But there is also a point.

What you're asking is will there be Long Tail of social networks. I think there are two prerequisites for a long tail to really develop and remain viable as things shake out:

1. Easily portable identity a la OpenID or some such. There's got to be single-sign on system that's not owned by anybody. That was the first point I was trying to make.

2. There has got to be a way for me to be able to have some ownership of my social graph on the web. This is a tough one because you have to balance privacy issues with portability. But there's got to be a decentralized social graph managament infrastructure as well such that my social graph is also owned by me and not Facebook and LinkedIn. Then nodes (people) on my graph will also have to be able to control whether or not I can expose them to a new niche network.

Example. I, Kayvaan, have a 1000 person social graph that's hosted by some neutral service that's decentralized (kind of like OpenID - maybe OpenGraph). Some of the people on my graph, also using this service, mark me as "fully trusted" meaning I can expose them to any "social network" as a node in my graph. Other people on this network don't trust me as much so they've identified only a limited set of networks to which I can expose them.

The key is that the hosting of the ID and the Graph must be neutral and portable.

In that scenario, the "social networks" as we know them now don't own the graphs anymore. The value they add is either content or functionality. Which is as it should be.

Put it this way - the platform of the social web should be neutral, not private.

SOCIAL NET NEUTRALITY!!!!!!!

(You heard it hear first!).

[Anil Jain]

I think the evolution of social networking is going to head in the direction expressed by Kayvaan, where an individual retains "ownership" or control of their social graph. There are a number of approaches to this being explored right now, but it will take a few years before we see this take shape (I think).

I do think there is a lot of potential for niche social networking communities... but I believe that for such social networks to thrive, they will need to provide more than just networking capabilities. The differentiators that will provide sustainable advantage are rich/deep content, unique functionality, affiliated services (e.g. marketplaces, community-specific products and services, etc.). I also believe that such sites can command significant advertising value if they do a good job of cohesively pulling together a strong, well defined demographic.

[Miles Lennon]

portability will be crucial to the success of social networks both niche and generic. Social networking needs to become social context--meaning that the other activities in which participate on a daily basis will be within the context of your various networks.

I think that niche networks are also better buyout candidates because SaaS companies, for example, who are targeting a specific demographic may want to purchase an audience to grow their customer base.

http://collegemogul.com

[KathrynK (20 year tech veteran)]

I think the reality is that we have to assume the lowest common denominator. And that means keep it simple, simple, simple. Whatever model will give the easiest user experience will win. I believe that means the future will be a very small number of mega communities that allow you to easily choose to be part of as many micro networks as you wish. It would require just a click or 2 to add yourself to a new community. It would be idiot-proof to manage your access/privacy. LinkedIn has made a small attempt at this, but the functionality is way too limited.

[Shreshth Mani]

lately all are feeling the heat of valuations of social networks and their respective comparisons to the revenue model. i was reading a somewhat discussion on valuation at Fred Wilson's blog, basically saying that Blogging sites are more valuable than facebook.
I think peer to peer web networking has been evolving right from Napster in 2000, to wiki for content sharing & then networks that offered it all like myspace, friendster or facebook. So facebook is an evolution in the process, which has transformed to form INTERACTIONS rather than communications, which is why i believe it is here to stay. The real monetization will happen when the network is able to harness the real power of interaction and not just concentrate on the page views. So Patience for now!!! Cheers. Shreshth Mani http://prudent-v-r-not.blogspot.com

[Edward Vielmetti]

The key flaw (or the key insight, hard to know) in this analysis is how sensitive the analysis to the estimate of the CPM rate.

For search engine marketers placing context ads on social network sites, the results of Adsense on Myspace et al are miserable. People simply don't click on those ads, and when they do they don't convert to customers. It's going to vary from place to place, but my sense and from looking at numbers and campaign results suggest that keyword ads and their high CPC numbers don't exist on mass market sites.

The other approach is to aggregate enough traffic so that media buyers who are used to buying media by the square yard or by the hour or by the eyeball get plenty of eyeballs. The advertising shifts from carefully keyword-targeted to display and brand building, and demographics and psychographics and behavioral targeting start to come into play.

This suggests to me that there's some untenable middle, where if the network is small enough and exclusive enough that you can get high value precisely focused ads at good CPC rates, and if it's large enough you get boatloads of page views that total up to reasonable CPM totals, but in the unhappy valley between the network is too unfocused to target and not busy enough to blanket.

[Matt]

Hi Don
I will declare my personal interest up front, but I believe the future of social networks is not in vertical niche but rather in 'purpose'. So there will be 'social' networks and 'business' networks and 'lifestyle' networks. This will create a more 'immersive experience' based on three hypotheses:
1) I think there are inherent challenges with targeting display advertising in a web 2.0 environment because the user's expectations are set higher than normal. However, I think the more niche social networks provide renewed opportunities to dial-up the relevance of pushed messages.
2) I think new 'advertising' or 'commercial' models need to be developed based around the user's journey and mindset.
3) I think web 2.0 environments might present better sales opportunities not for 'brands' but for 'businesses' - homebased, small, small to medium sized.
I can elaborate on these points respectively based on what is being created at www.comotivate.com
- Specific goal-related teams created and actively maintained which provide highly qualified audiences for advertisers
- Intra-team gift-giving opportunities at key stages of goal progress in which affiliate commissions replace display ad revenues
- Registered coaches or experts invited into the team by the team owner to help members progress will receive a share of the revenue generated by that team's purchase activities or exposure to ads.
The site is live but in BETA at the moment and these hypotheses are yet to be tested, but if comotivate is to survive it will need to not only attract users, but commercial partners who understand that the future of social networks is to 'support' the awesome power of communities rather than 'milk' it.

[Nicole]

I think there's gonna be a new social network thats gonna be more successful than facebook. All its gonna take is a good name. I mean, who really wants to join twitter, iming, or ning with names like that? The names of the networks just dont sound interesting or legitimate like myspace and facebook do.
maybe once someone makes a site with a good name, it'll emerge successfully.
hmm..something to think about, right!

[bobby]

The social networks that are catching my attention are the little ones gaining memontum. Sites such as Yuwie, Zenzuu, 6dgr, and Direct matches are paying it members unlike the big stars like Myspace.