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The Downfall of Large Social Networks

Posted by Nick O'Neill on April 21st, 2008 9:00 AM

Charles Hudson wrote an interesting post about how social networking advertising will be harder than we think. He suggests the largest challenge for social networks is that most consumer decisions on the site take place through the referral of friends. Back in November I proclaimed that social networks will become the new television. If that’s the case, why is advertising so challenging on social networks but not as challenging for the telvision.

Current Monetization Models
News alert: television advertising is in decline. Where are companies advertising budgets moving to? Online of course! So if advertising money is going away from the television and social networks are the new television, why aren’t the large social networks making a ton of money? The primary reason is because online advertising is focused on conversion. If I sell skis and advertise my ski company online where am I going to advertise? If I had an unlimited budget this is how I would spend my money:

  1. Google - Honestly nothing beats it. John Battelle called it the database of intentions and that’s why they are number one. Typing a keyword into a search box is currently the most accurate measure of intention on the web if not in the world.
  2. Facebook - Wow! Has Facebook already become the number two location for advertising? Not really but the reason I would spend my money here second is because Facebook’s conversions are known for having high conversion rates (based on my conversation with a number of people I have spoken to that have launched campaigns on the site).

    If I know the demographics and interests of the individuals I’m targeting, I’m highly likely to find people that are interested in my product. While they may not intend to purchase the product right then these people are your target demographic.

  3. Banner Campaigns - Next up comes banner campaigns. As far as I’m concerned, untargeted banner campaigns are practically useless. They drive random people to your site. While some advertising solutions providers such as Advertising.com provide multiple channels to advertise to, this form of advertising is still relatively untargeted.

So somehow Facebook ranks second but I agree with Charles Hudson that large social networks won’t monetize effectively? Yes. The long-tail of advertising has a steep drop off at the beginning. Any tool that can measure intention will always be at the top. Facebook will be able to monetize better than they currently are but it will never be a Google until your friends can give you results in under a second (as Erik Nordlander said in the comments on Thursday).

How to Monetize Social Networks
So how will social networks ever make money? Honestly, the large ones will find it extremely difficult to monetize effectively until they become the creators of niche content. What do I mean? On large social networks the media is currently the users. I am, you are, we are all media. The only problem is that there is only so much money you can make off of individuals. Media is still king but it needs to be compelling content and also centered around a topic that has material relevance if it is going to be effectively monetized.

Ultimately, effectively monetizing these sites is straightforward:

  1. Create content around a given niche topic.
  2. Attract other users to the site that are interested in that content.
  3. Get them in your network.
  4. Advertise to them about related brands and services.

It’s that simple! The problem with the larger social networks is that they are too disparate. Many of the people have different interests. In theory you could try to sift through user profiles to determine what they are interested in (as Facebook does). Alternatively you could rely on the groups that they join (that have been created by other users). The only problem with both situations is that you are relying on user generated content which has proven time and time again that the majority of the content is crap.

Without having some form of editorial control or management of what is being discussed or defining discussions, it is impossible to automatically determine the type of people that are participating in various conversations across your site.

Who are the Winners?
As we will see the real winners will be niche networks. This is an easy thing to assert following Ning’s $500 million valuation. I could dissect the pro and cons of the Ning business model but I will save that for another day. Ultimately, the combination of valuable niche content and networks around that content will build the most effective way at monetizing social networks. Do you foresee another successful model for social network monetization? Who do you think will become the real winners?

Posted in Advertising
  

This entry was posted on Monday, April 21st, 2008 at 9:00 am and is filed under Advertising. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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