Where are social networks going?
I use Facebook as the primary example in this article only because I have a Facebook account – I’ve never used MySpace because I can’t stand the fact that they let people design their own user pages and people choose to make them hideous.
For the past year or so I’ve been a member of Facebook. I log in once or twice a month, usually when I get a friend request email. I’ve been wondering for a while how social networking sites make money. Not only social networking sites, but forums too, which are basically the social networks of 5 years ago.
My issue lies in the fact that the people visiting these sites aren’t looking for new information, they’re not looking for products. The reason they’re at the site is because they want to talk to friends, look at pictures, update their profile, or play with the other (useless) options that are available.
How do you monetize this type of user? Why is MySpace worth $500,000,000? Why does Facebook think they’re worth $2,000,000,000? Because they have a lot of people logging into their website everyday? Well, that’s cool, but it’s not worth billions of dollars. There is no patent on the social network idea and it certainly wouldn’t cost me $2 billion to hire a few brilliant PHP coders and a world class designer to start my own social network.
You’re probably thinking, “But Ben, you still have to get people to sign up for your network!”
You’re right – so maybe I won’t start the network. But what if a company like MTV did? They already have a high traffic site and a bunch of marketing people working for them, they might be able to get people to start signing up. Hire a few brilliant idea guys to work with those PHP programmers and suddenly you have an innovative social network developing, one that could potentially take the market share away from MySpace or Facebook. Oh – and MTV already makes money from their incredibly popular television network and their other properties, so their social network doesn’t even have to be particularly profitable, it simply provides another way to connect with people already using their products and keeps them using MTV owned properties.
Why advertising won’t work for a social network
Well, it’s really pretty simple. People aren’t actively looking for information. But I’ll elaborate a little bit.
The reason Google AdWords is so successful is because when people search Google for information they are actively looking for a website that can give them what they’re looking for. When your advertisement appears they know that if they click your advertisement they can get closer to their goal of getting information. They click the ad. If they are prompted to buy an ebook to get their information, some people will buy it. Others will keep searching, even if it means clicking more ads. The point is, the advertising works.
I know that companies have been advertising with television commercials for years, but it’s not the same thing as a banner on a website. A commercial is the only thing happening on the television at a given point in time and the commercial has 30 seconds to connect with the person watching it. A web banner probably has less than a few seconds. Add in the fact that this banner is competing with information that people are more interested in and suddenly you have a pretty low return on investment. Even if someone clicks a random banner because it looks interesting they’re not in a “buy” state of mind, they’re just curious.
People logging into Facebook are looking for information that lies within the Facebook site itself, not at an advertiser’s website. When I login to Facebook I’m not hoping to find out how much the latest cell phone costs, I’m trying to find someone in my class that knows what homework is due tomorrow. I’m certainly not paying attention to advertisements. Why would I? Do the advertisers know what homework is due? Of course not.
Maybe someone will figure this out…maybe.
Facebook has come up with creative solutions, such as “fliers” and classified ads that students can buy at a relatively cheap price. I don’t have any revenue figures, but I can’t imagine selling a few $5 fliers here and there will add up to pay the salaries of programmers, designers, account executives, etc. Oh well – at least it’s a start.
I’m certainly not disputing the value of social networks or the fact that people like them, I’m simply asking whether or not they’re actually worth hundreds of millions of dollars. There is proof that one social network can topple another so why buy one when you can build one (remember Friendster?)? Obviously sites like LinkedIn are important, Facebook is important, hell, even MySpace might be important…might be. These sites can’t and won’t just disappear.
If you can answer any of my questions or think I’m wrong, let me know. Explain to me why advertising at Facebook is money well spent. Tell me why someone should spend money to advertise at MySpace.com.
I’ve advertised on Facebook a few times…results were negligible at best. You are right, it is untargeted traffic. However, certain advertising (i.e. Pepsi/Coke/Doritos) that you see everyone, no one is looking for those ads, and any attention is something. So while the valuation may be off, they do control a lot of eyeballs and that has at least some value.
I think advertising is the easy way out for these sites…How should they be making money
-Gathering trend data and selling it to research companies
-Partnering with sites like craigslist to increase traffic and provide an alternative revenue stream (% of paid ads)