This Just In From Captain Obvious

There's an article this week in the NY Times treading some well-worn ground, namely that advertising on social networks isn't going so well:

Advertisers Face Hurdles on Social Networking Sites

There's not much new in the piece, so if you've already been reading on the topic you can probably skip this one; highly-placed in the piece, for instance, is this earth-shattering insight: "Members of social networks want to spend time with friends, not brands."

Still, maybe there's value in belaboring the point (or, at least, in documenting it in a publication as respected as the NYT). There is this one takeaway, though:

"Brand advertisers on Facebook can try one of two new approaches. They can be more intrusive, but the outcome will not be positive. Or they can create genuinely entertaining commercials, but spend ungodly sums to do so."

I can think of a third approach: don't advertise on social networks. And even a fourth: advertise, but do so knowing that you're advertising for the purpose of brand awareness rather than sales.

Actually, that last point is maybe a little interesting. Facebook and other social networks might be where ads go to die, but there's got to be an oppportunity cost if you don't advertise on those platforms. That is to say, there's a risk in choosing not to advertise on hot Internet media properties -- namely, your brand might come to be associated with old media, your parents' generation, etc. It's probably hard to quantify, but I'd love to see an analysis on an actual cost-benefit ratio of social network advertising, where the cost is obvious (the cost of producing the ad, placing the ad, maintaining the promotion plus any prizes you give out) but the benefit is maybe a little obscure (not just sales but also brand recognition and positive brand associations).

Facebook Relying on the Money Fairies

Interesting interview with Sheryl Sandberg, Facebook's chief operating officer:

Facebook's Sandberg: Growth before monetization

Anyone who was working in the industry in 1998 or '99 should already be familiar with this sort of business plan:

"Our focus is on growth--we believe this is the moment people are joining social networks. Then it's monetization to support that growth."

In other words, do your thing, grow as fast as possible, and let the money take care of itself. Because that method worked so well for companies like Pets.com.

It's easy for me to sit here and point fingers. Monetizing web traffic has been a problem for as long as there's been web traffic, and finding a way to extract profit out of social interaction (without so tarnishing the experience that you drive your members away) is simply a tough nut to crack. To Facebook's credit, they seem to be focusing on advertising that promotes brand awareness, rather than direct product sales, and that's likely to be much less intrusive than most of the alternatives. Their goal should definitely be to avoid the hard-sell, "click here now!" approach that would quickly spoil the experience.

So, let's run down a few monetization possibilities for Facebook, and sites like it:

1. The magazine model. Magazines and websites have a similar problem: they need to find a way to make money off of people who -- at the moment of engaging with their product -- are not interested in buying something. Magazines have long made a practice of putting glossy ads between their stories; no one spends much time on those ads, but advertisers still value the exposure and are willing to pay for it. Pro: a proven business model. Con: magazines also charge a subscription fee, and most people still think the web should be free.


2. The drug dealer model (i.e. "the first taste is free"). Also known as the tiered service plan. Give away basic services, but charge for the premium plan. ESPN.com has been profitable for years with just this model. Pro: you don't need to convert everyone to a paying customer, just a sufficient percentage. Con: If a group of friends ends up with your pay wall dividing them, they're not going to enjoy the experience.


3. The singles bar model. Invite people over to interact with each other, and sell something that, like booze, enhances the experience. Conceivably Facebook could develop a set of premium widgets that makes the Facebook experience more fun and rewarding. Pro: Similar to the tiered model, except you're not (necessarily) dividing your members into two camps. Con: one mojito tends to lead to another, but a customer is only going to buy your widget once.

Sites like Facebook and MySpace, of course, have a unique challenge: all their eggs are in the social networking basket, so they need to make that one activity profitable. For now, at least, the better business model might be to approach social networking as an adjunct to an already-profitable business model. If you already make a living selling cars or computers, and your primary goal is to increase customer satisfaction and brand loyalty, social networking is an excellent means of approaching that goal. If, however, social networking is the only product you have to offer, get thinking, because if there's one thing we learned in Y2K, it's that growth in and of itself is not a business plan.

Will Social Networks Ever Make Money?

This morning I came across a two-part article on Technology Review:

http://www.technologyreview.com/Biztech/20978/?nlid=1163
http://www.technologyreview.com/Biztech/20979/?nlid=1166

It's an interesting piece that focuses on the disparity between all the attention and venture capital focused on social networks, and the uncomfortable truth that (to date) no one has developed a business model to turn a profit on those networks. Definitely worth a read.

The crux of the problem is that advertising simply doesn't suit a social network audience. Google ads are profitable because people often search Google for a product they're interested in. They go there with the specific intention of learning more about Product X, so when ads pop up for Product X, they're more than happy to click on them. The situation is completely different for social networks, though. No one goes to Facebook to buy a television, and they're not on MySpace to do anything other than connect with friends and maybe cruise through a few random pages. Ads in that context are an intrusion, and marketers are only going to make it worse. Consider this ominous quote:

"The trouble," says Goldstein, "is we're putting ads up in front of users, where they can ignore them. We've got to get them between users."

Yes, good thinking -- put your ads between users, thereby effectively blocking the one activity that they come to social networks in order to pursue. I couldn't think of a better or faster way to shut a social network down than to force its members to click through an ad every time they want to make a social connection.

There may be no solution to this problem. Certain human activities are simply not connected closely enough with a purchasing decision for the activity to be monetized. This, of course, could pose a very serious problem for online communities that need to find some way to offset the cost of their bandwidth, servers, and company payroll. One possibility is to charge a subscription fee, but very few sites that throw up a pay wall will attract enough members to make their community experience worthwhile. Another possibility is to take a lesson from the music industry and try to think of ways that free content in one space can attract money somewhere else. Are you more likely to buy a used car from someone on a social network who's listed as a friend of a friend (of a friend)? If so, maybe a Craigslist tie-in is the way to go. Most fruitful are likely to be products or offerings that improve the social experience itself -- greeting cards, for instance, or gifts.

There are reasons for optimism. I don't read magazines or watch television because I'm looking for something to buy, but advertisers have long seen value in placing ads in those media. Perhaps social networks are simply too young, and the money will come later. Still, it's a tricky scenario that likely will not be solved anytime soon. When the next Internet bubble pops (in six months to a year, if the rumors I'm hearing turn out to be accurate), expect more than a few trendy social networks to be among the leading candidates to be this generation's Pets.com.