Friday, March 28, 2008
Social Networks Will Fail (At Advertising)
What about if the salesguy overhears you talking about your frustrations dating and jumps in to sell you a subscription to a dating service? Slightly less annoying, but still annoying.
Okay, what if the salesguy instead just dances around your conversation waving a poster-sized print ad? Okay, you get the idea.
These are exaggerated but not inaccurate analogies of what is happening on social networking sites these days. Storming out of nowhere just a few years ago, sites like Facebook and MySpace have become two of the most popular Internet spots. But there's a problem: All this popularity, buzz, and traffic isn't equating into profits for these sites.
These sites are acting as a mechanism for interaction between people. In the minds of participants, the sites are about them and not about the site owners or advertisers (which, I'd suggest, is in fact the mark of a pretty good site). But, just like like email or the watercooler, the fact people use Facebook and MySpace for discourse doesn't guarantee they'll be appropriate and effective places for advertising. Social Networks will need to find other ways to earn a profit.
We Americans like to act like the Internet is ours, but there's a social networking site that's bigger than Facebook and MySpace combined: China's QQ has as many subscribers as there are people living in the US (although this may be inflated by folks with multiple accounts). And get this--while U.S. social networks struggle to find profit, QQ made an operating profit of $224M last year; in contrast, the hottest site of 2007, Facebook, lost $50M last year.
You might think QQ has this social network advertising nut cracked, but their profit doesn't come from advertising (for the most part). Just 13% of their revenue comes from advertising; the rest comes from the sale of digital goods, games, and mobile services.
Back here in the states, the latest feeling is that widgets will provide social sites with a substantial source of revenue and profits. But, as an article on IHT points out, "the widgets currently in fashion are very 'lightweight' and do not command the loyalty of their audiences." In other words, widgets have to move beyond simple fun and games and begin to provide visitors to these sites something they'll value--something that will enhance the social experience rather than detract from it.
So, let's return to our analogy. There you are standing out in the heat and sun having a conversation with your friend. A smart entrepreneur sees this and thinks he can provide a nice venue for your future conversations. So, he builds a building and invites everyone to stop to have a fun time with friends. To make money, he plasters the walls with advertising.
It works--to a point. People enjoy the venue and he has lines out the door, but our enterprising entrepreneur finds he cannot make enough money off advertising. So, he hits on an idea--he can sell all these people glasses of Miller Lite! The idea is a twofer--not only does the owner make cash hand over fist, but his customers find that beer enhances their social interactions. He calls his idea Beer Activated Rap Session (or BARS, for short).
Sorry for the awkward analogy, but the idea here is a sound one. Social Network sites are lacking in creativity; they think they can advertise their way to profitability, but that's because they think of their users as users rather than social interactors and their traffic as traffic rather than discussions. With more creativity and focus on providing tools that enhance users' lives and social interactions, the increasingly crowded and confusing Facebook and MySpace could improve online dialogs rather than adding more and more noise to those communications.