Anyone party that is interested in investing or building a social networking site, must ultimately answer the question, how can such a site make money. What will be the vehicle for for monetizing visitors, if monetization is the goal? These are important questions for entrepreneurs, investors, and all other types of website business owners.
The Wall Street Journal recently reported that Social Sites Don’t Deliver Big Ad Gains. This can have a profound affect on companies like Google and Microsoft who have invested heavily in social networks hoping to monetize their large people networks via ads and products. I have also suspected that this will not turn out the way the big guys hoped it would.
Frequent visitors to any website have learned to tune out the ads. This is especially true for websites that host forums, social networks, and social bookmarks. When was the last time you visited any of these sites and actually clicked on an ad? Infrequent visitors are a source of revenue. If they arrive at a sight and do not find the information they are seeking, they might spend some time perusing the site to see if there might be some links or ads that may guide them to the information they are seeking. Well placed ads, under these circumstances, are excellent sources of revenue. They are very similar to the large ads that are placed in the printed Yellow Pages.
It is a well known phenomenon that in order to properly monetize a website you have to have a combination of repeat and new visitors. The repeat visitors provide the content. Forums depend on repeat visitors to fill the forum with new information that might attract new visitors. If the forum is designed for monetization, then it will include some target ads in a close proximity to the content. Most forums are not built this way, which is why forum owners have a very difficult time turning their sites into a money making endeavor.
Some of the social sites, are learning to better monetize their product by creating value in each of the personalized social networks. The most recent example of this are Facebook widgets, which are plugin tools that are developed by third-parties in order to advertise or promote some third-party service or offerings. By building the ads right into the sites, their is a better chance of converting the visitor, however, the gains are small. The same Wall Street Journal article suggests that Facebook has been struggling to to make money, while Microsoft’s investment in Facebook is losing money.
Similarly, Google disappointing fourth-quarter, 2007 results were somewhat attributed to the difficult time Google is having generating ad revenue from investments such as YouTube. YouTube is a Internet surfer’s dream, but a owner’s nightmare. It uses enormous capacity, is expensive to maintain and monitor, and so far has demonstrated no straightforward model for generating revenue. It’s great to watch video and TV with subscriptions or ads – but that doesn’t mean it is a good investment. Some companies are playing around with embedding ads in videos, but this is extremely annoying and it doesn’t take long before a viral, non-commercial version is available. Consumers hate ads that are not personally requested.
Digg also is a source of bewilderment for me. The stories that are posted are chaotic with very little editorial control. It appears that postings are a great source for traffic, but in themselves are very difficult to monetize. Who is the target audience for this type of site? What audience are they delivering to advertisers? Ditto for similar social bookmarking sites.
For some time, I have personally looked at building my own social networking website. It would certainly be feasible for me. But there were two barriers that I was never able to overcome:
1) I could not find the technology to build a site that had adequate privacy and security protections. To this day, these issues still plague Facebook and MySpace.
2) I could never figure out how I was going to monetize the site and get a reasonable return on my investments (ROI). Building and maintaining a social network is probably one of the most costly ventures a business person could pursue, so given the high risks, I felt I needed to have some high level of comfort that I would be able to see some ROI.
If you own a successful social networking site, I would love to hear from you. I have search high and low and have not found one that I feel has been successfully monetized. However, I have seen lots of niche sites, that fulfill a valuable in bringing people together in a larger context – e.g. a social cause. This is a different situation, since the goal is not to invest but to bring people together for social interaction, and some sponsor is willing to fund the effort. For these type of sites, I think social networking has been very successful.
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