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Can Social Networking Create Revenue Streams?
By Gary B. Smith
YASNS are taking off at an exponential rate on the Internet. This acronym stands for Yet Another Social Networking Service and is fast becoming the 'next big thing' on the Web. Yet, the question on every Webmaster's lips is whether social networking is a viable business model and if it will succeed in boosting their revenue streams.
The Web has been inundated with a host of new social networking websites and services. There are literary hundreds vying for attention, ranging from the most well-known and popular social and personal services, such as Friendster (www.friendster.com) and Orkut www.orkut.com), to business networks for entrepreneurs such as the very effective Ryze. However, while some commentators see the increase in social networking as just another Internet fad with little long-term staying power or market potential, others are less pessimistic and see social networking as an immensely promising business model. The latter view is bolstered by the fact that Business 2.0 named social networking as the "technology of the year" for 2003. Venture capitalists are also throwing money at social networking start-ups, which all bodes well for the future.
While critics state that social networks are in essence not anything new, the latest facts and statistics paint a different picture of the potential of this new trend. For example, one of the most popular social networks, Friendster, recently received $13-million in financing and also rejected a $30-million takeover offer from Google. Another factor that detractors of social networks should consider is that social networking is already starting to expand in versatility and technology, moving to mobile platforms and telecommunications to extend the range of connections and opportunities for advertising as well as additional means of expanding revenue resources.
What is Social Networking?
Wikipedia describes social networking as a "process of connecting individuals via friends, relatives, and acquaintances -- a person's "personal network." These networks can then branch out and allow friends to connect with people inside their accepted social circle, allowing for a greater sense of security, compared to someone perceived as being anonymous and random." (LINK) It is this sense of connectivity to others - within systems of known and referenced contacts, and trusted referrals - that many social networking sites offer. They also differ from news groups and other more spurious and anonymous forms of communication in that they provide a greater sense of personal rather than anonymous contact. This ability to make contacts truly personal and simultaneously potentially lucrative, without exposing an individual to an invasion of privacy, is probably the most important factor that will determine the future success of social networking.
Social Networking Models
From a study by Ross Mayfield
Explicit Networks
These networks establish connections between individuals based on declared identities and interests. An example is the Ryze network. The entire system is based on a system of openness and exploits declarations of interests.
Physical Networks create connections by means of in-person meetings. An example is Meetup. "An initial connection is made by people introducing themselves the old-fashioned way, the Social Software facilitates coordination and drives people with similar interests to be in the same time and place. (Source: radio.weblogs.com)
Conversational Network fosters creation of connections by communication -- such as with LiveJournal and Weblogs. These networks work by reading the sites or Weblogs and identifying with the aims and interests in the content of that site. One then communicates on the basis of common interest.
A Private Network fosters connections by referrals -- such as with Friendster. "An initial connection is made through a referral backed by existing social ties." (ibid)
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Social networking began to emerge in 2003 on the Internet as an alternative to chat rooms and news groups. One of the most important aspects of the new networking phenomenon is that it allows a means of meeting people of like-mind and with similar interests through a controlled environment and often by permission or invitation. At the same time social networks are usually open-ended with potential for increasing the range of contacts through linking to other friends and their contact databases.
One of the arguments against the view that social networking is just another short-lived Internet fad is the way in which some very far-sighted companies and people are investing in this emerging technology. Social networking sites like Friendster and Meetup.com have attracted considerable attention from Silicon Valley celebrities. The board of Friendster also has luminaries such as Tim Koogle, of Yahoo! as a member. Among those who have invested large amounts of venture capital in social networks like Friendster are PayPal's CEO, Peter Thiel, and Google board member Ram Shriram. Venture capitalists Kleiner Perkins Caufield & Byers and Benchmark Capital have already invested $10-million in Friendster. Adding to these enlightening statistics is the fact that since its inception in early 2003, Friendster has enlisted a total of four million members. (Source: news.com.com)
Statistics on this service also point to an increasing interest and growth potential. According to Nielsen/NetRatings, Friendster had I-million people spend an average of 35 minutes on its site during November, 2003. (Source: news.com.com) Business-oriented Spoke and LinkedIn have also received $20.5-million and $4.7-million in venture capital respectively.
Conversely, there is still a perception that social networks are nothing more than dating pools. However, contrary to this perception, social networks have progressed and diversified into various types and structures that cater to particular markets with different communication modes and potentials. There are numerous categories that include business networks, in-person meeting systems, and referential type systems (See sidebar for further details about these categories).
Making it Personal
One of the central reasons for the increase in social networking, as opposed to the old chat rooms and news groups, is that there is a new desire for truly personal one-on-one relationships on the 'Net. This is a sign of the Internet's maturity as a communications medium and that social networks are not just a fancy extension of newsgroups and chat formats. Most of the social networks work to make identities and profiles known, with permission from the user of that service. Philipp Harper, a freelance business writer states: "By making identities known and relationships transparent, social networking has the potential to set a salubrious precedent. And, if a few gutsy entrepreneurs make some money in the process, so much the better."
(Source: mobilemomentum.msn.com)
Essentially, modern social network platforms and software function by allowing the user to create databases of friends and business contacts and to extend these databases through further access to the databases of their present contacts. The underlying principle is "Who you know now is key to who you're going to know in the future, and to what you're going to achieve, whether in love or business."
(Source: mobilemomentum.msn.com)
The essence of the process lies in making contacts and creating effective databases of like-minded people with the same interest areas and aims. Social network sites also provide the facility to conduct searches through the entire network of common interest databases. This functionality is impressive when it comes to business networks such as Ryze and Spoke, which achieve a high degree of effectiveness. Spoke analyzes participants' contact sources, including e-mail archives, contact lists, address books and calendars. From this information it creates a map of the internal relationships of the company. While it analyzes two-way relationships within the company by creating a detailed map of all communication networking, it also provides access to those contacts emanating out to other companies.
As a Business Model
The jury is still out on whether social networks can be turned into stable and viable money-making machines. It is early days yet and there are a number of differing opinions of this topic. Some commentators state that the money-making potential of these networks are immense as there is little cost associated with populating the network-sites, as existing users refer friends and associates. Contextual targeted advertising is another obvious way in which networks can be turned into revenue streams and has already been implemented across some networks.
However, the central question that many are asking is why, if there is no consistent and obvious business model for social networks, are investors throwing so much money into social networking systems? Recently the founder of Tribes, Mark Pincus, stated that "revenues are non-existent and profitability is not even in the equation today." (Source: internetnews.com)
Some pundits suggest that the answer to this question lies in the promise of potential business in the form of subscriptions, classifieds and targeted advertising. The success of online classifieds is given as a reason for this business enthusiasm, and the example often quoted is the success of Craglist. This site, which charges a $75 fee to list job openings, has succeeded in generating millions of dollars in annual revenue. The key point that many commentators mention is the magic word - interconnectivity. They believe that once social networks become fully established and are streamlined in terms of privacy and other functional factors, they will offer a huge potential for business models based on interconnectivity, such as online classifieds. Another area that could be very lucrative is directed marketing and targeted advertising. A further possibility is the introduction of subscription fees. This is not seen to be a viable option at present, but could become a possibility as networks grow in acceptability and popularity.
An important factor in the debate about business models are the different markets that various social networks aim for. While some see their focus market as an extension of the lucrative dating market, others feel that their best bet lies at the enterprise and corporate level. This is the case with New York-based Visible Path, which is taking a different approach to marketing their service. Their aim is to target enterprises with social networking technology. "Visible Path Chief Executive Antony Brydon believes the corporate customer is an easier sell for technology that offers relationship networks that connect them to prospective customers, partners, investors and employees." (Source: internetnews.com)
Another business possibility that has been touted is termed "convergence events." This refers to focal points in the network that act as nodes or areas of attraction for the creation of further networks. From a different viewpoint this is in fact another way of creating contacts from existing relationships and can be extended through various coinciding interests. "For social networking to be fully monetized, the nodes in the social network need a convergence event. These events provide a focal point where new networks are created and existing ones utilized." (Source: bway.net)
While many are unsure about the viability of social networks, some experts in the field are more salubrious and see few problems when it comes to talks of business models for social networking. Jonathan Abrams, CEO of Friendster states: "People are confused about the business model for social networking. We already have advertisements on our site. We will add some premium services. But we won't charge people to sign in. I don't think 'business model' even makes sense. If people said 'business models,' it might make more sense, but it's still not very interesting. There's a hunger for some kind of mini-bubble." (Source: blog.fastcompany.com)
And of course there is viral marketing. When it comes to systems based on interaction and the establishment of larger associations, this seems to be an obvious way of making money. The CEO of Friendster goes even further in his description of viral marketing in the social network environment
A lot of people want to create a viral service. Friendster goes beyond this viral marketing that people talk about. It's something I call viral nagging. People get peer pressure from their friends to sign up, improve their profile, and change their photo. That's more powerful than anything I could do. Instead of a site like Match.com where you build a site and hope your friends find you, you build your site with them.
(Source: blog.fastcompany.com)
Another expert who is optimistic about the business potential of social networking is Michael Jones, president of Userplane. Jones has this to say about the future of social networking: "Where services such as Friendster, MySpace and Connexion have been successful bringing singles and groups together, based on affinity and mutual interests, business-networking services are now offering a parallel experience in the professional world. Along with LinkedIn are such offerings as Ryze and Tribe.net. My take? This use of online, friend/associate-based networking will prove to be one of the most valuable business tools the Internet has yet provided." (Source: entrepreneurs.about.com)
To a certain extent some of the funding and enthusiasm for social networking systems is based on the desire to be part of the pf the 'next big thing." Whether this is just 'hype' or not is still to be seen. New terms are also being bandied about and there is talk of a new 'architecture' that social networking will bring to online communication. By this is meant that new possibilities for constructive communication are being initiated by social networking. For instance, when two people speak to each other, they assume their conversation is fleeting, but e-mail and instant messaging, by making that conversation persistent, offer a new architecture. (Source: changemariner.com)
Added to this is the concept of 'mapping' to express an innovative way of seeing and describing contacts and relationships. Sites such as Orkut and Friendster specifically aim to 'map' individuals to other individuals. Underlying all these different models is a basic belief in the potential of networking on the Internet. Some interpret this certainty as a 'tipping point' in online development, where users are 'ready' to participate in well-run and effective systems of networking that can be open and directed towards achieving effective communication between people. Coupled with this is the fact that the Internet is dynamic and growing, not only in terms of size but also in terms of creativity and flexibility. Commentators make the point that there is an increasing understanding of the possibilities for communication that go beyond the present models. This is especially the case when it comes to business networks. There are also new developments in understanding how to take advantage of the 'clouds of data' surrounding business transactions.
Those who are funding and promoting new social networks are aware of these facts. They are also aware that basic communications and the interchange of contacts and ideas are the fundamental aspects that drive all business. What they see in social networks is a development of this fundamental principle to new heights of sophistication and subtlety that will translate from business potential to actuality in the future.
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