Posted by: Spencer Ante on June 1, 2009
Last week, my colleague Steven Baker wrote a cover story with the provocative question: What’s a Friend Worth?
The dream was that social networks, with all of their tons of user data, would create an advertising gold mine. But the answer, so far, is that despite the huge and growing amount of interest in social networks, your social friends are not worth that much. People are just not in a buying mood on social networks so they don’t click on those ads that much at all.
The good news is that that social networks are coming to grips with this hard realization and developing new ways to make money from all those friends—beyond advertising. The recent $200 million investment that Facebook received from Russian investment firm, Digital Sky Technologies, which says it has developed several profitable social networks, was driven in some part by the company’s expertise in generating non-advertising revenue.
“[Yuri’s] experience with social networks in different countries was one of the primary reasons why we wanted to do this partnership with them,” said Facebook CEO Mark Zuckerberg on a conference call. “I am really looking forward to understanding how these models work in Europe and Asia.”
I see a few emerging potential models. One is so-called premium services. Think LinkedIn or Ning. The basic LinkedIn service is free but the company charges users extra money to be able to connect with so-called friends that they don’t know that well. LinkedIn charges its members $24.95 a month, $49.95 a month, or an astounding $499.95 per month to send messages to people on its network.
Similarly, the basic service of Ning, which lets people set up their own social networks, is also free. Ning hosts your social network as long as you let the company serve ads on your site. But Ning also offers its customers five premium services that allow the company to make up to $55 a month per site. To remove ads or run your own ads costs $24.96 per month, while additional storage goes for $9.95 a month.
This could add up to become a significant revenue stream. Ning CEO Gina Bianchini says there are 12,000 social networks on Ning who are paying for premium services. Assuming they pay on average $25 a month, that adds up to $3.6 million a year.
Another new revenue stream are paid services, such as printing photo albums from digital snapshots. Social network Multiply.com, which has 17 million users worldwide, started offering print products last November. 12-month calendars cost $19.99 while photo albums go for about $29.99.
So far, the company says 4% of its 1.17 million U.S. users on average are using its printing services such as photo books, calendars and cards. That adds up to nearly 50,000 people who have rang Multiply.com’s cash register. Like Ning, Multiply.com also offers its users a high-resolution back up of photos and videos for $20 per year.
Multiply.com CEO Peter Pezaris estimates that the company’s revenue will consist of 60% advertising, 20% premium and 20% print products. Pezaris, who sold an online fantasy sports Web site that he co-founded to Sports-line.com in 1999 for $46 million, predicts that 5-year-old Multiply.com will turn cash flow positive in the second half of next year.
The last emerging model is for micro-payments or virtual currency. Social networks can potentially make money by serving as the middleman between buyers and sellers, and taking a small transaction fee in the process. Think PayPal for social media.
Facebook does this by selling virtual gifts right now, as does Chinese gaming firm Changyou. But Facebook has begun to lets users of 3 applications - GroupCard, Birthday Calendar, and MouseHunt - to buy virtual goods with Facebook credits. I expect other large social networks to begin experimenting with this in the near future.
The move beyond advertising is a natural step in the evolution of social media. The question is how many sites will be able to make the transition to a more diversified model.