Derek Powazek questions the intrinsic economic viability social networks in his post “What If Social Networks Just Aren’t Profitable?”. It’s a logical question to pose in the aftermath of the Digg sale and the wobbly Facebook IPO.

There is one clear lesson from Digg’s sale: the technology that powered a once-massive social network is worth about $500,000. All the rest of the value derives from the people that use it.

The Big Digg Lesson

The Atlantic summed up the essence of of social networks’ business models brilliantly. Net net: once users commit to a network, the network must develop a revenue model based upon the content created by the users. In so doing, social networks can generate huge revenues quite profitably. But these networks don’t all go to market the same way.

Below is a draft taxonomy of social network revenue models. Comments welcome.

Media Social Networks (MySpace, Facebook, Twitter, Pinterest, Gogobot, Phonebooks) – Media networks’ primary insert ads into the experiences of potential customers. MySpace generated hundreds of millions of dollars by selling home page take overs and remnant ads. Facebook generates billions by providing more granular targeting across a much larger user base. Leafing through the pages of history, this is no different than the business of phone books: create a listing of people’s name and contact details and businesses will soon follow paying for inclusion. To date, ad dollars have formed the largest fraction of social network revenue dollars.

Data By-Product Social Networks (LinkedIn, Branchout, PatientsLikeMe) – Data by-product social networks offer free services to the main user base but sell some data product to a different customer set. LinkedIn, Branchout and PatientsLikeMe have cultivated vibrant communication networks. To generate revenue, they collect, filter, serve and sell the data users create to interested parties: recruiters and professional networkers in the first and second cases and pharmaceutical companies in the third case.

Premium Subscription Social Networks (Yammer, AxialMarket, Gerson Lehrman Group, XBox Live, World of Warcraft, Dating Sites) – Sometimes access the community is valuable enough to the end user to warrant charging a monthly subscription. Yammer charges for secure, managed enterprise social networks. AxialMarket collects fees from financial professionals to access user created deal flow. GLG collects fees to access subject matter experts. Gaming networks like XBox Live and World of Warcraft offer matchmaking and game hosting services.  Dating sites offer access to a network of candidates for a fee and often will charge for relevant digital goods or rights to communicate with other members.

Pro Bono Social Networks (Chat, Email) – Email hasn’t generated much revenue since the days of dial-up when a subscription to Aol included an email address and chat account. Email and chat have since become commodified and are operated at or near a loss, ideally winning user loyalty on behalf of adjacent properties. If you use GMail, you’ll likely use Google.com more often.

To Be Determined Social Networks (FourSquare, Tumblr, Quora, Path, Instagram) – For many of the newest social networks, revenue models are still nascent. Discovering the most natural form of monetization within a community is challenging. Some networks never need to find it (Instagram). Others spend years searching for it. Perhaps this group’s revenue models will fall into the above categories. Or perhaps they will create a new form of revenue model.

Payment Social Networks: (Facebook) I wrote a few months ago that I believed Facebook could mint the reserve currency for the Internet. Trust forms the basis of every transaction system. Facebook has unparalleled access to user interactions on Facebook and elsewhere on the web through Facebook Connect. Using all this data,  Facebook is capable of building the most fraud resistant payment systems. Despite Facebook’s recent retrenchment from credits, I still believe we will see a class of networks whose primary revenue model is payment-based.

Social networks have only existed for about 7 years. In that time, we have witnessed the growth of a few hegemonies and scores of niche players. We have retrofitted revenue models from previous eras of Internet businesses. But the data quality and density found in social networks are unlike most other computer systems. Networks are still exploring the alchemy of converting social media data to gold. One day, it will be a science.


7 thoughts on “Social network alchemy

  1. I think the social media sites have been uncreative in business models. I read a post once that advocated Facebook becoming a sort of archiving business for photos. Rather than just having some photos get posted, they set it up so we store all of them there and eventually, pay for the space. A sort of Shutterfly / Carbonite service. I think the numbers would work great and they would not be so vulnerable to changes in laws about privacy.

    • Yes, paid subscription for photo storage makes sense. There were rumors flying around the Sun Valley conference that Facebook might acquire Dropbox.

  2. Another interesting social media business model twist is the red hot Edmodo company. It’s essentially a Facebook for teachers and their students. Their business model seems to be to provide a market place for apps (borrowing from Apple) and take a 30% cut of the action.

    • Bitcoin is a beautiful idea and incredibly well thought through. I just don’t think it will gain mainstream adoption. Plus the initial bitcoin seeding strategy doesn’t seem fair to me.

  3. Great article. I think there is one that you might have missed. Vertical social networks. We have personally seen a lot of data that suggest a social network in a vertical can generate lots of revenue in that vertical (full disclosure we are a social network in a vertical).

    The whole social space is in its infancy, there is certainly a lot more to come.

    • Great job pitching at 500 startups demo day yesterday, Andrew. Do vertical social networks like yours have a different revenue model? If I remember correctly, Bluefields charges a subscription, no?

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