The most important market challenge for social networks in 2007 can be summarized in three words: monetization, monetization, and monetization.
Regardless of whether social networks will splinter into niches and verticals (e.g. sports, pets, moms, teenage girls, etc.), regardless of whether social networks adopt interoperability (e.g. OpenID), regardless of whether individual profile pages morph into widgetized and personalized start-pages, regardless of whether 2007 will be the year that social networking goes mobile… all such market development activities will prove secondary to a much more fundamental issue.
And that issue is whether social networks can innovate on the revenue generation side of its business model sufficiently to pull its average ad rates out of “junk” status into “premium” rate levels (e.g. from today’s $0.50 CPMs into something closer to $10 CPMs).
Towards such ends, there are four critical success factors that any innovation in monetization scheme for social networks must adhere to:
Social networks, and online communities in general, are terrible platforms for advertising formats designed for any type of call to action. As such, Google Adwords-type direct-response PPC ads have proven highly ineffective. On the contrary, the significant opportunity for social networks is to become highly-efficient branding vehicles. In fact, it is my prediction that social networks will prove themselves to be the most effective brand communication platforms on the Internet.
As we all know by now, social networks are a new media for self-expression and communications. And since the core revolves around people (not products), it is vital that any innovation in brand communication include the active and explicit participation of those people within the process itself. In other words, people themselves are the platforms, capable of message amplification and network effects, and they should be treated as brand re-communicators, not just end-receivers. So just don’t advertise at them, advertise with and through them.
Given the extreme pressure to monetize with low CPMs, many of today’s social networks are way too cluttered with ads. Virtually every pageview that is generated carries an ad. This is highly wasteful and counterproductive, for both users and advertisers. Instead, improved methods of monetization yielding higher CPMs, must correspond with a reduction in the volume of ads. To some extent, old-fashioned artificial scarcity must be imposed on available ad inventory in order to achieve improved performance and satisfaction for all parties involved.
Scalability is key; therefore, automation is critical. Google represents the best comp here. Every scale-enabling innovation that has been built into their Adwords & Adsense platform, from Do-It-Yourself purchasing to auction-based pricing to placement by performance, even the fact that they take credit cards, are all key reference points for anyone seeking to optimize monetization within social networks. The need for scalability also implies the capability to service the needs of smaller advertisers, alongside the big Madison Ave spenders.
The bottom line of all this for anyone running a social network already, or if you are in the process of building a new one… make sure that everything you do is designed to maximize monetization, as the difference between success and failure will rest on this metric. For instance, if you are creating a niche social network, do so in order to fetch high CPMs. If you are going to widgetize profiles, make sure it results in an enhanced path to monetization. 2005 and 2006 were years that proved that social networks were not a passing fad, but superior monetization is what will prove key for social networks in 2007. Consequently, it’s likely that M&A activity will also accrue towards those who are able to crack this nut.