Glimpse into Profit Model of SNS-based Advertising
Viral marketing will be the key word for marketing in the Web 2.0 time.
[+]The history of SNS
Last month, AOL’s purchasd Bebo, the largest social networking site in Britain, for USD 850 million in cash. That once again highlighted the value of SNS (Social Networking Service). In the United States, Bebo is the No.3 social networking site, behind MySpace and Facebook, with more than 40 million users around the world.
Further back, News Corp acquired MySpace with USD 580 million in 2005; Microsoft paid USD 240 million for merely 1.6% stakes in Facebook. The first deal seems to be too hasty for MySpace and too juicy for News Corp. What, indeed, is the most attractive aspect about SNS to investors?
SNS is really a confusing concept when mentioned together with dating sites, community sites or Blog. Even SNS operators do not view themselves as dating sites, community sites or Blog sites. While those sites have been in place since the Web 1.0 time, or at least the end of that time, SNS focuses on inter-personal relations, and therefore is a mixture of all above.
Finally, it seems that only ambiguous terms such as "personal space" could differentiate SNS from those traditional concepts. In terms of functionality, SNS enables blog, photo album, friends, community (or group) as basic functions. With the intentional guide of the operators, users could visit the blogs and photo albums of others, eventually activating the social networking function.
In terms of social networking behavior, SNS depends on the migration of offline personal relations to online platforms to combine with those of others to build a larger relation network. While using the service primarily to interact with acquaintances, users might meet strangers for deeper communication intentionally or unintentionally, resulting in larger social communities. Hence, interpersonal relations could be maintained by paying attention to the activities of each other.
[+]How to convert page views into revenue
With more than 40 million users around the world, Bebo is worth USD 850 million. In China, the largest social networking sites, e.g., Tecent Q Zone and 51.com, have more than 100 million users, yet none is deemed to be worth that much. What, indeed, is the commercial value of the social networking sites? At the present time, it seems, the value lies primarily in being purchased.
Thanks to the high interactivity among its users, social networking sites have far more page views than conventional portals. What’s more, each user would keep an eye on the presence of his/her friends, resulting in a much longer average online time. Many SNS users log onto the site as soon as they get off work/class, and remain connected until they go to sleep. How to convert the addiction into revenue?
There are 3 possible ways: 1) through Internet advertising; 2) by providing users with fee-based value-added services; 3) by offering e-commerce services in the communities and collecting commissions from transactions. In the foreseeable future, any social networking site is expected to reap revenue through all of these 3 approaches. The only difference lies in the revenue proportion because of different primary users of each SNS site
One of the most distinct features of SNS is its distribution by word-of-mouth. An article by a common person on MySpace or Facebook would get widely spread through his friends, or friends of friends. Such effect is what advertisers have been dreaming for, as distribution by word-of-mouth is the most cost-effective approach.
In the Web 1.0 time, however, this kind of viral marketing was only a result of sheer luck, rather than deliberate planning. Without a platform to operate on, most advertisers had to pay for the views of their ads, allowing their budgets to be washed away by the visit traffic of the portals. While the focus of Internet advertising in Web 1.0 time was target advertising, it would be viral advertising enabled by SNS in the Web 2.0 time.
At the 2008 Annual Conference for the New Economy hosted by iResearch, I gave a speech titled "The Key Word for Marketing in Web 2.0: Viral marketing". You can find and watch the video at: http://v.iresearch.cn/data/20080425/79812.shtml
[+]Impacting the traditional Internet advertising model
However, the business model has trouble facing advertisers, who generally accept it as a cost-effective approach. For example, one million clicks at a portal or one million users’ interaction at a social networking platform, which one do you prefer? For online advertisers, the answer is the latter. The question is, however, how do you charge them for the one million users’ interaction?
Currently, SNS is still not able to compete with portals by means of CPM or CPC. With surprisingly good results but no billing method available for SNS, there has appeared a weird phenomenon of "free interaction for ad exposure or clicks purchased". Unable to generate income from its most valuable part, SNS is not yet ready to compete with portals for users by means of CPC.
For advertisers, word-of-mouth-based distribution is the most cost-effective marketing method, as well as one of the reasons for them to move their budgets from portals to SNS. In addition, there’s not yet a unified standard in the industry for billing by results. An event might have one million participants, however the extent of involvement varies substantially. There is not a simple and intuitive measurement like CPM or CPC.
Currently, advertisers are still testing SNS marketing, while SNS operators are exploring new billing methods. Therefore, there’s a huge potential. Eventually, it becomes a process of negotiation between sales reps and advertisers, and the final result depends on who is going to convince whom. The criteria for advertising effect in the Web 1.0 time is no longer able to keep up with the market changes, but the Web 2.0 criteria are yet to be developed.
Viral marketing will be the key word for marketing in the Web 2.0 time, as SNS will become a platform enabling word-of-mouth-based distribution among advertisers. Share and recommendation by friends would enable higher market awareness and better marketing effect. What we don’t have yet is a set of criteria to measure the marketing result, as CPM and CPC, which derived from traditional media, are obviously out-of-date.
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