The markets get anti-social with social networks
Social networks have for several years been the toast of new media. Their principal strength has been an ability to gather tens of millions of unique users84. Their main shortcoming, however, has been the inability of several social networks to monetize their volumes of signed-up users.
Average revenue per user for some of the largest new media sites is measured in just cents per month, not dollars85. This compares with a typical average revenue per user of tens of dollars for a cable subscriber, a regular newspaper reader or a movie-goer. Social networks may need more than 100 users to generate the equivalent revenue of every traditional media customer.
Social networks have so far been afforded the benefit of the doubt, with monetization being regarded as a long-term objective86. The focus has very much been on growing the subscriber base, which is where investors perceive the value to be87.
This ethos has been accepted, even encouraged, through 2008. However, a fundamentally harsher financial outlook in 2009 and beyond, combined with an expected contraction in online advertising, is likely to make the managers of social networks and their investors pause for thought. The likely response is that social networks will focus more on monetizing their subscriber bases, than maximizing their size88.
Social networks are therefore likely to be under increased financial scrutiny in 2009, particularly for sites offering video hosting and streaming, which may require significant operational expenditure89. Social networks whose future looks uncertain may suffer a debilitating outflow of senior management. The book value of some social networks may be written down. Some companies may fail altogether, if funding dries up.
The challenges of social networks may also be exacerbated by litigation. Owners of some of the content hosted by social networks may pursue payment for use of their material more rigorously as media creators look for additional sources of revenue90.
Some attempts at differentiation, for example by formerly consumer-oriented social networks seeking business customers, may prove to be too little, too late91.
Bottom line
Social networks need to consider how to transform themselves in 2009. They should articulate and deliver on a clear, credible route to revenues. Management at social networks must be able to demonstrate a desire and an ability to monetize subscribers. It should also effect a change of culture within the workforce so that it focuses on revenues, not just subscribers. Management should also be able to motivate staff in an environment in which workers are being laid off, perks cancelled, and where share options are heading underwater92.
Social networks that are profitable should ensure that they differentiate themselves from their less well-placed equivalents. As with the dot com bust earlier this decade, investors may swing from exuberance to pessimism within a few quarters93.
Investors should take a hard line, but be radical in their thinking on the monetization issue. Monetizing social interaction, particularly when it used to be free, is hard. But if members are hard to monetize, the focus may need to shift to generating revenues from the aggregated value of their actions and behavior94.
Further, social networks should consider how elements of their technology could be applied in an enterprise context95. Social networks have developed information-sharing functionality across PC and mobile platforms that could be deployed to help teams within companies work together better, or encourage knowledge management. Social networks should hire individuals with strong experience of the business sector, who could identify which functionality would assist in each core business process.
Social networks should move carefully. Those currently reliant solely on advertising for funding may find that advertisers sharply reduce the amount they spend with them in 200996 97. Some advertising may have been boosted by guaranteed deals and experimentation by advertisers98. Usage and users may also fall as the economic outlook encourages workers to reduce time spent - and often time tracked - on social network sites99.
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Social networks in the enterprise: Facebook for the Fortune 500
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