Why social networks are not making (the promised) money

Facebook is now worth $15 billion, after Microsoft chew a 1.6 percent bite ($240 million) of it last March. Yet it will probably lose $150 million in 2008, according to Mark Zuckerberg, Facebook’s CEO. Joining the same chorus, Google – who paid $900 million in 2006 for the right to deliver ads on MySpace for 3 years – says the ad revenues from MySpace have been hardly satisfying.

The current issue of Technology Review provides 3 reasons to explain the disappointment. According to Bryant Urstadt, the problems with social network advertising are three-fold:

• lack of attention for ads

In social networks, […] users show up to find friends; ads are, at best, irrele­vant to that goal. […] While around 2 percent of Google users actually click on a given ad (and the number is much higher when users are conducting searches for purchasing reasons), fewer than .04 percent of Facebook users do, according to a media buyer’s report obtained last year by the Silicon Valley blog Valleywag. – Bryant Urstadt

• users are concerned with privacy issues

[…] in order to get your attention, advertisers need to let you know what your friends are buying or thinking about buying, or they must somehow get you to send each other ads. It’s either a beautiful idea or a creepy one, depending on whether you’re an ad executive or the user of a social network. – Bryant Urstadt

• advertisers complain about content adjacency
  

The concept is called “content adjacency” and refers to the unpredictability of the nature of the content with which ads are associated with. Brands who seek to project a certain image might not want their ads to be displayed along side dubious or dodgy content, as could be the case with profanity or explicit content.

It seems reasonable to say that the lack of attention for ads by the users should account for most of the problem. The first reason users are online is entertainment; they are not actively searching for something (which is by far the main successful scenario for advertisement, as I will detail in a forthcoming post).

Despite the lack of return on investment, investors still keep the faith:

Roger McNamee remains convinced that Facebook is too alluring, too useful, and too established not to be profitable somehow. The answer is out there, even if he doesn’t have it. “Someone,” says McNamee, “is going to have to get creative. I take it on faith that it will emerge. After all, I’m an investor. I’m hopelessly biased.” – Bryant Urstadt

So far the profits have not met the hype (I always like to recall that Facebook’s userbase is greater than the population of France, and MySpace has twice as much). If the amount of eye balls (i.e. the traffic) is usually related to revenue potential, the rule does not hold true with social networks yet: they still have to figure out strategies to monetize their business.

The business model of highlighting online

Highlighting in a book is a common practice because it has some real value:

• you force your brain to focus on what’s essential

• you can share with others what you thought was important

• you’re saving time in case you would return to the same text in the future

Awesome Highlighter is the latest of a few attempts to use this technique online.

I tried it and I found it simple, easy to use, and practical. According to this Techcrunch post, the revenue stream would come from selling their “awesome highlighter” functionality to media sites.

The incentives for media sites to buy it?

• nice feature for their users to share highlights with anyone
  

• possibility to survey what their users find interesting

I believe there is some revenue potential in this. And when you think about it, that’s just another real-life practice translated into the online world.

It just strikes me how simple business ideas can be. Once again, value is the key, not complexity.

The mistake of governing in terms of historical cliches

I’ve just had an educative and interesting read, with an article from Newsweek. I need to start with that quote:

It may be true, as the saying goes, that leaders who ignore history are doomed to repeat it. But it’s also true that leaders who carelessly or heedlessly use historical analogies, who twist or hype the lessons of the past, may be destined to make even bigger mistakes than their predecessors. – Evan Thomas, from Newsweek

The article surveys some major events in world history from the perspective of American presidents, starting with World War II until today’s US presidential election. All events are seen through the prism of historical cliches such as Chamberlain’s politic of appeasement in Munich or Vietnam’s failure.

It shows how politicians are influenced by these historical cliches, casting their strategies for action in terms of those historical cliches, even accusing each others of repeating history for worse.

The conclusion? There’s no black and white politics:

In the reality of power, presidents generally realize that the choice between negotiation and force is rarely clear-cut or either-or. – Evan Thomas, from Newsweek

Good judgment is the key. Every situation needs its assessment before taking action. Hardly breaking news, but wise words nevertheless.

Leveraging the non-profit to make profits

Jama software, a software company which makes a web-based management application, has grown tired of spending so much to Google in order to get its traffic. The solution? To kiss Google goodbye and give to a non-profit organization instead.

The organization is Kiva, the very popular micro-lending non-profit organization tailored to cater to the developing world. The search marketing budget that Jama Software used to give to Google will now be given to Kiva instead. The more traffic Jama Software gets, the more money they will send to Kiva. As they say on the company’s blog:

[…] we’d much rather help a chicken farmer in Cambodia feed her village than fund a Google billionaire’s hobby of flying to space. – Jama Software

Dont’ believe it? See the loans from Jama Software on Kiva’s site. Will it work? It all depends on the buzz it will create. ReadWriteWeb – 10th most authoritative blog according to Technorati – picked up the story (that’s where I read it first), so it seems to start on the right foot. As reported on the ReadWriteWeb post, according to Jama’s Director of Customer Outreach & Marketing, the strategy is to display the “commitment as a company to giving back, whether big or small”, and to rely on the blogosphere and the press coverage to relay the news.

There’s certainly some value in this innovation in what we could call “social marketing strategies”, which goes beyond the usual social networks, and I hope it will work.

The objective of a for-profit organization is to make profits by definition, but that does not prevent it from being human. Or is it what they want us to believe? The company’s reputation will tell us with time.

Behavioral targeting is not evil

Behavioral targeting is a sensitive topic, because of privacy issues. But it is not evil in essence. That is the message from this article from The Economist.

We have ads shown in front of us everywhere: ads in the streets, ads in the bus, ads on TV and ads online. The latest fashion is behavioral ads, adequately selected to fit your own tastes and needs.

Personally, I don’t see why it would be a problem if you are presented with products or services that are relevant to you. Amazon is a very recurrent example in this case. I do see a value in the recommendations – based on my previous purchases – that Amazon is giving me. The spectrum of products is not comprehensive (and there exists other tools to reach that objective), but they are often sound pointers.

Of course those recommendations are incentives to buy (just like any ads really), but you’re always free to buy it or not, aren’t you. And I prefer to spend my money on the most relevant products out there that will fit my needs.

In order to deal with the privacy issues, the article goes, the advertising industry needs to handle them the proper way:

[…] as behavioural-targeting systems become more sophisticated and invasive, it is vital that the companies behind them are open with users about what is going on, and give them control over their personal information. The Economist

Or from this other article, on the same subject:

Behavioural targeting is not necessarily a bad idea, but imposing it without telling people is likely to annoy them when they find out about it. Without adequate disclosure, an “opt out” system looks like snooping; but an “opt in” system, given all the fuss, now looks like a tough sell. The Economist

Behavioral advertising is just a smart evolution of the previous online ads. And it must be smart enough to keep the user in control.