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Clicking and Screaming: An Analysis of Monetization Schemes in Online Social Networking

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					MASSACHUSETTS INSTITUTE

OF

TECHNOLOGY

SLOAN SCHOOL OF MANAGEMENT

Clicking and Screaming
an analysis of monetization schemes in online social networking
Ariel Santos ~ Amanda Peyton ~ Allen T. Lamb

Professor: Stuart Madnick Teaching Assistants: Yaar Schnitman & James Blair Course: 15.579 - Evolution towards Web 3.0 and the Emergence of Management 3.0 Submitted: Monday, May 4, 2009

Online social networks have gained significant momentum with consumers, but have yet to establish a meaningful and sustainable source of revenue. Most users of broad-based online social networks are not exhibiting targeted or commercial behavior – they tend to simply hang out and browse, play games, look at pictures, and watch videos. These are social activities that attract consumers online, but have been difficult to translate into cash. This analysis seeks to explore the history and potential future of revenue generation, or monetization as it is called in Internet circles, within online social networking constructs.

15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0

Table of Contents
Introduction .................................................................................................................................................. 3 Our Definition of Online Social Networking.................................................................................................. 4 Commonalities among Online Social Networking Sites ............................................................................ 5 Clarification: Why Facebook Counts and Second Life Does Not ............................................................... 7 Historical Models of Revenue Generation in Online Social Networking ...................................................... 8 Advertising ................................................................................................................................................ 9 Subscription ............................................................................................................................................ 10 Freemium ................................................................................................................................................ 12 Proposed Models of Monetization in Online Social Networking................................................................ 15 Personal Endorsement ............................................................................................................................ 15 Brand Affiliate ......................................................................................................................................... 16 Virtual Goods .......................................................................................................................................... 17 Conclusion ................................................................................................................................................... 19 Bibliography ................................................................................................................................................ 20 Appendix: Project Presentation… .............................................................................................................. 20

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15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0

Introduction
Online social networks have gained significant momentum with consumers, but have yet to establish a meaningful and sustainable source of revenue. Most users of broad-based online social networks are not exhibiting targeted or commercial behavior – they tend to simply hang out and browse, play games, look at pictures, and watch videos. These are social activities that attract consumers online, but have been difficult to translate into cash. Most of the attempts made thus far to monetize social networks can be traced back to some form of pre-Internet framework -- most notably recognized in the adoption of traditional advertising and subscription revenue models. More adaptive frameworks have also surfaced, however, such as the "Freemium1" model, originally articulated by venture capitalist Fred Wilson in early 2006. In the absence of concrete financial results from the most successful social networking sites to date (MySpace, Facebook, and Twitter), we rely on the overwhelming agreement by social networking pundits of these companies' foreseeable unprofitable performance, and therefore seek to explore alternative solutions. We have identified three innovative potential business models that may provide an answer to the question of how to successfully monetize online social networking: • Personal Endorsements – Consumers opt into broadcasting what products they use. Brands pay consumers by the endorsement • Brand Affiliate – Selling an outside party’s goods/services and getting a commission or fee for each sale that is made • Virtual Goods – Merchandising through online personality/avatar We will evaluate the pluses and minuses of all three models as they relate to generating revenue for online social networking in the following pages.
Freemium is a business model in which the owner or service provider offers basic features to users at no cost and charges a premium for supplemental or advanced features. The term, which is a combination of the words "free" and "premium," was coined by Jarid Lukin of Alacra after venture capitalist Fred Wilson articulated the idea on his blog (www.avc.com) in a post entitled “My Favorite Business Model” on March 26, 2006.
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Our Definition of Online Social Networking
Social networking in its simplest form has existed almost as long as societies themselves have existed, defined as the practice of expanding the number of one’s business and/or social contacts by making connections through individuals. One person gets to know another who knows another who knows another, almost instantaneously expanding the set of knowledge and resources that would normally outside the scope of an individual’s immediate environment. It is through this phenomenon that the concept of ‘six degrees of separation’, or the idea that any two people on the planet could make contact through a chain of no more than five intermediaries, was born. The proliferation of Internet access in the world has created unparalleled opportunity to promote social networking connections via interconnected online communities that help people make contacts they would be unlikely to have met otherwise. The model is usually set up to work like this: you join one of the sites and invite people you know to join, as well. Those people then invite their contacts to join, who in turn invite their contacts to join, and the process repeats for each person – just as it does in the “real-world,” or traditional, model. In theory, any individual can make contact through anyone they have a connection to, to any of the people that next person has a person to, and so on. Where the online social networking model differs from the traditional model, however, is in its speed, corporate memory and nearly infinite reach. Unlike traditional social networking where it may, at minimum, have taken getting to know someone over a number of years at the office (or at least a few invitations to enjoy a cup of coffee together) before being in a position to bridge your personal networks, online social networking places the full-knowledge of the intricate backgrounds of your networks and your networks’ networks at your fingertips instantly. Whereas in the pre-Internet age, it may have taken months for a contact to get around to remembering to tell you about a person she met who would be good for you to know, you have instant access to knowledge of that person entering your social circles via online updates. Additionally, every point of information stored about your social

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15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0 networks – educational institutions, work background, volunteer organizations, etc. – is stored in an extremely organized manner almost indefinitely, and likely includes individuals from across the globe. We certainly do not mean to imply that online social networking is a replacement for the traditional means of in-person, face-to-face interaction, but the barrier for obtaining, managing, and acting upon one’s social network knowledge is now lower than ever before. Some of the most popular online outfits that have helped to lower the traditional barriers of social networking are Facebook, MySpace, LinkedIn and, most recently, Twitter. All of these online social networking sites meet our formal definition of online social networking in that they allow individuals to: 1. Construct a public or semi-public online profile within a bounded system 2. Articulate a list of other users with whom they share a connection (of whatever sort), and 3. Traverse their own connections and those made by others within the system via search.

Commonalities among Online Social Networking Sites
Following are descriptions of the online outfits we have chosen to identify as the four most representative social networking sites on the web today: Facebook, MySpace , LinkedIn, and Twitter. • FACEBOOK2: Facebook is a social networking website where users can join networks organized by city, workplace, school, and region to connect and interact with other people. People can also add friends and send them messages, and update their personal profiles to notify friends about themselves; Launched February 2004.i • MYSPACE2: MySpace is a social networking website with an interactive, user-submitted network of friends, personal profiles, blogs, groups, photos, music, and videos for teenagers and adults internationally; Launched August 2003.

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Description adapted from Wikipedia (www.wikipedia.com), a multi-lingual, Web-based, free-content multimedia project. Wikipedia is written collaboratively by volunteers from all around the world; anyone can edit it.

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15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0 LINKEDIN2: LinkedIn is a business-oriented social networking site that allows registered users to maintain a list of contact details of people they know and trust in business. The people in the list are called Connections. Users can invite anyone (whether a site user or not) to become a connection; Launched May 2003. • TWITTER2: Twitter is a social networking and micro-blogging service that enables its users to send and read other users' updates known as tweets. Tweets are text-based posts of up to 140 characters in length which are displayed on the user's profile page and delivered to other users who have subscribed to them (known as followers). Senders can restrict delivery to those in their circle of friends or, by default, allow anybody to access them; Launched July 2006. Upon reviewing their descriptions it is not difficult to see that each of these online constructs meet our formal definition of an online social networking site, however, there is one aspect of their business models that makes them collectively representative of their genre – each largely operates on a freeaccess, advertising-based revenue model. This has earned the consensus opinion that online social networks have a monetization problem. It is not that they do not generate revenue, as each is estimated generates a relatively healthy sum of cash, but rather that they have not discovered means to leverage their traffic and generate significant revenue per user or page view. Exhibit 1: Unique Visitors as of March 2009 Google.com 137,630,925
Source: Compete.com

•

Yahoo.com 130,224,791

Facebook.com 91,054,535

MySpace.com 55,594,761

Twitter.com 14,031,985

LinkedIn.com 12,699,785

On a comparative basis, companies with similar usage, like Yahoo, are doing $7.2 billion in revenues, while Facebook is estimated to be in the ball-park of $450 million in revenues. (Gurley, 2009) It is appropriate to note at this point, that most other online communication products have had similar struggles. Bill Gurley, of abovethecrowd.com, notes that many leading players in the Instant Messaging

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15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0 space (AIM, ICQ) and the leading free email sites (Hotmail, Yahoo! Mail) have had similar struggled, and have largely remained behind the frontier of this conundrum.

Clarification: Why Facebook Counts and Second Life Does Not
Second Life is a virtual online world that enables its users, called Residents, to interact with each other through avatars. Residents can explore the online world, meet other residents, socialize, participate in individual and group activities, and create and trade virtual property and services with one another. Although we have seen some references to Second Life as 3D social networking, we would like to argue that is stands outside of the scope of our implicit criteria for social networking sites. Second Life, by many standards, would appear to fit within the functionality of most of today’s popular social networking sites by allowing individuals to meet strangers, it is not this aspect of what we define to be social networking sites that make them unique. Rather, our definition seeks to focus on their trait of enabling users to articulate and make visible their social networks. Many of the large social networking sites’ participants are not necessarily "networking" or looking to meet new people; instead, they are primarily communicating with people who are already a part of their extended social network. (Boyd & Ellison, 2007) This does not hold true for Second Life and its experiential focus and design. We believe this point is important to distinguish, in particular, since Second Life is a rather profitable outfit (monetizing at roughly $9.30 per user per month (Lightspeed Ventures, 2008), with roughly 16 million users as of February 2009, according to CNN) that uses a mix of revenue models unattainable on social networking sites. Approximately 70% of Second Life’s revenues comes from land leases (ranging from $5 to $195, depending on the size of the land in question) within their virtual world, and associated maintenance fees. Additionally, sites more in the spirit of Facebook, have user engagement levels and an ease of entry that clearly distinguish them from the Second Life platform when it comes to social networking. Approximately a million Second Life users log in during a given 30 day period, while half of Facebook’s

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15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0 active users return at least one a day, and Second Life requires download of a software client, while Facebook is accessible via any standard browser in minutes.

Historical Models of Revenue Generation in Online Social Networking
The title of “first” social networking site in any real sense of the term is credited to Classmates.com. The site launched in 1995, and came 2 years before SixDegrees, 4 years before Epinions’ Circle of Trust and a full 7 years before Friendster. However, classmates.com’s decision to charge consumers up front via subscription, the very model that allowed them to successfully monetize (by most standards), cost them the market that Facebook now dominates. As a matter of fact, they eventually moved to a free sign-up and adopted the Facebook ‘monetize with advertising’ model and went as far as incorporating the Facebook-style news feed and friend finder. In the following sections, we explore some of the initial revenue generation models that have been attempted within social networking (see Exhibit 2), but have had limited success in qualifying as full-out monetization, or achieving a balanced users to income ratio. Exhibit 2: Revenue models of selected social networking sites (as of May 2008.)

Source: Albrecht Enders, Harald Hungenberg, Hans-Peter Denker, Sebastian Mauch. “The Long Tail of Social Networking: Revenue Models of Social Networking Sites.” European Management Journal, Volume 26 (3), June 2008, p. 199-211.

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Advertising
Generating revenue via an online advertising model has been popular since the establishment of the first high-traffic sites on the World Wide Web, especially since online advertising is an extension of a rather lucrative model of marketing in the offline world. Online advertising, however, is relatively inexpensive when compared to the ratio of cost in reaching a target audience. Companies are able to reach a wide audience for a small fraction of their traditional multi-million dollar advertising budgets. Online advertising campaigns also present the advantage of measuring statistics easily and inexpensively, allowing companies the ability to determine which messages are more appealing to the audience almost immediately. As a matter of fact, the collapse of the dot-com bubble has been partially associated with advertisers having been able to actually measure heir online advertising spend accurately, and determining that the leading advertising monetization model at the time, Banner Ads, was not generating enough real sales to merit investing in it any further. Many major publishers who were dependent on Banner Ad revenue were unable to make it once advertisers began pulling out, and thus we saw the dot-com implosion of 2001. In our research on the topic of advertising on online social networks, we frequently encountered the sentiment that obvious marketing messages on social networks crowd out interaction, thereby inciting push back from consumers. Eric, Steve & Arjun (2007) described the unreleased results of two experiments conducted by MIT Professor Dan Ariele that concluded consumers tend to distrust paid advertising or the information from a source that is seen as having an interest in influencing outcomes. Professor Ariely explained this collapse of credibility of paid advertising as an example of the “Tragedy of the Commons”.3 Similarly, Seth Goldstein, CEO of SocialMedia Networks, has spoken of a self-

“Tragedy of the Commons describes a dilemma in which multiple individuals acting independently in their own self-interest can ultimately destroy a shared limited resource even when it is clear that it is not in anyone's long term interest for this to happen.

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15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0 perpetuating cycle in social networks: “Advertisers distract users; users ignore advertisers; advertisers distract better; users ignore better.” Although we certainly have not excluded advertising as a channel for monetizing social networks at some point in the future, given its modestly successful results in the past, we are convinced the historical utilization of banner ads in online media remains relatively unsophisticated. We believe, along with many others, that most online advertising models still resemble traditional media advertising models, merely transplanting newspaper-style advertisements online. Success in monetizing social networking through advertising will ultimately lie in creative exploitation of the network’s ability to continually to attract and engage users to return. A new solution to monetization of online social networks will certainly be needed until advertisers realistically adapt the model to specifically suit the web environment – translating increases in the number of page views into increased advertising dollars.

Subscription
A subscription model charges the user of a social networking service for access. Instead of advertising, where revenue comes from advertisers targeting members of various social networks, the subscription-based sites earn revenue directly from their users. An article on social networks in the European Business Journal states that the subscription model relies heavily on three factors: the number of users, willingness to pay, and level of consumer trust. Although attempting to quantify willingness to pay is subjective at best, the author characterizes willingness to pay as follows: In order to maximize the willingness to pay, the community provider must aim at creating customer value, which can be achieved (1) by increasing levels of user generated content, (2) by providing functionalities and incentives so that members frequently update and expand their profiles, and (3) by offering multiple membership packages with different pricing schemes.4
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Albrecht Enders, Harald Hungenberga, Hans-Peter Denkera and Sebastian Maucha. “The long tail of social networking.: Revenue models of social networking sites” European Management Journal, Volume 26, Issue 3, June 2008, Pages 199-211

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User-generated content alone, however, is no longer enough to create willingness to pay among potential customers. Because the larger social networks generate so much content that is offered for free, charging for user generated content is not viewed as a potential revenue generation model. Sarah Lacy, author of Once You’re Lucky, Twice You’re Good: The Rebirth of Silicon Valley and the Rise of Web 2.0 noted: “Welcome to the catch-22 of User Generated Content. And guess what? It hasn’t changed with time…It doesn’t make money. Users don’t want to pay subscription fees for something aspiring writers, singers, and actors are uploading for free.”5 Market trends have driven away from use of the subscription model for social networks. Especially in the United States the two largest social networks – Facebook and MySpace – do not charge members at all. Therefore, sites that employ a subscription model must now offer a level of trust and premium content so superior and accessible to readily available free content in order to entice users to not only sign up, but pay for the service offered. Successful employment of the subscription model allows companies to create exclusivity around their site. Should they wish to market the site as “premium” a subscription charge to join the network would help a company to realize that goal. In addition, a subscription model contributes to a more improved user experience by keeping out advertisements that detract from the user’s experience. Larger and more widespread social networking sites focus on volume of traffic and number of registered users in order to maintain steady advertising revenue. With a subscription model, a social network can have more niche or “long tail” appeal and develop a potentially more devoted base of users. Finally, subscriptions are a more reliable source of revenue for social networks. Advertising relies entirely on traffic numbers while subscriptions are a more direct connection between the user and the website.
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http://www.sarahlacy.com/sarahlacy/2009/04/from-techcrunch-ugc-the-loss-leader-part-two.html

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15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0 Current market trends, however, do not support the use of a subscription model for social networking sites. User’s willingness to pay is declining and getting users to pay right away for the product is a difficult process. A more popular implementation of the subscription model has been to allow users to register for a basic account and then offer more premium subscriptions that complement the basic account.

Freemium
The Freemium model came to prominence in 2006 when the term was coined by Jarid Lukin of Alacra after venture capitalist Fred Wilson articulated the idea on his blog (www.avc.com). It is a model that over the last few years has grown in popularity in a variety of industries, such as with the music recording and book publishing industry. However, the Freemium business model has experienced tremendous growth in the online environment and has seen significant success. Companies such as Skype and Flickr have been the pioneers in this field, which has allowed them to attract a tremendous user base by giving their basic service away for free, while charging a fee for “premium” services. Even small upstart companies such as Flat World Knowledge (www.flatworldknowledge.com) are aiming to shake up the college textbook industry by employing the basic principles of the Freemium model. It is a model that has grown in popularity over the last three to four years. Recently, a survey completed by Abrams Research of 200 social media leaders highlighted the following: What's the best way to monetize social media? "Freemium" - a free basic model followed by a fee for advanced options Targeted ads (e.g. contextual ads) Research (polling, surveys, trend-mining) API access/developer tools for third-party services Subscription model Corporate sponsorship Selling user metadata Banner ads/traditional online advertising

45.5% 20.3% 8.9% 7.4% 6.9% 4.0% 4.0% 3.0%

The following section will describe the Freemium model in a bit more in detail, followed by an analysis of why the model is not an optimal source of monetization for social networks.

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15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0 The economics behind the Freemium model are fairly simple. The idea is that a few users, who are willing to pay a premium for a service, will subsidize the costs associated with providing the service for free. While being quite straightforward, the Freemium model is challenging to implement as there are many difficult decisions to make. Companies that employ the Freemium model must first decide which services they will offer for free as opposed to the premium content. If a company chooses to offer too little as free content, they will struggle with user adoption, if the value of the service is not attractive enough to users. On the other hand, if a company offers a greater amount of services, it will be a challenge to identify the premium services. After figuring out the content issue, companies must also determine the correct price for the premium service. If the initial price for the premium service is high, there is a risk that users will be unwilling to subscribe to the service. The benefit of having a high price though is that once users have subscribed, they are less likely to leave the website because of the investment they have made. If the pricing is low, it may lead to more users subscribing to the premium service but at a lower price point, which clearly leads to less revenue. These two decisions around content and price are crucial to the success of the Freemium model and are also key when analyzing why this particularly model is not a proper monetizing scheme for social networks. As we have discussed earlier in the paper, the value of social networks is the ability to connect people in a variety of ways. Facebook, Myspace, LinkedIn, and Twitter have all become successful network environments because they have found different ways for people to connect on-line. These companies are a perfect example of network effects. The value of the service provided increases exponentially by each additional user that is on the network. The success of these companies has been dependent on their unique abilities to draw as many users as possible to their website. For example, Twitter over the last year plus has seen amazing growth (see Exhibit 3).

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15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0 Exhibit 3: Trend in Twitter Usage (Feb 2008 – Feb 2009)

Source: comScore Media Metrix

If Twitter or any other of these companies had sacrificed their free services for the possibility of a premium service, they would have struggled to build up their user base, which is their most valuable asset. Because of this predicament, the first decision around content becomes even tougher. What decision could have Twitter done to limit some of the content available to users? What if they would have limited the number of “tweets” by an user in a certain day? Or charge for the ability to post pictures? While this could have signified a possible source of revenue, it would have definitely come at the risk of acquiring new users, which is the lifeblood of social network site. Furthermore, while still using the twitter example, the issue of price becomes also quite difficult. Twitter’s service, similar to other social quite network sites, is hard to quantify and establishing a price for the service would have been another major impediment to acquiring users. While we used Twitter as an example in this section, the s same questions and challenges can be applied to Facebook, Myspace, and LinkedIn. One of these websites, which has tried to apply the Freemium model is LinkedIn. While their main service is free, users are able to upgrade to a premium account where they have access to a variety of different services. While we were not able to find official financial results on LinkedIn, there is chatter among Internet forums that LinkedIn’s premium features have not been doing so well. Even if users are signing up for premium accounts, the revenues generated from the premium content are only from a remium

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15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0 relatively small group of people. In addition to the constraints mentioned above, a Freemium model is also hard to scale on social networks and to make it a significant source of revenue. While the Freemium model has become a popular theory for how social networks can monetize, we argue that it is not an effective source of revenue. Social networks thrive on the unlimited growth of their user base and the Freemium model inhibits that process. We will offer additional options to monetize the social web.

Proposed Models of Monetization in Online Social Networking
In the following sections, we attempt to represent some of the most promising ideas we came across in our research on the optic of monetizing online social networking:

Personal Endorsement
Even the current king of online social networking, Facebook, has had to recognize that a personal endorsement system may lead to the future of revenue generation on social networks. Mark Zuckerberg, Facebook’s founder, argued at the 2008 South By SouthWest (SXSW) music, film, and interactive conference that “exposed shopping activity was the future of advertising, that such personal endorsements of products from trusted friends was the ultimate in advertising.” The statement was not a strategically foretelling one, since Facebook had already integrated such a concept (named Beacon) into its platform, but certainly indicated that despite some harsh user reactions to the systems methodology, monetization via person-to-person endorsements was still top of mind. The Beacon system allows a user’s activity outside of Facebook to be recorded and then posted on his or her newsfeed. Merchandise purchases, rentals of films and games, streaming videos being viewed, or reviews being written and submitted, all trigger events that are linked back to the user’s Facebook page as an update that friends can view. Beacon was simply turned on one day in 2007 for the millions of Facebook users without an opt-in program, and led to rather unsuccessful user reception.

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15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0 We believe Facebook was on the right track, though, despite its poor initial implementation of its Beacon system. We foresee a new online marketing category coming about that operates as a friend endorsement system, perhaps called “social advertising.6” An implementation might look something like this: you would enter the products, services, websites you are willing to endorse from an inventory of ads that advertisers are willing to pay to have displayed. Your friends do the same. When you are ready to purchase an item, you check the friend endorsement system and review your friend’s product endorsements in the category you are interested in purchasing within. To combat any fraud with the reviews, only products actually purchased would be available for review and endorsement. The question remains, however, regarding how the value chain of this model will be shifted from the traditional “celebrities endorse products for big, big dollars” to a new model that uses individuals with a social graph of about thirty to forty people. Comparatively, while the “real celebrity’s” endorsement really means nothing as to the quality, features or durability of a product, they create brand recognition among the masses, but we argue that the average online social networking user could accomplish the same. To quote blogger Mark Hopkins on the topic: At the niche level, “folks that have a sizable social graph or a clearly defined audience of at least a few hundred appear to be perfect candidates for the micro-celebrity endorsement.” The lingering issue is that we expect most people would have issue with marketing items, no matter the low-level passive input, on an unpaid basis.

Brand Affiliate
Social networks have continued to get better at one truly important metric: average time spent on a website. In a recent report issued by Nielsen Online, they estimated that the average facebook user spends 3 hours and 10 minutes on Facebook. The “stickiness” ability of these social networking websites is extremely powerful and valuable. For years, since the establishment of the web, companies

Term used by blogger Mark ‘Rizzn’ Hopkins in a post to Mashable.com on June 9, 2008 entitled “Are We Nearing the Beginning of Micro-Celebrity Endorsements?”

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15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0 have worked to design websites that will continue to generate views and user interaction. While social network websites have not yet figured out how to monetize the value of this asset, it is a gold mine waiting to be harvested. Imagine a situation where you go to your friend’s Facebook account, who has recently updated his status about the new Kindle 2 he purchased. You are interested and trust this friend’s opinion and you click on the Kindle 2 link he provided. A purchase was made because of the value of the network created on Facebook. Amazon will pay a significant referral fee to Facebook, who will be able to use this as a significant source of revenue. Becoming a brand affiliate can go further beyone technology products, but to everyday items such as groceries, as well as movie tickets or even songs purchased on ITunes. The possibilities for a Facebook, Twitter or LinkeIn to partner with these large retailers is a tremendous monetary source. A similar example of such a partnership was XBOX’s partnership with NetFlix. Xbox’s gamer community is a thriving and growing one (17 Million subscribers). Users spend hours playing video games with one another online, as part of the Xbox live program. To capitalize on the value of this network, Xbox users can now download a NetFlix application and download movies directly to their Xbox. Facebook or Twitter may also be able to find similar ways to capture the value created by their large network of users by developing win-win relationships with retailers.

Virtual Goods
Virtual goods present a compelling alternative to monetizing social networks because of their low marginal cost and huge potential margins. It gives users the opportunity to extend their online personality offline and vice versa – and although this type of personal branding has taken off internationally in countries such as China, there is still ample opportunity in the U.S. market to successfully monetize social networking sites using virtual goods.

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15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0 China’s Tencent has successfully employed this revenue model through the wildly popular instant messaging tool QQ. Tencent had annual revenues of over $1bil in 2008 of which “Overall, the so-called IVAS (“internet value-added service”) revenue category contributed to 70.5 percent or $719.1 million, a 95.5 increase over 2007; mobile and telecom services contributed $204.7 million and online advertising contributed $120.9 million. This stands in contrast to American social networks.”7 The majority of QQ’s revenue comes from its internet services such as avatars, dating services, online memberships, music and community sites. According to the website ReadWriteWeb “QQ introduced a virtual currency named Q-coin which can be used by QQ users to buy their IM avatar’s virtual clothes, hairstyles and furniture – and even virtual pet food for their virtual pets.”8 Social Networking websites in the U.S., by contrast, collect over 90 percent of their revenues from advertising. The popular financial website Seeking Alpha recently released a study that highlights the monitization differences between QQ, Facebook and MySpace. As author Bill Gurley states: “For each we have taken our best guess at monthly unique users, monthly page views, monthly revenues, and advertising as a percentage of revenue. For TenCent, these numbers are published. For MySpace and Facebook we used the best information we could find and/or infer.” (see Exhibit 4) Investors and social networking experts alike see the potential in successfully employing virtual merchandizing, though there are stumbling blocks in the U.S. market. Primarily, the problem is conceptual: there is not yet the belief that one’s virtual life and real life are fluid. For social networking sites one of the key “experiences” for users is self-expression. As Bill Gurley (2009, March 9) states: is “It my perception that most U.S. executives have trouble conceiving and believing in the digital item model. For starters, they simply think it’s strange”. Additionally, market trends suggest that willingness to pay for social networking is declining as users of social networks are less willing to embrace
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http://venturebeat.com/2009/03/19/the-worlds-most-lucrative-social-network-chinas-tencent-beats-1-billionrevenue-mark/ 8 http://www.readwriteweb.com/archives/qq_china_im_web20.php)

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15.579 – Evolution towards Web 3.0 and the Emergence of Management 3.0 subscription models. Brand loyalty, however, is arguably stronger in the United States than anywhere else in the world. Though virtual merchandizing would need to be properly disseminated in order to be successful, the potential in U.S. markets is compelling. Exhibit 4:

Source: http://seekingalpha.com/article/125012-what-myspace-and-facebook-can-learn-from-tencent-on-social-networkmonetization

Conclusion
The potential for Internet-based social networking applications to expand their revenue streams is vast. Above we have outlined three existing revenue models – Advertising, Subscription, and Freemium. Though these models have been moderately successful in certain instances, we believe there is significant untapped revenue potential in online social networks. Through our research on the topic of monetization of online social networking, we have highlighted three potentially lucrative sources of revenue that could augment revenue generation within these sites. These solutions are: Personal Endorsements, Brand Affiliation, and Virtual Merchandising. Although we consider all three models to have the potential to impact online social networks, we believe virtual merchandizing – given its history of performance with QQ – has the most potential to provide significant revenue increases.

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Bibliography
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Appendix: Project Presentation…


				
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