The Economist - A World of Connections

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					A world of connections
  A special report on social networking
            January 30th 2010
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 The Economist January 30th 2010                                                                                 A special report on social networking 1




                                                             A world of connections
Also in this section
Global swap shops
Why social networks have grown so fast
and how Facebook has become so dominant.
Page 3

Twitter’s transmitters
The magic of 140 characters. Page 5

Pro ting from friendship
Social networks have a better chance of
making money than their critics think.
Page 6

A peach of an opportunity
Small businesses are using networks to
become bigger. Page 8

Yammering away at the o ce
A distraction or a bonus? Page 9

Social contracts                                             Online social networks are changing the way people communicate,
The smart way to hire workers.
Page 10
                                                             work and play, and mostly for the better, says Martin Giles

Privacy 2.0                                                  T    HE annual meeting of the World Eco-
                                                                  nomic Forum in Davos, currently in
                                                             progress, is famous for making connec-
                                                                                                             is outside the United States.
                                                                                                                 Although Facebook is the world’s big-
                                                                                                             gest social network, there are a number of
Give a little, take a little. Page 12
                                                             tions among the global great and good. But      other globetrotting sites, such as MySpace,
                                                             when the delegates go home again, getting       which concentrates on music and enter-
Towards a socialised state                                   even a few of them together in a room be-       tainment; LinkedIn, which targets career-
The joy of unlimited communication.                          comes di cult. To allow the leaders to          minded professionals; and Twitter, a net-
Page 13                                                      keep talking, the forum’s organisers last       working service that lets members send
                                                             year launched a pilot version of a secure       out short, 140-character messages called
                                                             online service where members can post            tweets . All of these appear in a ranking
                                                             mini-biographies and other information,         of the world’s most popular networks by
                                                             and create links with other users to form       total monthly web visits (see chart 1, next
                                                             collaborative working groups. Dubbed the        page), which also includes Orkut, a Goo-
                                                             World Electronic Community, or WEL-             gle-owned service that is heavily used in
                                                             COM, the forum’s exclusive online net-          India and Brazil, and QQ, which is big in
                                                             work has only about 5,000 members.              China. On top of these there are other big
                                                                 But if any service deserves such a grand    national community sites such as Skyrock
                                                             title it is surely Facebook, which celebrates   in France, VKontakte in Russia, and Cy-
Acknowledgments                                              its sixth birthday next month and is now        world in South Korea, as well as numerous
The author would like to express particular thanks for       the second most popular site on the inter-      smaller social networks that appeal to spe-
their help in preparing this special report to Pete          net after Google. The globe’s largest online    ci c interests such as Muxlim, aimed at the
Blackshaw of Nielsen; Ron Burt of the University of
Chicago’s Booth School of Business; Bill Gurley of           social network boasts over 350m users           world’s Muslims, and ResearchGATE,
Benchmark Capital; Keith Hampton of the University of        which, were it a nation, would make Face-       which connects scientists and researchers.
Pennsylvania; Bradley Horowitz of Google; Jason              book the world’s third most populous after
Kaufman of the Berkman Institute; Cameron Marlowe and
Ethan Beard of Facebook; D.J. Patil of LinkedIn; and Clara   China and India. That is not the only strik-    Going public
Shih of Hearsay Labs.                                        ing statistic associated with the business.     All this shows just how far online commu-
                                                             Its users now post over 55m updates a day       nities have come. Until the mid-1990s they
A list of sources is at
                                                             on the site and share more than 3.5 billion     were largely ghettos for geeks who hid be-
 Economist.com/specialreports                                pieces of content with one another every        hind online aliases. Thanks to easy-to-use
                                                             week. As it has grown like Topsy, the site      interfaces and ne-grained privacy con-
An audio interview with the author is at
                                                             has also expanded way beyond its Ameri-         trols, social networks have been trans-
 Economist.com/audiovideo                                    can roots: today some 70% of its audience       formed into vast public spaces where mil- 1
2 A special report on social networking                                                                                     The Economist January 30th 2010




2 lions of people now feel comfortable using                                                                   yammering and chattering smacks of an-
  their real identities online. ComScore, a                                                                    other internet bubble in the making. They
  market-research rm, reckons that last Oc-                                                                    argue that even a huge social network such
  tober big social-networking sites received                                                                   as Facebook will struggle to make money
  over 800m visitors. The social networks’                                                                     because ckle networkers will not stay in
  greatest achievement has been to bring hu-                                                                   one place for long, pointing to the example
  manity into a place that was once cold and                                                                   of MySpace, which was once all the rage
  technological, says Charlene Li of the Al-                                                                   but has now become a shadow of its for-
  timeter Group, a consulting rm.                                                                              mer self. Last year the site, which is owned
      Their other great achievement has been                                                                   by News Corp, installed a new boss and
  to turn themselves into superb tools for                                                                       red 45% of its sta as part of a plan to re-
  mass communication. Simply by updating                                                                       vive its fortunes. Critics also say that the
  a personal page on Facebook or sending                                                                       networks’ advertising-driven business
  out a tweet, users can let their network of                                                                  model is awed.
  friends and sometimes the world know                                                                             Within companies there is plenty of
  what is happening in their lives. Moreover,                                                                  doubt about the bene ts of online social
  they can send out videos, pictures and lots                                                                  networking in the o ce. A survey of 1,400
  of other content with just a few clicks of a                                                                 chief information o cers conducted last
  mouse. This represents a dramatic and                                                                        year by Robert Half Technology, a recruit-
  permanent upgrade in people’s ability to                    in ever greater numbers.                         ment rm, found that only one-tenth of
  communicate with one another, says                              Social-networking sites’ impressive          them gave employees full access to such
  Marc Andreessen, a Silicon Valley veteran                   growth has attracted much attention be-          networks during the day, and that many
  who has invested in Facebook, Twitter and                   cause the sites have made people’s perso-        were blocking Facebook and Twitter alto-
  Ning, an American rm that hosts almost                      nal relationships more visible and quanti-       gether. The executives’ biggest concern
  2m social networks for clients.                              able than ever before. They have also           was that social networking would lead to
      And people are making copious use of                    become important vehicles for news and           social notworking, with employees using
  that ability. Nielsen, a market-research                    channels of in uence. Twitter regularly          the sites to chat with friends instead of do-
    rm, reckons that since February 2009                      scores headlines with its real-time updates      ing their jobs. Some bosses also fretted that
  they have been spending more time on so-                    on events like the Mumbai terrorist attacks      the sites would be used to leak sensitive
  cial-networking sites than on e-mail, and                   and on the activities of its high-pro le us-     corporate information.
  the lead is getting bigger. Measured by                     ers, who include rap stars, writers and roy-         This special report will examine these
  hours spent on them per social-network                      alty. And both Twitter and Facebook              issues in detail. It will argue that social net-
  user, the most avid online networkers are                   played a starring role in the online cam-        works are more robust than their critics
  in Australia, followed by those in Britain                  paign strategy that helped sweep Barack          think, though not every site will prosper,
  and Italy (see chart 2). Last October Ameri-                Obama to victory in the presidential race.       and that social-networking technologies
  cans spent just under six hours sur ng so-                                                                   are creating considerable bene ts for the
  cial networks, almost three times as much                   Delivery time                                    businesses that embrace them, whatever
  as in the same month in 2007. And it isn’t                  But like Mr Obama, social networks have          their size. Lastly, it will contend that this is
  just youngsters who are friending and pok-                  also generated great expectations along          just the beginning of an exciting new era of
  ing one another Facebook-speak for mak-                     the way on which they must now deliver.          global interconnectedness that will spread
  ing connections and saying hi to your pals.                 They need to prove to the world that they        ideas and innovations around the world
  People of all ages are joining the networks                 are here to stay. They must demonstrate          faster than ever before. 7
                                                              that they are capable of generating the re-
                                                              turns that justify the lofty valuations inves-
     Who will be my friend?                               1                                                       Sociable types                                      2
                                                              tors have given them. And they need to do
     Social-networking sites, total unique visitors           all this while also reassuring users that           Average time spent on social-networking sites
     October 2009, m                                          their privacy will not be violated in the           October 2009, hours per user

                                                              pursuit of pro t.
                    0   50    100    150    200                                                                                     0      2     4      6         8
                                                                  In the business world there has also
     Facebook                                     430.2       been much hype around something called              Australia
     Windows Live                                              Enterprise 2.0 , a term coined to describe         Britain
     MySpace                                                  e orts to bring technologies such as social         Italy
     Baidu                                                    networks and blogs into the workplace.              United States
                                                              Fans claim that new social-networking of-
     Twitter                                                                                                      South Korea
                                                              ferings now being developed for the cor-
     Orkut                                                    porate world will create huge bene ts for           Spain
     Hi5                                                      businesses. Among those being touted are            Brazil
     QQ                                                       services such as Yammer, which produces             Germany
     LinkedIn                                                 a corporate version of Twitter, and Chatter,        France
     deviantART
                                                              a social-networking service that has been           Japan
                                                              developed by Salesforce.com.
     Source: comScore                                                                                             Source: Nielsen
                                                                  To sceptics all this talk of twittering,
 The Economist January 30th 2010                                                                                  A special report on social networking 3




 Global swap shops
 Why social networks have grown so fast and how Facebook has become so dominant

F  ACEBOOK has not only helped people
    to make zillions of new connections, it
has also inspired a screenplay. A lm called
                                                     Facelift
                                                     Facebook, number of registered users, m
                                                                                                          3
                                                                                                              made it easy to publish them online. Over
                                                                                                              2.5 billion photos a month are uploaded to
                                                                                                              Facebook, making it one of the largest pho-
  The Social Network , due to be released                                                                     to-sharing sites on the web. In Asia video
                                                                                                    250
later this year, will trace the site’s meteoric                                                               content is hugely popular on services such
rise from its foundation in 2004 to become                                                          200
                                                                                                              as Cyworld.
king of the social-networking world. How                                     Rest of the world                    One reason that people are willing to
have social networks managed to shoot to                                                            150       share so much private information on so-
such prominence that they are already be-                                                                     cial networks is that many of the sites have
ing given the Hollywood treatment?                                                                  100       developed detailed sets of privacy controls
    The most important reason for their                                                                       that let users decide what others can and
phenomenal growth is something called                                                               50        cannot see. This process has had its hic-
                                                                                           United
the network e ect . Originally coined to                                                   States             cups. Facebook, for instance, got into hot
describe the rapid spread of telephones,                                                            0         water when in late 2007 it launched a ser-
                                                      2004    05        06     07     08     09
this states that the value of a communica-                                                                    vice called Beacon that tracked users’ pur-
                                                     Source: Facebook
tions network to its users rises exponen-                                                                     chases on some other websites and auto-
tially with the number of people connect-                                                                     matically alerted their friends to them.
ed to it. This implies that the audience of a     power they will need because of the net-                    After a furious reaction from users, Beacon
social network will grow slowly at rst,           work e ect. Some sites set up in the 1990s                  was rst modi ed and then buried for
then explode once it passes a certain point.      su ered a series of outages as they strug-                  good. Last year Facebook was named one
Je Weiner, the chief executive of Linked-         gled to keep up with demand.                                of America’s 20 most trusted companies
In, which now has some 58m members,                  The latest crop of networks, most of                     on privacy issues by TRUSTe, an organisa-
says it took the company 16 months to             which were launched ve or six years ago,                    tion that rates companies’ online privacy
reach its rst million users, whereas the          have bene ted from a dramatic fall in the                   policies though there was another outcry
most recent additional million came on            cost of hardware needed to store and pro-                   in late 2009 when it modi ed its privacy
board in only 11 days. Facebook has had a         cess data. They have also been able to use                  policy yet again.
similar experience. It took almost ve             free, open-source software to build sys-                        Another reason that the networks have
years to drum up its rst 150m users, but          tems that scale quickly and easily. And                     become so popular is that there is so much
just eight months to double that number           they have come up with some tailor-made                     to do on them, mostly because companies
(see chart 3).                                    solutions to cope with rapid growth.                        such as Facebook and MySpace have al-
    The network e ect has been ampli ed                                                                       lowed independent developers to create
by the internet’s global reach. Gina Bian-        Thanks for the memory                                       programs, known as apps , which run on
chini, the boss of Ning, says that within         At Facebook, for example, the rm’s soft-                    their networks and tap into their treasure
two months of the rm’s launch in 2005             ware engineers built a system called Multi-                 trove of customer data. These apps range
people from 80 countries had signed up to         Feed that searches databases near-instant-                  from the inane to the inspiring. Super-
networks that it had created on behalf of         ly for relevant news from a person’s                        Poke!, for example, lets people spank ,
others. The Ning-hosted network of 50             friends. This has allowed the network to                      grope and kiss their Facebook friends
Cent, a rapper, has 490,000 members the           add many millions of new users without                      online, whereas Causes enables them to
world over, from Australia to Zambia.             damaging its ability to provide a constant                  create virtual groups to pursue charitable
Some rms have specially tailored their            stream of up-to-date news to people’s                       endeavours.
service to broaden its international appeal.      pages. In another feat of technical wizard-                     This division of labour pays dividends
Facebook, which is available in 70 di erent       ry, its engineers have quintupled the per-                  all round. Developers get access to the net-
languages, o ers Facebook Lite, a stripped-       formance of an open-source memory sys-                      works’ huge audience, network users en-
down version of its main site that is popu-       tem called memcached, which allows                          joy free access to thousands of clever apps
lar in countries without fast broadband           frequently used data to be retrieved faster                 and the networks acquire more users be-
connections.                                      than if stored in a database.                               cause the apps make their sites more ad-
    All this has allowed social sites to grow         Such creativity has enabled the net-                    dictive. Facebook now has over 1m devel-
quickly without having to spend a fortune         works to cope with a tsunami of data,                       opers creating software for it and its online
on marketing. But it has also created a huge      many of which are being produced by an-                     directory contains over 500,000 apps.
technical challenge. Most web businesses          other set of technologies that have also                    Twitter has spawned over 50,000 apps, in-
can add servers and databases in a fairly         helped to drive the growth of social net-                   cluding o erings from rms such as Twit-
linear fashion as they acquire more users,        working. Personal digital cameras and vid-                  pic, which lets people post photos to their
but social networks nd it almost impossi-         eo recorders have greatly reduced the cost                  Twitter feeds, and Twitscoop, which high-
ble to gauge exactly how much computing           of producing high-quality images and                        lights popular topics being talked about on 1
4 A special report on social networking                                                                               The Economist January 30th 2010




2 the service at any moment.                                                                                    It’s basically Facebook’s to lose , says
                                                        MySpace invader                                   4
      That leaves the networks free to con-                                                                   Mark Pincus, the chief executive of Zynga,
  centrate on innovations that encourage                Social-networking sites                               a social-gaming rm that develops apps to
  even more sharing. The most striking of               Unique visitors in America, m                         run on the service.
  these is Facebook Connect, which the                                                              100
                                                                                                                   Not so long ago, exactly the same thing
  company launched just over a year ago.                                                                      might have been said of MySpace. The site
  Mark Zuckerberg, the company’s founder,                                                           80        was riding high when News Corp bought it
  describes this as inverting the model of                            MySpace                                 for $580m in 2005. But a few years later it
  social networking. Instead of being ob-                                                           60        was going downhill (see chart 4). Some see
  liged to come to Facebook’s website, users                                                        40
                                                                                                              this as a sign that large social networks are
  can take their Facebook identity and net-                                             Facebook              destined to disintegrate when they be-
  work of friends to other websites and to                                                          20        come too big. But there was nothing inev-
  devices such as game consoles. This means                                                                   itable about MySpace’s decline: the site
  they no longer have to create a new online                                                        0         simply made a series of strategic mistakes.
                                                        2004    05         06      07   08     09
  group of friends each time they visit a dif-                                                                Faced with demanding revenue targets
                                                        Source: comScore
  ferent destination on the web.                                                                              from News Corp, it neglected its technol-
      The way it works is that Facebook’s                                                                     ogy and added new features such as job
  partner rms install Connect buttons on             their main doorway to the internet. He is                listings and horoscopes that drove web
  their websites and devices which give Fa-          so keen to realise his vision that he is said            tra c but had nothing to do with its core
  cebook users automatic access to informa-          to have turned down o ers to buy the com-                users’ interest in music, lm and other en-
  tion about their friends’ activities. At           pany which would have made him an in-                    tertainment. As the site became more clut-
  Hu Po Social News, a site run by the Huf-          stant billionaire.                                       tered than a teenager’s bedroom, some of
    ngton Post, a well-known American blog,              Mr Zuckerberg also wants Facebook to                 those users logged o for good. MySpace’s
  Facebook users can see what their friends          map out as much as possible of what peo-                 share of the American social-networking
  have been reading and exchange stories             ple in the social-networking industry refer              market fell from 67% in September 2008 to
  and comments with them. At Net ix,                 to as the social graph , a fancy name for a              30% in the same month of last year, accord-
  which hires out DVDs and Blu-ray discs by          model of nodes and links in which nodes                  ing to Hitwise, a research rm.
  post, they can see which lms their friends         are people and the links between them
  have watched and what other people have            represent friendships. He thinks that the                Network defects
  written about them. Facebook says there            relationships between people and objects                 Owen Van Natta, the network’s new boss,
  are now some 80,000 Connect-enabled                such as their o ce buildings, schools and                has already got rid of many of the products
  websites and devices, such as Microsoft’s          other things can be represented in the                   that were added and brought in a new
  Xbox console.                                      same way. The more people that join Face-                management team. MySpace is also clean-
      Connect is just the latest in a long line of   book, the greater the insights the business              ing up its pages and developing tools that
  innovations that have helped to turn Face-         will have into the nature of these relation-             will let its 100m users search its huge range
  book into the dominant global social net-          ships. And the more it knows about what                  of content more e ciently. And it has
  work. It also re ects the scale of Mr Zucker-      matters to people, the better it should be at            stopped pursuing Facebook to concentrate
  berg’s ambition. For the social web, I             pro ting from that knowledge.                            on a strategy that Mr Van Natta describes
  think the killer app is Facebook, he says.             Some people think that Facebook’s net-               as o ering people the ability to engage in
  His goal is to connect as much of the              work e ect is now so great that it will be               content and socialise at the same time .
  world’s population as possible via the net-        impossible to knock it o its pedestal as                     The idea is that people with, say, similar
  work and then to get its users to use it as        the world’s largest online meeting place.                tastes in music will connect with one an-
                                                                                                              other on MySpace and then swap other
                                                                                                              material too. Last year the rm bought
                                                                                                              iLike, which allows users to share playlists,
                                                                                                              and Imeem, a music-streaming service. Its
                                                                                                              new focus, Mr Van Natta insists, will allow
                                                                                                              MySpace to rise Phoenix-like from the
                                                                                                              mess in which he found it. But the admit-
                                                                                                              tedly brief history of social networking
                                                                                                              suggests that once a network e ect has
                                                                                                              gone into reverse it rarely returns to form.
                                                                                                                  Facebook, for its part, is unlikely to
                                                                                                              make the same strategic mistakes as My-
                                                                                                              Space because it pays much more atten-
                                                                                                              tion to the plumbing that connects people
                                                                                                              with each other than to the content that
                                                                                                                ows through it. The people at Facebook
                                                                                                              are essentially utilitarians, explains Matt
                                                                                                              Cohler, a former employee who is now a
                                                                                                              partner at Benchmark Capital, a venture-
                                                                                                              capital rm. They want to give people the 1
  The Economist January 30th 2010                                                                     A special report on social networking 5




2 very best technology for sharing and then           To help generate new ideas, the rm          buy it, but was rebu ed. Despite their dif-
 get out of their way. That technology is so      holds all-night hackathons at which en-         ferences, both rms are powerful commu-
 good that people are willing to stick            gineers work on their pet projects, fuelled     nication tools that compete for people’s at-
 around on the site as it grows, rather than      by Chinese takeaways and energy drinks.         tention (see box). They also have some-
 abandoning it for something edgier.              It also gives its people plenty of freedom to   thing else in common: an enormous price
     Another reason for optimism is the           try out their ideas on Facebook’s site. Mr      tag. Last year Twitter raised a round of ven-
  rm’s hacker-type culture which has pro-         Schroepfer is particularly proud of the fact    ture capital that valued the company at $1
 duced the innovations that have made the         that the company has only one engineer          billion, even though it had yet to turn a pro-
 service so addictive. Mike Schroepfer, Face-     for every 1.2m users.                             t. And an investment in the preference
 book’s head of engineering, says that one            It is always possible that a better         shares of Facebook by a Russian company
 of its mottos is move fast and break stu .       plumber could turn up, which explains           valued it at $10 billion. Such astronomical
 What matters is getting fresh products out       why Facebook’s bosses are so wary of po-        sums are a sign that investors think the
 to users quickly, even if they do not always     tential competitors. The network has been       best social networks will become big
 work as intended.                                watching Twitter closely and even tried to      money-spinners. 7




  Twitter’s transmitters                                                                          The magic of 140 characters

  B   IZ STONE, one of Twitter’s co-foun-
       ders, uses the term social alchemy to
  describe the way in which short, seeming-
                                                                                                  cial networks the most active users typi-
                                                                                                  cally produce just 30% of all content. An-
                                                                                                  other survey published in June by
  ly inconsequential 140-character mes-                                                           Sysomos, a research rm that had ana-
  sages are often transformed into some-                                                          lysed 11.5m Twitter accounts, found that
  thing of real value. Imagine, he says, that                                                     one in ve people that were signed up to
  you are having a drink at an airport bar                                                        the service had never posted anything.
  waiting to catch your ight. You send out a                                                          Another big di erence between Twit-
  tweet explaining where you are and what                                                         ter and Facebook is in the kind of content
  you are drinking. Perhaps you get no re-                                                        that gets sent over their networks. Face-
  sponse. But it is also possible that a friend                                                   book allows people to exchange videos,
  who is following you on Twitter hap-                                                            photos and other material, whereas Twit-
  pens to be in the airport at the same time,                                                     ter is part-blog, part e-mail. There’s a real
  sees your tweet and comes over to say hel-                                                      di erence here between the power of
  lo. Thus what would otherwise have been                                                         multimedia and the power of text, says
  a solitary moment is magically trans-                                                           Dom Sagolla, the author of a book about
  formed into a pleasant encounter.                                                               the art of twittering.
      Such serendipity helped Twitter attract                                                         Even so, there are some tensions be-
  58m web visitors in October last year, ac-                                                      tween the two services. Last year, after its
  cording to comScore. Recently its growth        public tweets they like. The service, which     takeover talks with Twitter stalled, Face-
  appears to have faltered in America, but        boasts Ashton Kutcher (4.3m followers)          book introduced several Twitter-like
  the service is still expanding in countries     and Oprah Winfrey (3m) among its most           changes to make it more attractive for real-
  such as Japan and Germany. This has led         popular users, is in essence a broadcasting     time postings. It also gave more visibility
  to speculation that it could eventually         system that lets users transmit short           to its pages for athletes, celebrities and
  make a dent in Facebook’s fortunes, even        bursts of information to lots of strangers      musicians and lifted the limits on the
  though size-wise it is not in the same          as well as to their pals. Facebook, for its     maximum number of fans that they could
  league. Those who see a looming clash           part, is more of an intimate, continuing        have on the site.
  note that both companies are in the busi-       conversation between friends.                       Still, Mr Stone says he sees Twitter as
  ness of helping people to share informa-            This di erence is revealed in research      more akin to an out t like Google than to
  tion, and both have a real-time element to      conducted by Mikolaj Jan Piskorski, a pro-      Facebook. He describes the business as
  their services.                                 fessor at Harvard Business School, and           an information company whose users
      That is true, but the services di er in     one of his MBA students, Bill Heil. They        are keen to nd out answers to what is
  two important respects. The rst is the na-      surveyed just over 300,000 Twitter users        happening in the world. The billions of
  ture of the relationships that underlie         in May 2009 and found that more than            tweets that Twitter is gathering up could
  them. On Facebook, users can communi-           half of them tweeted less than once every       certainly be the basis for a vast, searchable
  cate directly only if one of them has           74 days. They also discovered that the          archive. The challenge facing Mr Stone
  agreed to be a friend of the other. On          most proli c 10% of twitterers accounted        and his colleagues is to nd smart ways of
  Twitter, people can sign up to follow any       for 90% of all tweets. On other online so-      transforming those raw data into pro ts.
6 A special report on social networking                                                                   The Economist January 30th 2010




   Pro ting from friendship
   Social networks have a better chance of making money than their critics think

 E    NTREPRENEURS in Silicon Valley, only
      half-jokingly, call it the URL strategy.
  The three letters usually stand for Uniform
                                                  in America, its biggest advertising market,
                                                  rose only by a modest 4% to $1.2 billion,
                                                  says eMarketer, a market-research rm.
  Resource Locator the unique address of              That was still an achievement, because
  any le that is accessible via the internet.     the total online advertising market shrank
  But in the world of internet start-ups, URL     in 2009. The picture would have been even
  has another meaning: Ubiquity rst, Rev-         brighter without MySpace, whose rev-
  enue Later. This pretty much describes the      enues are thought to have fallen last year.
  strategy of most big online social net-         Another drop seems likely this year when
  works, which over the past few years have       a deal that MySpace struck with Google to
  concentrated on piling on users rather than     handle search advertising on its site comes
  worrying about pro ts. That has allowed         up for renewal. Assuming a new agree-
  them to build huge followings, but it has       ment can be reached, it will probably be
  also raised a big question-mark over their      less generous than the old one, which of-
  ability to make money from the audiences        fered MySpace $900m over three years if it
  they have put together.                         hit certain minimum tra c targets.
      At issue is whether the social-network-         The broader outlook for networking
  ing industry can come up with a wildly          sites is more encouraging. This year
  successful form of advertising that propels     eMarketer expects revenues to grow by
  it to stardom in the same way that Google       over 7% in spite of MySpace’s predicament.
  has been able to make billions of dollars       ComScore, another market-research rm,
  from the targeted ads that run alongside        has found that one in ve display ads            deed, Mr Lynton is famous for having once
  the search results it serves up. Without        viewed by American web users last June          declared that nothing good had ever come
  such a formula, runs the argument, social       ran on social-networking sites, with My-        from the internet, which was a jab at on-
  networks such as Facebook will never            Space still accounting for the biggest chunk    line piracy of lm studios’ content.
  amount to much.                                 of the total. Another study in Britain last         But something good did come from an
      Doubters claim that the networks face       August came up with a similar proportion,       online experiment that Sony conducted
  two big handicaps. The rst is that people       with telecoms companies and retailers           last summer. The studio ran a series of ads
  logged into social-networking sites are         providing a big chunk of the business.          on Facebook promoting three of its lms
  there to hang out with their friends, so they       Why are the networks becoming more          after they had just featured in a traditional
  will pay no attention to ads. The second is     popular when their click-through rates are      television campaign. District 9 was
  that because the sites let users generate       so low? One reason is that advertisers are      aimed at young men, Julie & Julia at mid-
  their own content, they will nd it hard to      being drawn to the leading sites by their       dle-aged women and The Ugly Truth at
  attract advertisers because brands will not     sheer scale. Facebook’s audience is bigger      younger women. Awareness of the lms
  want to take the risk of appearing along-       than any TV network that has ever existed       was measured after the TV ads had run
  side examples of profanity, obscenity or        on the face of the earth, says Randall          and then again after the web ads had run.
  nudity or all three at once.                    Rothenberg, the head of the Interactive Ad-     Each time the online ads signi cantly
                                                  vertising Bureau (IAB). Another thing that      boosted awareness. Mr Lynton says he is
  Elusive click-throughs                          has attracted companies is the networks’        now convinced that social networks are
  The sceptics have some evidence on their        ability to target ads with laser-like preci-    radically altering the marketing landscape.
  side. Click-through rates on display ads at     sion, thanks to the data they hold on their
  sites such as Facebook are a small fraction     users’ ages, gender, interests and so forth.    Rock, baby
  of those that Google commands for its           Although there are still lingering concerns     Another rm that has become convinced
  highly targeted search ads. And although        about brands appearing next to racy con-        of that is Toyota, which last year worked
  marketers love to promote their brands via      tent, rms seem more willing to run this         with MySpace to create a competition
  their own (free) pages on social sites, some    risk now that the networks’ advertising         called Rock the Space in which bands
  are wary of buying ads on them because          proposition has become more compelling.         were invited to send in demo tapes of their
  of those abysmal click-through rates. We            The other reason more money is head-        music. Some 18,000 entries were received
  spend the majority of our time engaging         ing the networks’ way is that some adver-       and MySpace’s users voted for the best
  with people on these networks, not adver-       tisers are seeing a great return on their in-   tape, with a record contract as the prize for
  tising on them, says Scott Monty, the head      vestment. Michael Lynton, the boss of           the winning band. Doug Frisbie, who over-
  of Ford’s social-media activities. Although     Sony Pictures Entertainment, a lm studio,       sees social-media marketing for Toyota’s
  user numbers were sharply up last year,         says he was deeply sceptical about using        American operations, says the promotion
  the social-networking industry’s revenues       social-networking sites for advertising. In-    exceeded the company’s hopes for brand 1
  The Economist January 30th 2010                                                                              A special report on social networking 7




2 promotion by a factor of several times.        change, reported revenues of just over $1                 big money can be made from selling make-
     Both rms’ experience suggests that          billion, with $720m coming from online                    believe items may seem bizarre. But the
 people using social networks are more           gaming and sales of items such as digital                 practice replicates the physical presents
 likely to engage with brands than sceptics      swords and other virtual goods. Many                      that people give to one another to cement
 think. Mr Lynton also reckons that the net-     Asian networks such as South Korea’s Cy-                  relationships in the real world. Although
 works produce a powerful viral marketing        world and Japan’s Mixi also mint money                    Asia remains by far the biggest market for
 e ect because friends use them to tell one      by selling users custom backgrounds and                   digital knick-knacks, Inside Network, a re-
 another about things they have discov-          other paraphernalia that allow them to                    search rm, has estimated that sales of vir-
 ered. Marketers have long known that            personalise their network pages.                          tual wares in America on many di erent
 such recommendations are hugely impor-              Inspired by this, rms elsewhere are                   kinds of websites reached $1 billion last
 tant in purchase decisions (see chart 5). So-   embracing elements of the Asian model.                    year and could grow to $1.6 billion in 2010.
 cial networks are harnessing technology         Hi5, which is based in America and has
 to accelerate this process by, for example,     60m members around the world, has                         Plain or de luxe?
 automatically alerting a person’s friends       launched a number of games on its plat-                   Another business model that has proved
 when he or she signs up to become the fan       form and created its own virtual currency,                lucrative involves charging users for pre-
 of a particular brand or product on a site.     called Hi5 coins, for use in them. Alex St                mium services. The networks that have
     The big question is whether all this will   John, the rm’s chief technology o cer,                    been best at this have been the business-
 translate into an advertising bonanza.          says that gaming and advertising can easi-                oriented kind. LinkedIn, for example, pro-
   There is a pretty strong argument to be       ly be combined by, for instance, persuad-                 vides a free basic service, but asks users to
 made that social networks are worth more        ing an advertiser to sponsor a currency                   pay a monthly subscription fee of up to
 than they are being given credit for, says      used by players.                                          $500 for extras, such as being able to send a
 Andrew Lipsman, an analyst at comScore.             Ning is targeting gifts rather than games.            larger number of introductory e-mails to
 But he cautions that the advertising indus-     In October it launched an initiative that al-             other people on the site. The rm, which is
 try may be slow to recognise the shift that     lows people who have set up networks on                   said to have revenues of over $100m a year,
 is taking place. In a bid to speed things up,   its system to sell customised digital items               also makes money by charging companies
 Facebook has struck an alliance with Niel-      to their members. These cost anything                     for online tools that help them track down
 sen to create a series of benchmarks for        from 50 cents to $10, and over 400,000 of                 talent. This freemium model plus a
 measuring the impact of social-network          them are now being exchanged every                        healthy dose of advertising from big
 advertising on brands. Sheryl Sandberg,         month, with Ning splitting the pro t equal-               brands aiming to reach its a uent audi-
 Facebook’s chief operating o cer, says this     ly with its customers. This will add to the               ence has helped the network to turn a pro-
 will allow companies to get feedback on         revenues that it makes from ad sales and                    t for several years running.
 the e ectiveness of their campaigns much        network-management fees. Even Face-                            Social networks have also bene ted
 faster than before.                             book, with its focus on advertising, has a                from search engines’ desire to get their
     Facebook has also been experimenting        virtual warehouse of birthday cakes,                      hands on more content. Twitter signed lu-
 with new kinds of ads designed to draw          champagne bottles and other goodies.                      crative deals with Google and Microsoft’s
 people in, including some with embedded             The beauty of this business for social                Bing search service in October that allow
 online polls or videos to which comments        networks is that the cost of producing and                both companies to include tweets from
 can be added. So far it has not come up         storing virtual inventory is minimal. More-               Twitter’s database in their search results.
 with a killer format, but that does not seem    over, because these are closed markets,                   Thanks to these transactions the network
 to be holding it back. The company does         networks can x prices at levels that gener-               is rumoured to have made a small pro t
 not reveal numbers, but its revenues last       ate fat margins. To some, the notion that                 last year, though it will not con rm this.
 year are thought to have been at least                                                                         This year it plans to start making more
 $500m and quite possibly more, which                                                                      money in two ways. The rst involves
                                                    In friends we trust                                5
 helped it to turn cash- ow positive in                                                                    charging rms for services such as tools for
 mid-2009. Against the backdrop of a world          Global consumer trust in advertising, Q1 2009          analysing discussions on Twitter and for
                                                    % of respondents
 economy in recession and a dire advertis-                                                                 authenticated accounts that let people
 ing market, that is quite an achievement. It            Trust completely             Trust somewhat       know tweets they are receiving come from
 also suggests that Facebook can do well us-                            0   20   40   60    80   100       a genuine business. It is also hoping to pro-
 ing a variety of di erent ad formats rather        Friends’                                                 t from advertising by serving up targeted
 than a single, winning one. There doesn’t          recommendations                                        ads in the way Google does. Biz Stone, one
 have to be one enormous, oh my God hit,            Brand websites                                         of the rm’s co-founders, reckons that
 says the IAB’s Mr Rothenberg.                      Consumer forums                                        Twitter’s fans will be receptive to these be-
                                                    Editorial content                                      cause they already use the service to seek
 Fun and gains                                      Brand                                                  out information from others. They regular-
 Nor does there have to be just one advertis-       sponsorships                                           ly share links to commercial sites and one
                                                    Television
 ing-driven business model. In Asia several                                                                survey last year found that as people twit-
  rms such as Japan’s GREE and China’s              Newspapers                                             tered, they mentioned speci c brands or
 Tencent, which owns QQ, a service that in-         Magazines                                              products in 20% of their updates. That ex-
 cludes a big online social network, are al-        Radio                                                  plains why Twitter and other social net-
 ready making healthy pro ts from sales of                                                                 works have caught the attention of mil-
                                                    Billboards
 games and virtual goods. In 2008 Tencent,                                                                 lions of small businesses, as well as
                                                    Source: Nielsen
 which is listed on the Hong Kong Stock Ex-                                                                thousands of big ones. 7
8 A special report on social networking                                                                  The Economist January 30th 2010




   A peach of an opportunity
   Small businesses are using networks to become bigger

    H      EY rst peaches of the season are
           here. Come and get your peach pie
  @10am. Simple tweets like that have
                                                  as Twitter and Facebook are putting cor-
                                                  porate tiddlers on a par with behemoths
                                                  such as Starbucks and Dell when it comes
                                                                                                 spondent suggested that he contact China
                                                                                                 BAK Battery, which produces a small,
                                                                                                 plug-in battery for the iPhone. Impressed
  helped Mission Pie, a small shop in San         to broadcasting messages to a mass mar-        with the product, Mr Van Ess told mem-
  Francisco, drum up interest in its mouth-       ket. They have also created what Steve         bers of his online network about it and
  watering array of sweet and savoury pies.       Hasker of Nielsen calls the world’s big-       was soon handling orders for them. After a
  As well as twittering about its wares, the      gest, fastest and most dynamic focus           while he formed his own company,
  store also alerts customers to poetry read-     groups , which can be a boon to entrepre-      3GJUICE, to produce a plug-in unit for the
  ings and other events it organises. Krystin     neurs without fat research budgets.            iPhone that incorporates the Chinese
  Rubin, a co-owner of Mission Pie, says the          Some small businesses are already us-        rm’s battery.
  business had just 150 or so followers for a     ing social networks to generate new ideas.         Mr Van Ess’s rm is tiny, but social net-
  while after one of its bakers started send-     After spending time on Twitter, employees      works such as Facebook and MySpace
  ing out tweets almost a year ago. Then that     at Cordarounds.com, a small American           have also served as launching pads for
  number suddenly shot up to over 1,000.          clothing company, noticed that many folk       much bigger out ts. Among the largest of
  Over the past few months business has           twittering in their area were using bicycles   these are companies such as Zynga, Play-
  been very brisk and Ms Rubin reckons            to get to work. So the rm produced a new         sh and Playdom, whose popular online
  Twitter deserves part of the credit. It has a   line of trousers, dubbed bike-to-work          games run on the big networks’ platforms.
  sort of street credibility that’s not there     pants , with built-in re ective materials      Some of these games, such as Zynga’s
  with traditional media, she says.               that make wearers more visible to tra c         FarmVille , have attracted millions of
      Other companies have discovered the         while cycling at night. And of course it       players and produced mountains of mon-
  same thing. Kogi BBQ, which has several         used tweets to get the word out about its      ey for their creators. Zynga says it has been
  trucks serving Korean food in Los Angeles,      new creations.                                 pro table almost since it opened in 2007,
  now has over 52,000 followers on Twitter             Follow me on Twitter signs are ap-        and last month the business attracted an
  and uses the service to tell customers          pearing on the doors and windows of            investment of $180m from a bunch of
  where they can nd its vans each day.            small businesses in other countries too. A     prominent nanciers convinced of its po-
  Sprinkles, a cupcake bakery with stores all     survey last year by O2, a mobile-phone op-     tential. Many of the social-games compa-
  over America and nearly 94,000 fans of its      erator, found that some 17% of Britain’s       nies are on a hiring binge, creating hun-
  Facebook page, posts a password to that         small businesses were using Twitter. Many      dreds of new jobs at a time when the
  page each day which can be redeemed for         of the rms that responded said they were       economy around them is in the doldrums.
  a free cake by a certain number of visitors     doing this to attract new customers. Some      Their experience provides an insight into
  to its shops. Such o ers can attract a lot of   reckoned they had been able to save up to      how social networks can help propel small
  attention. A survey of 1,000 heavy users of     £5,000 (over $8,000) a year by cutting out     businesses to much bigger things.
  social networks and other digital media         other forms of marketing in favour of the          Like most games, the ones produced by
  conducted in August 2009 by Razor sh, an        networking service.                            Zynga and its peers appeal to people’s nat-
  advertising agency, found that 44% of                                                          ural competitive instincts. Leader boards
  those following brands on Twitter said          Charging for batteries                         and a host of other features allow players
  they did so because of the exclusive deals      The connections made possible by social        to show o their status within a game to
  the rms o ered to users.                        networks are helping to create new busi-       their friends. But the games also encourage
      As Kogi BBQ and Sprinkles show, social      nesses as well as promote existing ones.       lots of co-operation among players, who
  networks are arguably having an even            When Henk van Ess, a Dutch technology          can build rapport by, say, sending virtual
  greater impact on small businesses than         consultant, posted a complaint about the       gifts to each other or handing virtual cur-
  on the big league. By giving entrepreneurs      short lifespan of his iPhone’s battery on      rency to new players when they join a
  free access to their audience, services such    LinkedIn a couple of years ago, one re-        game. The best virtual goods have real 1
  The Economist January 30th 2010                                                                      A special report on social networking 9




2 currency, says Mark Pincus, Zynga’s boss.            This astonishing growth has been              rm subsequently removed them. But
 He reckons that the games have become so          helped by the fact that social games are free   such hiccups have not dented interest in
 popular because they combine fun with             to play. The companies make their money         social gaming: last November Play sh was
 the various ways to strengthen relation-          by selling digital goods in the games, by       snapped up by Electronic Arts, a big video-
 ships that Facebook and other networks            carrying advertising and by getting players     game publisher that thinks the business is
 have brought online.                              to sign up for marketing promotions. Sur-       going to be huge. It may well be right. Thin-
                                                   prising though this may seem to some, vir-      kEquity, an investment bank, reckons that
 Better than the real thing                        tual goods such as swords, tractors and         revenues in America from social games
 Social games have also become extraordi-          even digital boyfriends are much in de-         could hit $2.2 billion by 2012, a big leap
 narily popular because they cleverly ex-          mand. After users of its Sorority Life          from last year’s $375m.
 ploit those relationships. Once someone           game complained in an online forum that             Admittedly this is an extreme example
 has signed up for, say, Ma a Wars , anoth-        the game lacked virtual men they could          of the bene ts social networks can bring to
 er Zynga invention, they are urged to invite      date, Playdom quickly introduced some           small businesses. Rewards for out ts such
 their friends to join too. And players’ grue-     last November. Over 10m of the boy-             as Mission Pie will be far more modest. But
 some successes in such games are regular-         friends were promptly snapped up, with a        if they were added up across an entire
 ly posted to their personal page on Face-         few players buying as many as 500 each.         economy, they could have a signi cant ef-
 book, which can be seen by all of their           Some paid for their digital darlings with       fect on growth. What a pity, then, that
 friends. Thanks to such wheezes, online           virtual credits won in the game, but others     many small rms are reluctant to take the
 games bene t from a powerful network ef-          stumped up over $5 a time for their beaux.      plunge into the social-networking world.
 fect. Café World , which gives users the              The rise of the social-gaming rms has       A survey of 500 small businesses in Amer-
 opportunity to run their own virtual res-         not been without controversy. Last year         ica conducted by Citibank last October
 taurant, launched on Facebook at the end          Zynga came under re from TechCrunch, a          found that most of them had not used on-
 of September and within a week had at-            Silicon Valley blog, for allowing mislead-      line networks at all because they thought
 tracted a mind-boggling 10m players.              ing marketing o ers to run on its site. The     they would be a waste of time. 7



  Yammering away at the o ce
  A distraction or a bonus?

 A   N ASTONISHING amount of time is be-
      ing wasted on investigating the
 amount of time being wasted on social
                                                   the fuss over social networking sounds all
                                                   too familiar. Whenever a new and disrup-
                                                   tive technology appears, there is initially a
                                                                                                   iPhones at the ready.
                                                                                                       Moreover, as people become increas-
                                                                                                   ingly used to sharing and collaborating
 networks. Studies regularly claim that the        backlash against it before it becomes           outside the workplace, they are coming to
 use of Twitter, Facebook and other such           broadly accepted. Even a seemingly inno-        expect rms to be more open and collabo-
 services poses a threat to corporate wealth.      cent application such as Microsoft’s Excel      rative places too. Many companies are or-
 One published last year by Morse, an IT           spreadsheet was greeted with much scepti-       ganised into strictly separate regional, pro-
 company, estimated that personal use of           cism because managers assumed workers           duct-line and functional silos , making it
 social networks during the working day            would use it to make lists of their fantasy     hard for people to share information be-
 was costing the British economy almost            football teams or their weekend shop-           yond their immediate colleagues. And the
 £1.4 billion ($2.3 billion) a year in lost pro-   ping which is exactly what they did and         rise of vast, globe-spanning corporate em-
 ductivity. Another, by Nucleus Research,          still do. But along the way, Excel has also     pires with hundreds of thousands of em-
 an American rm, concluded that if com-            become an invaluable business tool.             ployees has left many folk isolated in small
 panies banned employees from using Fa-                Social networks were not designed for       work groups run by managers who care
 cebook while at work, their productivity          businesses as Excel was. Instead they are       only about their particular efs. As a result,
 would improve by 1.5%.                            part of a growing trend known as the con-       e orts are duplicated and valuable infor-
     This assumes that people would actual-        sumerisation of IT. Thanks to companies         mation ends up being hoarded, not shared.
 ly work rather than nd some other way to          such as Apple, Google and Facebook, peo-
 pass the time they have to spare. In the          ple now have access to communications           I spy A-Space
 same vein, perhaps companies should               devices and web applications that are of-       In the corporate world such hoarding leads
 also ban water coolers and prohibit people        ten far superior to those o ered by their       to lost pro ts. In the world of intelligence it
 sending e-mails to their friends. The as-         employers. And thanks to cloud comput-          can lead to lost lives. The recent unsuccess-
 sumption that rms can block access to the         ing, which allows all sorts of computing        ful attempt by a terrorist to blow up an
 networks altogether is also rather heroic.        services to be delivered via the internet,      American aircraft in ight has highlighted
 Some employees now have web-enabled               they can use these devices and applica-         the need for better information-sharing
 smart phones, so trying to stop them from         tions pretty much wherever they like, in-       among security agencies. To improve mat-
 sur ng their favourite sites will be another      cluding in o ces and factories. This trend      ters, the intelligence community is devel-
 waste of time.                                    is accelerating as more digitally savvy         oping a system called A-Space, a sort of
     To veterans of the technology industry,       youngsters enter the workforce with their       Facebook for spies that holds pro les of 1
10 A special report on social networking                                                                     The Economist January 30th 2010




   Social contracts                                                                                 The smart way to hire workers

   W       HEN it comes to online networking,
           cyberspace often mimics the real
    world. There are networks such as Face-
                                                   tools that networks provide. LinkedIn, for
                                                   example, is developing a service that ag-
                                                   gregates data it holds to show career paths
                                                                                                    than traditional recruitment channels.
                                                                                                        Mr Piskorski of the Harvard Business
                                                                                                    School thinks professional networks have
    book and MySpace that are mainly for so-       for certain professions. So someone who          been so successful because they o er a
    cialising with friends, and there are others   wants to become, say, head of software           way for people to participate passively in
    such as LinkedIn, France’s Viadeo and          engineering at a large company in ten            the job market yet still claim plausibly that
    Germany’s Xing that concentrate on             years’ time can see what sort of jobs have       they are seeking out information to do
    work-related matters. The sites aimed at       led on to such roles for others.                 their current job better. Companies put up
    professionals, although much smaller                Online networks have attracted plenty       with this, he says, because the bene t
    than the ones for hanging out with             of attention from corporate recruiters too.      they get from better-informed workers
    friends, are already having a big e ect on     Olivier Fecherolle, the head of Viadeo’s         more than o sets the cost of losing them if
    labour markets.                                French operations, says that for an em-          they are poached.
        In many ways the world of commerce         ployer the networks have several advan-              All this makes labour markets more ef-
    is a perfect place for a social network to     tages over online job boards. One is that          cient. By cutting out middlemen such as
      ourish. Doing business, after all, boils     people visit them frequently, so pro les         headhunters, rms save money. And by
    down to managing a complex web of rela-        on the sites tend to be more up-to-date          looking at rich online pro les of candi-
    tionships with customers, suppliers and        than those on job boards. Another bene-          dates, they can cut the time it takes to get
    others. Professional networks make it eas-       t, he says, is that the networks’ rich pro-    the right people into jobs. Network users,
    ier for people to maintain such relation-        les help recruiters get a good feel for a      for their part, get what Reid Ho man, Lin-
    ships and to forge new ones. LinkedIn, for     candidate without having to delve into a         kedIn’s chairman, calls an active sonar
    instance, has over 500,000 groups some         detailed curriculum vitae.                       system that publicises their skills to a
    better than others on specialised sub-                                                          broad marketplace with minimal e ort
    jects that people can join to share ideas      Bargain hunting                                  and collects the responses that ping back.
    and make new contacts.                         But perhaps the biggest attraction is that           Social networks have made the labour
        Such connections may prove useful          the networks help rms to cut search              market more transparent in another way
    later on: research has shown that the more     costs. Don Cooper, a recruiter at Intel, reck-   too. A survey by CareerBuilder.com of
    distant members of people’s networks are       ons that the chipmaker saves millions of         about 2,700 executives in America last
    often the best source of new job leads.        dollars a year in fees by recruiting senior      year found that 45% of them looked at job
    Job-hunters can also use their networks to     managers through LinkedIn rather than            candidates’ social-network pages as part
    gather intelligence about prospective em-      using headhunters. US Cellular, a tele-          of their research, and more than a third of
    ployers and to solicit recommendations         coms company, says it saved over $1m last        those had unearthed information there
    that strengthen their candidacies, and         year by using a LinkedIn system that pro-        that put them o hiring someone. Time to
    they can bene t from some of the career        duced good candidates for its jobs faster        turn up those privacy settings?


 2 analysts from various agencies and allows       works such as Twitter to share informa-          their sta to circulate freely.
   them to contact one another and to share        tion. The argument for using a system that           This has generated interest in Enter-
   large amounts of text, graphics, images         allows the world to see what a rm’s em-          prise 2.0 networks tailor-made for the cor-
   and videos.                                     ployees are up to is that it helps make face-    porate world. These work in much the
       Before a pilot of the system was            less corporations seem more human in the         same way as a Twitter or a Facebook, but
   launched in 2008 it often took weeks,           eyes of their customers. Networks such as        keep information o the public web and
   sometimes months, for spooks to track           Twitter are also free and very easy to use,      behind a corporate rewall. They have sev-
   down relevant people to talk to at other        which means people adopt them quickly.           eral other advantages too. Many automati-
   agencies. The intelligence community                But most companies are deeply uncom-         cally pull information from companies’
   was a bunch of stove pipes, says Ahmad          fortable with the notion of baring all to        human-resources systems into people’s
   Ishaq, A-Space’s project manager. Now the       such a wide public. Among other things,          pro les. Services such as IBM’s Lotus Con-
   14,000 people with access to the secure         they fret that employees might let slip con-     nections and Salesforce.com’s Chatter can
   system can easily and quickly get in touch        dential data, that competitors will be         also be easily integrated with other IT tools
   with each other.                                alerted to forthcoming innovations and           that workers use, so they are more likely to
       Social networks are being used to break     that the public networks will be hard to in-     be adopted than public networks.
   down internal barriers in the corporate         tegrate with their internal IT systems.              These corporate Facebooks can also
   world too. A few companies, such as Zap-        Firms in highly regulated industries such        be tweaked to t rms’ speci c needs. Nic-
   pos, an online retailer owned by Amazon,        as pharmaceuticals and banking are espe-         olas Rolland, who is helping to bring in an
   encourage employees to use public net-          cially wary of allowing information from         online social network for the almost 1
  The Economist January 30th 2010                                                                                     A special report on social networking 11




2 90,000 employees of Danone, a global
 food group based in France, says that the
 company added invitation-only private
 discussion groups after getting requests
 from sta who wanted to share con den-
 tial information. Danone, whose workers
 are spread across more than 100 countries,
 is testing its network in several locations
 before making it more widely available.

 Goodbye to silos
 Although these are early days, companies
 say such network initiatives are already
 speeding up knowledge-sharing and inter-
 nal communications. Samuel Driessen,
 who is overseeing the introduction of
 Yammer at Océ, a large printer company
 based in the Netherlands, says the messag-
 ing system has helped the rm spot where
 work is in danger of being duplicated and
 share information about sales prospects.                         of Yammer and other social media at Alca-       that good ideas can emerge from any-
 Danone’s Mr Rolland reckons its system                           tel-Lucent, a Franco-American telecoms          where. This should be a reason for celebra-
 has already led to smart operating prac-                           rm. Yet there are grounds for thinking the    tion rather than a cause for suspicion. If
 tices being shared more e ciently.                               bene ts they create are worth having. A         you trust your employees, then you have
     Marc Benio , the chief executive of Sa-                      study last year by IDC, a research rm,          nothing to worry about when deploying a
 lesforce.com, predicts that demand for cor-                      found that knowledge workers spend be-          social network, says Eugene Lee, the chief
 porate social-networking services will                           tween six and ten hours a week hunting          executive of Socialtext, which provides so-
 take o as managers realise that they now                         for information. By using social networks       cial-media services to rms.
 know more about strangers on Twitter and                         to nd data faster, employees can free up a          The networks are also a great way to
 Facebook than they do about the people in                        chunk of that time for other things, says       capture knowledge and identify experts
 their own organisation. Some analysts                            Caroline Dangson, an analyst at the rm.         on di erent subjects within an organisa-
 agree with him (see chart 6). Mr Benio                               Yet even if they can make a good busi-      tion. Mr Driessen at Océ says that many
 even thinks social computing could be the                        ness case for a network, some managers          earlier knowledge-management systems
 next big business for the IT industry after                      hesitate to introduce one because they fear     were little more than boring collections of
 cloud computing. Perhaps so, but social                          that sta might use it to broadcast political-   documents. Social networks are a huge im-
 networks must clear several hurdles before                       ly incorrect comments. Andrew McAfee, a         provement over them because they com-
 they can enter the corporate mainstream.                         professor at MIT who has seen many cor-         bine content with commentary from peo-
     The rst of these is the lingering doubt                      porate networks in action, thinks that this     ple whose know-how might previously
 about networks’ ability to deliver genuine                       concern is overblown. I nd it hard to be-       not have been recognised. Suzanne Living-
 bene ts. The biggest challenge most com-                         lieve that employees were waiting for so-       ston, the head of IBM’s social-software op-
 panies are facing is that the value proposi-                     cial networks to come around to be able to      erations, says that rms can even create
 tions for social networks are all soft, ex-                      post something inappropriate, he sco s.         new, jointly owned social networks or
 plains Greg Lowe, who champions the use                          He points out that because all comments         splice existing ones together to share
                                                                  can be traced to their authors, people are      know-how with outsiders.
                                                                  very careful about what they post.                  Some executives see another big bene-
    Money talks                                               6
                                                                                                                    t of networking. A few of the systems on
    Web 2.0 revenues by technology, $m                            A owering of ideas                              o er have analytical tools built into them
          2009*               2013†                               A third hurdle is that bosses are worried       that let managers track information such
                  0     200   400     600    800                  about allowing informal groups of work-         as which people are regularly in contact
                                                                  ers to spring up that managers cannot con-      with one another and what subjects they
    Social
    networking                                      1,997         trol. Yet this is precisely why the systems     are discussing. This social business intelli-
    RSS
                                                                  are so valuable. Often new ideas and in-        gence can then be used to, for example,
                                                                  sights as well as warnings about potential      identify people for a project team based on
    Blogs                                                         threats come from informal contacts rath-       their expertise and their links to others
                                                                  er than from formal meetings. The trouble       whose support will be needed to make the
    Wikis
                                                                  is that existing IT systems are geared to-      project a success. But the data could also be
    Mashups                                                       wards reinforcing separate silos rather         used to make judgments about candidates
                                                                  than building bridges between them.             for a promotion or to spy on colleagues. All
    Podcasting                                                        Services such as Yammer and Chatter         this makes some people queasy. What
    Widgets                                                       create a more open workplace by letting         happens with personal data is a big issue
                                                  †Forecast
                                                                  people see what others are working on           not just within companies but for the big
    Source: Forrester                 *Estimate
                                                                  and encouraging sharing. The upshot is          public networks too. 7
12 A special report on social networking                                                                     The Economist January 30th 2010




    Privacy 2.0
    Give a little, take a little

  I  F THERE is one thing that could halt the
     ascent of social networks, it is the vexed
   question of privacy. This is controversial
                                                    settings for younger people on social-net-
                                                    working sites are often more restrictive
                                                    than those for adults to ensure they are
   because it goes right to the heart of the so-    protected from unwanted attention.
   cial-networking business model. In order             Social networks deserve applause for
   to attract users, sites need to o er ways for    developing these ne-grained controls,
   members to restrict the information about        and for their e orts to educate youngsters
   themselves that gets shared with a wider         in the appropriate use of social-network-
   public. Without e ective controls people         ing sites. But their desire for pro t can put
   would be reluctant to sign up. But if a site     them on a collision course with privacy ac-
   allows members to keep too much of their         tivists, regulators and their users.
   information private, there will be less traf-        One bone of contention is social net-
     c that can be turned into pro t through        works’ reluctance to draw attention to
   advertising and various other means, so          their privacy statements. A study pub-
   the network’s business will su er.               lished last year by two researchers at Cam-
        There is a tension here because these       bridge University, Joseph Bonneau and Sö-
   networking sites are based on the idea that      ren Preibusch, looked at 45 networks and
   people will share information about them-        found that many of them buried their pri-
   selves, says Amanda Lenhart of the Pew           vacy statements in obscure corners of their
   Institute for the Internet & American Life, a    sites. Speculating about the reason for this,
   non-pro t research group. If people stop         the researchers thought it might be con-             Earlier this month Mr Zuckerberg told
   swapping content then the sites will fade        cern about privacy salience : the worry          an audience in California that he believed
   away. There is some evidence that people         that alerting people to privacy as a poten-      social norms had shifted and that people
   are starting to become more sophisticated        tial issue will make them less inclined to       had become willing to share information
   about the way in which they manage their         share things, even if robust privacy con-        about themselves more widely. On this
   data, which could have longer-term impli-        trols are available.                             view, what Facebook did was simply a re-
   cations for the networks’ growth.                    That matters, because networks are do-        ection of a new social reality. But the
       Research published last year by Pew          ing their best to lock in users. Messrs Bon-      rm’s critics argue that Facebook is trying
   showed that some 60% of adults are re-           neau and Preibusch found that none of the        to drive change on privacy rather than re-
   stricting access to their online pro les. In     sites they looked at made it easy for people     act to it.
   an earlier study the institute had found         to export their pro le data, friendship              Some privacy groups have led a com-
   that, contrary to received opinion, many         links, photos and other material. The more       plaint against Facebook to America’s Fed-
   teenagers and young adults are also using        content that a user produces, the more like-     eral Trade Commission, arguing that the re-
   privacy controls to restrict access to online    ly he or she is to remain on a particular site   cent changes to its privacy policies and
   information about them. Nicole Ellison, a        because moving becomes too much trou-            settings violate federal law. The complaint
   professor at Michigan State University           ble. That explains why most sites like to        notes that before Facebook’s latest move
   who studies social networks, says that           play up the bene ts of content-sharing           the only data about individuals that were
   over the past few years she has noticed          and play down talk about privacy.                publicly available were their names and
   that her students have become steadily                                                            the regional or national network within
   more cautious about whom they share in-          We’d like to see more of you                     Facebook that they belonged to. Now far
   formation with.                                  Some of the tactics employed to encourage        more information is being put on show
       As it happens, the social networks have      greater sharing are more blatant. Last           automatically, though users can change
   partly brought this on themselves. In order      month Facebook caused a storm of protest         their default privacy settings to restrict ac-
   to o er a better service, many have created      from privacy groups and users when it un-        cess to some of it. Critics argue that Face-
   extensive sets of privacy controls that al-      veiled plans to simplify its privacy settings.   book has loosened privacy protections in
   low users to toggle between di erent lev-        Critics welcomed some of the changes, in-        order to increase tra c and to compete
   els of protection to shield their online data.   cluding one that allows users to specify         with upstarts such as Twitter.
   Hemanshu Nigam, MySpace’s chief securi-          who can see an individual piece of con-              There may well be more clashes with
   ty o cer, says the site now o ers 65 di er-      tent a level of detail not available before.     privacy regulators and privacy groups.
   ent features that people can use to deter-       But privacy activists are deeply unhappy         Facebook made a number of changes to its
   mine what, if anything, can be seen by           with the site’s decision to make more data       privacy policy last year after Canada’s pri-
   other users. Facebook also has a plethora        from individuals’ Facebook pro les avail-        vacy watchdog raised several concerns
   of controls that can be adjusted to create       able by default to anyone with access to         with the rm. In particular, the watchdog
   di erent levels of con dentiality. Default       the internet.                                    wanted Facebook to give members more 1
  The Economist January 30th 2010                                                                         A special report on social networking 13




2 control over the way their information is       out that companies engaged in so-called             tion about themselves. But Mr Zuckerberg
 used by apps, which the rm agreed to do.           behavioural advertising are tracking in-          and his colleagues clearly believe that peo-
 Privacy bodies in Europe are also looking        dividuals’ activities on the web without            ple are happy to do so.
 into social networks, hoping to establish        their knowledge, whereas Facebook seeks                Twitter’s Mr Stone also sees a longer-
 pan-European guidelines.                         its members’ explicit permission when               term trend towards greater openness, and
     Sharing information with apps devel-         they sign up to the service to let it use their     claims that his service’s users are quite
 opers is an especially sensitive issue. If se-   data for ad-targeting purposes. He also             happy to share more information about
 vere restrictions are placed on networks’        stresses that the company provides adver-           themselves. The network has recently
 ability to pass on data, both they and the       tisers with data only in aggregated form so         changed its own terms of service to give it
 developers could end up making less mon-         that individuals’ personal information is           greater leeway to add data about users’
 ey than envisaged. Advertising is another        not divulged to anyone.                             physical location to its tra c. Mr Stone
 touchy subject. Je rey Chester of the Cen-                                                           says this is critical because the next big
 tre for Digital Democracy, a privacy group,      How much is a free lunch?                           wave of social networking will revolve
 sees social networks as part of a broader        Most people who use Facebook and other              around mobile phones and the places that
 set of companies that are trying to track in-    social networks seem prepared to accept             people take them to. A new crop of net-
 dividuals’ behaviour online to gather data       the idea of targeted advertising as the price       working rms has already sprung up to
 that can be used by marketers for precisely      of getting free access to the service. It is less   capitalise on the opportunities o ered by
 targeted advertising.                            clear whether they are prepared to go               mobile phones. That opens up the pros-
     Elliot Schrage, Facebook’s head of pub-      along with Facebook’s attempts to per-              pect of even broader changes in the social-
 lic policy, sees things di erently. He points    suade them to share ever more informa-              networking landscape. 7



  Towards a socialised state
  The joy of unlimited communication

 W      HAT will the future of social net-
       working look like? Imagine this: your
 digital video recorder automatically copies
                                                  on your way. And this: as you are buying a
                                                  pair of running shoes that you think one of
                                                  your friends might be interested in, you
                                                                                                      teapot will soon be twittering about what
                                                                                                      you had for breakfast. Some of the ideas
                                                                                                      outlined above may sound far-fetched, but
 a television show that several of your           can send a picture to their network page            a service such as Facebook Connect, which
 friends were talking about on a social net-      with a couple of clicks on a keypad next to         already lets people export their social
 work before the show went on air. Or this:       the checkout counter.                               graph of online relationships to other web-
 you get into your car, switch on its naviga-        Networking types like to talk about the          enabled gizmos, suggests they are not com-
 tion system and ask it to guide you to a         idea that there is a pervasive social ele-          pletely outlandish. Everything from cars to
 friend’s house. As you pull out of the drive-    ment in all of the things people interact           cookers could ultimately have social con-
 way, the network to which you both be-           with. Listen to them long enough and you            nectivity embedded in it.
 long automatically alerts her that you are       come away with the impression that your                 But when it comes to helping social net-
                                                                                                      works achieve ubiquity, none of these
                                                                                                      things will be remotely as important as the
                                                                                                      mobile phone. Using a web-enabled
                                                                                                      phone to post status updates and send
                                                                                                      messages is still a niche activity in many
                                                                                                      countries, but it will rapidly become a
                                                                                                      mainstream one as mobile-broadband ser-
                                                                                                      vices overtake xed-line ones in a few
                                                                                                      years’ time. One estimate by eMarketer
                                                                                                      suggests that just over 600m people will
                                                                                                      use their phones to tap into social net-
                                                                                                      works by 2013, a more-than-fourfold in-
                                                                                                      crease on last year’s 140m.

                                                                                                      Dial-a-pal
                                                                                                      This shift has big implications. For a start,
                                                                                                      mobile phones in emerging markets or
                                                                                                      devices such as cheap netbooks linked to
                                                                                                      the internet via mobile networks will
                                                                                                      open up a brand new audience whose use
                                                                                                      of social sites has so far been hampered by
                                                                                                      a frustrating lack of fast, PC-based internet 1
14 A special report on social networking                                                                                The Economist January 30th 2010




 2 connections. Companies such as Sembuse                                                                      The ultimate goal, he wrote, was to come
                                                      On the move                                          7
   in Kenya, which bills itself as east Africa’s                                                               up with something that, rst and foremost,
     rst mobile social network, and South Af-         Mixi’s average monthly page views, m                     would make it easier for people to collabo-
   rica’s Mxit are already gearing up to con-             Mobile             PC                                rate with one another.
   nect millions more people to one another                                                                        This special report has argued that so-
                                                                                                      16
   through their mobile phones, providing a                                                                    cial networks have already done much to
   big llip to the amount of information-                                                             12
                                                                                                               achieve that goal. They have created
   sharing going on around the world.                                                                          trusted online venues where people can
       The rise of mobile-phone-based net-                                                            8        meet up using their real identities. They
   working will have an impact on rich-                                                                        have provided rms with new ways to
   world markets too. Thanks to fast and rela-                                                        4        reach their customers and those who in u-
   tively cheap mobile broadband services,                                                                     ence them. They have reduced friction in
   phones have already become the device of                                                           0        the labour market by allowing employers
   choice for accessing some sites in Asia. Shi-       Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3               and prospective employees to connect
   geya Kawagishi, an executive at Mixi, one            2006          07            08           09            more easily than ever before. And they
                                                      Sources: Company reports; Morgan Stanley
   of Japan’s largest social networks with 18m                                                                 have speeded up the ow of information
   members, says the vast majority of its traf-                                                                within companies.
     c now comes from phone-toting custom-         tential to change the world, though we                          All of these are impressive achieve-
   ers who check in to get updates four or ve      have a long way to go.                                      ments. But arguably the most important
   times a day (see chart 7). Facebook, which          Much the same sort of thing was said                    contribution that the sites have made is to
   has some 65m mobile users, says they are        about the internet when it rst emerged.                     o er a free and immensely powerful set of
   almost half as active again on the site as      But it was also met with a great deal of                    communication and collaboration tools to
   other folk.                                     scepticism by those who thought the web                     everyone on Earth who has access to a
                                                   could never be used to make money, and                      broadband internet connection. This de-
   On location                                     from bosses who assumed that workers                        mocratisation of technology is driving the
   This trend towards mobile usage is fuelling     would use it simply to watch pornography                    socialisation of the web and fundamental-
   speculation that the next big thing will be     and play online poker. The sceptics were                    ly changing the way that people interact
   geo-networking apps, which use virtual          astonished when it went on to produce                       with one another, as well as with business-
   data to broker real-world encounters.           corporate powerhouses such as Amazon                        es and governments.
   These apps encourage the serendipity that       and Google, and provided businesses with                        It has also made it easy for anyone to
   Twitter’s Mr Stone talks about by allowing      remarkable new tools for boosting produc-                   form a globe-spanning discussion group of
   people to use their mobiles to signal where     tivity and generating fresh ideas.                          their own with just a few clicks of a mouse.
   they are to friends who may be nearby.              The parallels with social networks are                  Not so long ago that would have been the
   Several start-ups such as Foursquare and        striking. That should come as no surprise,                  preserve of an elite group of companies
   Gowalla are building businesses around          because those networks too are creatures                    and institutions which had the necessary
   this idea and Twitter plans to do so too.       of the internet and the ultimate expression                   nancial and technical clout to perform
   Asking people to add their whereabouts to       of what its founding father, Sir Tim Ber-                   such feats. Now, thanks to the technology
   their tweets, the rm hopes, will enable it      ners-Lee, wanted it to be. In his book                      created by Facebook and its peers, millions
   to use these data to direct advertising and      Weaving the Web Sir Tim explained that                     of these conversations can take place si-
   other services at people as they move from      the internet was always meant to be more                    multaneously with the greatest of ease.
   place to place.                                 of a social creation than a technical one.                  The world is better o for it. 7
       To some, the idea of a technology that
   can arrange chance meetings with their
                                                    O er to readers                                            Future special reports
   friends will seem like a dream come true.        Reprints of this special report are available at a         Financial risk February 13th
   To others, the thought of being tracked          price of £3.50 plus postage and packing.                   Managing information February 27th
   from place to place is a nightmarish pros-       A minimum order of ve copies is required.                  Germany March 13th
   pect that has a Big Brother feel about it. To                                                               America’s economy April 3rd
                                                    Corporate o er                                             Management innovation in emerging
   people who run social networks, location-        Customisation options on corporate orders of 100
   based networking is a logical extension of                                                                  markets April 17th
                                                    or more are available. Please contact us to discuss        Television May 1st
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   openness.
       The networks’ founders seem to have          The Rights and Syndication Department
   an almost Utopian belief in the bene ts          26 Red Lion Square
   that their creations will deliver. Facebook’s    London WC1R 4HQ
                                                    Tel +44 (0)20 7576 8148
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   greater openness he believes his rm and          e-mail: rights@economist.com
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    is something important that has the po-

				
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