This article discusses my views on business models for social networks. The content is a part of my forthcoming book mobile web 2.0. This article was also posted internally in the web 20 workgroup, of which I am member.Thanks to the members of the web20workgroup for their feedback.
I believe that Social networking should be like ‘Salt and Pepper’, a condiment: free or very cheap (the salt and pepper reference was made originally to WiFi as we see below). The real ‘value add’ is the value created by people using the network (i.e. nodes) or ancillary services that can be sold on the network; rather than the network itself. The network’s financial viability is then based on one or more secondary revenue models.
Social networking is a relatively new phenomenon. I am using this term here to also describe the sites included under ‘Social business networking’ (which also use the principles of Social networking). There is no shortage of theories about social networking , but oddly enough none of them talk of money/revenue models for social networking sites. On first glance, that sounds very unusual: until you realise that social networking sites are a microscopic version (i.e. model) of the Internet itself and are simply mirroring the Internet. This is a strong theme in this article i.e. Social networking sites should conform to the ethos of the web; else it is akin to fighting gravity and it won’t fly!
WiFi as a condiment (salt and pepper)
Back in September 2003, when we were all still in the nuclear winter of the dot bomb, there was a short, insightful article in Wired magazine called: Would you like WiFi with that by Paul Boutin.
It asked the question:
If wireless Internet access is such a hot technology, why is it such a dud business? Wi-Fi hardware, which uses radio signals instead of cables to connect computers to the Net, is already in more than 10 million laptops. But try to make a buck selling connectivity.
But then, it goes on to provide a solution
If you want to see the right way to serve wireless access, find a Schlotzsky’s Deli. The Austin, Texas-based sandwich chain figured out the secret of making money from Wi-Fi: Give it away. Schlotzsky’s lets anyone sign up and use its network free, even if they don’t come in for a sandwich. The chain advises its 600 franchise owners to beam Wi-Fi signals through the walls into nearby hotels, parks, and college dorms. Such complimentary access points are popping up everywhere, from Buck’s, a roadside restaurant in Woodside, California, to the Portland Harbor Hotel on the Maine coast. And why not? Giving away wireless broadband saves on billing costs, attracts customers, and creates an instant competitive advantage. Buck’s owner Jamis MacNiven, who serves buttermilk pancakes to some of Silicon Valley’s top venture capitalists, has the perfect rap on the topic: “Charging for online usage would be like charging for salt and pepper.”
Read that last sentence again : “Charging for online usage would be like charging for salt and pepper.”
(BTW: I never knew VCs ate buttermilk pancakes .. but there you go .. you learn something new each day! I had to google that term to find out more ; shall try it out when I am speaking in Santa Clara in Oct )
And the article ends with: Wi-Fi isn’t a luxury or even a commodity. It’s a condiment.
Social networking as a condiment and the Ethos of the web
Substitute WiFi by Social networking in the above discussion and you see why so many of the social networking sites have a business model problem. Many of these sites are contrary to the ethos of the Internet.
That’s not to say that they don’t have a business model, or even that they may not be making money. It’s just to say that they are retrofitting an offline business model into an online situation and that has limitations.
And what is the ethos of the Internet? Its something I have been advocating to Mobile network operators for years now .. You can summarise it by the phrase: ‘Dumb pipes and Smart nodes’
The network (Internet) itself is ‘dumb’. Its only job is to ‘connect people’. The value is provided by the nodes (the people / systems that are at the ends of the pipe). Jonathan Schwartz summarises these ideas in the Power of the end nodes (AKA: ‘the network is the computer’). I believe that the same phenomenon applies to social networks on the Internet. The moment you introduce tiered membership, complex pricing models and so on, you hamper connectivity. The effective size of the network decreases because all members can’t do all things.
The same applies to WiFi and the same principle is also applying to social networking. This is the social equivalent of the digital concept : ‘All packets are created equal’.
Observations and recommendations:
a) Subscription model or a tiered pricing model is a valid model : but it is more a remnant of offline business models than online business models. The point simply is this: you can’t build a ‘web business’ by restricting people. We can build ‘a business on the web’ but that business model is limited because it is retrofitted from the offline world into an online environment; where it does not have a natural home. The same logic extends to other web models like Social production . We can’t selectively apply one aspect of the web such as ‘social production’ and ignore others i.e. ‘it’s inclusiveness’. Such a hybrid model is not valued by the investment community(and rightly so: because it won’t scale)
b) Could we perhaps argue that we have a smaller number of members but each of our members is somehow more valuable than those in other networks? . Interesting, but again not a model that mirrors the ethos of the web. It’s like saying ‘packets in my network are more valuable than packets in your network’. The online equivalent of ‘Mine is bigger than yours’
c) As I have mentioned before, the advertising model works assuming you have a large, flat/ unrestricted network. Advertising is more than Google ads. Its more driven by richer media and broadband in addition to text based ads. That’s why VCs favour the MySpace model. Note that this model (for instance Myspace) conforms to the basic Internet ethos.
d) A network should be like Nokia – connecting people! If it does more(i.e. tries to act smart), then it starts to disconnect people!
e) Nodes may not be people, they could be clubs. i.e. a group of people creating a ‘network within a network’. The club could be built around a specific purpose. It is not the network, rather it is an endpoint in the network with a synergistic relationship (and potentially a revenue share relationship) with the core network.
f) One service to watch is Marc Canter’s Peopleaggregator, and by extension the whole idea of open social networks because they follow the principles of the Internet. In case of People Aggregator, each node (which is a separate network in itself) could act as a node within a much larger network.
As per the people aggregator site:
At the centre of all great Live Web software will be one’s digital identity. Each end-user will control who has access to their personal data, who can use it and how. Each end-user needs to be able to move their data to other systems – whether it be their personal profile record, list of friends, groups, their photos, MP3s, links, bookmarks or events.
Oddly enough, open social networks have a business model , exactly for the reasons I mention above i.e. conformity with the ethos of the web. For instance, for People Aggregator,
a) For people aggregator itself, it’s a ‘software sales’ model
b) For each participating network, it’s the possibility of attracting more members and by extension each participating node is likely to be specialised.
c) For the users, it is freedom from one specific closed network and the chance to meet more people globally.
If you have followed the arguments so far, it leads to the conclusion that the ‘Internet itself is ‘salt and pepper’’! And that’s exactly spot on!. The Internet connects people. Complexity and offline models disconnect people!
I am not necessarily advocating a free social business network, but definitely a flat, inclusive, open, ‘web like’ social business network whose primary job is to connect. Such a network follows the basic ethos of the web and is likely to be based on a secondary business model. This business model could be advertising but need not be. Whatever that model, it should not cripple the primary purpose of the network
Image source: www.bigfoto.com