Monetization is one of the biggest and most awkward issues every social network faces. Why does this happen to every social network, and why does it happen so poorly?
Most social networks start off as something that doesn’t make money. The creators come up with an idea that connects people and does something. This idea is usually something like “You’ll make a profile and then connect with your friends profiles and share messages.” People are amazed and start connecting to one another because it’s free and easy.
Then, the creators realize that the information and sharing take up data, electricity and money that they don’t have. So, they go meet people called angel investors. Angel investors are just rich folks who want to become richer and throw their money into things will provide them with more wealth. That’s only angelic if you’re a diehard capitalist that believes money is your god.
So, the angel investors are now invested, and they want to see their god money grow. They now push the social network to make money.
This is where things get awkward. The developers and creators, who are really good and coming up with fun ways to communicate, can’t figure out a way to make money. In their desperation, they turn to the time tested ways of the internet to make money: Advertising and subscriptions. Because everyone is already using the service for free and would quit in an instant with subscriptions, they turn to the other remaining option, advertisements.
So, now the social network, which was once heralded for its clean design and aesthetics, starts inserting ads wherever it can. People become blind to the ads because they don’t care about them, they care about connecting with their friends. As desperation increases, the social network makes the ads more prominent and starts featuring people’s own content in an effort to gain their attention.
People get annoyed and bored though, and someone makes a social network that is shinier, so all the users go there. The angel investors hope they’ve made enough money at this point, and they sell off their remaining shares to throw into the new and shinier social network. Thus, the cycle repeats as the angels fly to their new god.
And that’s how the internet is paid for. Not with good ideas that were intended to make money, but awkward money making tactics slapped onto good ideas.
Interesting. If you were a devloper of some social network how would you break the cycle?
@Jason allow a tier of service that provides customization, identity protection and the ability to opt out of advertisement or third party content..
Every feel like history has a tendency to repeat itself? Here’s an Infographic that blends what Jay is saying about monetization with the inaccuracies of valuation. Specifically how much are profiles worth in the scheme of social have a direct impact on how much said company can be valuated at.
http://bit.ly/lsUO5g
Great infographic Brent. Thanks for sharing!
That’s a nice infographic but there is a bigger problem…..revenue means next to nothing. Groupon might be valued at 32x it’s revenue but it’s blowing all that money so there is no real profit (not their voodoo financial numbers that ignore specific expenses) and has no sign of slowing that practice. Revenue is such a poor gauge of success when it can be easily gamed to look bigger then it should be with dollars the company would never see.
I’ll sell you a dollar bill for 1 billion dollars, but I’ll give you a coupon for $999,999,999.01 on the purchase and put it as a marketing expense. Now I’m a billion dollar revenue company.
That sounds good in theory but then we have things like Linkedin premium, which is not only annoying, but in essence mocks you for not having it by showing off its features and reminding you that you have to pay some obscene fee to get them.
I guess the point I’m trying to get at, is social networks seems to be doomed to fall into the same trap. Sell out, sell user information or fail.
Show me the money! 100K impressions a week gets you advertising! You can lock in 25K with LOL Cats! Now…if I would just write a blog post.
I need more LOLCats on here.
Well, duh. You make money by selling clever t-shirts and other logo-decorated merchandise.
So true. Merchandise is where it’s at.
“Angel investors are just rich folks who want to become richer and throw their money into things will provide them with more wealth.”
Another winner. Bravo, sir!
Just a heads up: It says “rich folks who want to becomes richer” shouldn’t it say “become”?
Apart from that, you rule the internets.
I rule the internets, where spelling and grammar don’t count.
You are right. Here, take all my money and possessions. 1 worn out dollar bill and half a stick of chewing gum, that is.
Yep Jay, you rule the internet! I love your blog and creative T-shirts!
And this blog loves you. It loves you more if you buy more t-shirts.
Hm, I totally agree with the sentiment here, I really do
But really, you should be talking about venture capitalists…most of the angel investors I am following & have spoken to are “younger” entrepreneur types who have found success and are helping fund others do the same. On the other hand, venture capitalists tend to work for firms with big funds (the kind of big money that most social networks need to keep running). In fact, VCs are typically not investing their own money but that of the firm, while angel investors are digging out of their own pockets (in much smaller amounts) to help a very early-stage entrepreneur get off the ground.
Anyway, would love to chat with you sometime about my idea, which in part, changes this. But I can & do rely on angel investors (also in part) to get my idea off the ground