• Topic 9 - Exercise 1

    Posted on October 25th, 2009, 12:55 am by admin

    Is social networking a business model?

    What are the arguments for and against social networking being classified as a business model?

    There is certainly a lot of talk on the web about business models and whether social networking sites could be classified as having one. Firstly, tracking down a definition of a business model that I could understand - as a non-business person was challenging. I finally got some satisfaction with this definition. A business model is -
    “A description of the operations of a business including the components of the business, the functions of the business, and the revenues and expenses that the business generates. ”     http://www.investorwords.com/629/business_model.html

    It seems that a business model is generally about how a business will generate revenue to sustain itself and satisfy anyone who has financial interests in it - monetization. Some models and the problems they may face with regard to social networking follow in the table below.

    Business model ideas Problems they may face
    Advertisements - social networks sell advertising space to companies and place the ads in sidebars or banners of pages for consumers to see and click on.
    • If people are busy absorbed in the content of social networking sites they are less likely to click on ads - they are busy enjoying the experience
    • Advertisers have no way of knowing if their target group is being reached

     
    Affiliation - befriending a product - social networking users are given the opportunity to befriend big brands. Other users may not know which products they use but they will get a fair idea from their affiliations.This could work particularly with celebrity affiliations much like it does with advertising in other types of media.
    • Majority of purchases by people are day-to-day items - are people going to want to tell others about all of the brands they buy?
    • Lack of scalability - the social network doesn’t get a cut - affiliation is between the company and the social network user.

     
    Partnership - companies go into partnership with the popular social networks
    • Partnerships exclude the rest of the market as they are only aimed at one group.

     
    Micropayments - a theory that members of Social Networks will make small payments for items to make their experience better and express their individuality.
    • Can’t be done right from the beginning of a member’s experience with a social network. A social networking group can’t just give a bare bones network and expect people to pay to make it better.
    • Members have to be given a great experience, hooked and want to improve what they are doing even more.
    • Members must feel they are getting value for money - can’t be using a pay to play mentality
    • Competition can be high - as there will always continue to be free services somewhere.

     
    User Payments - social networks charging fees for member participation.There are lots of social networks that people pay for outside the Web - so they will most likely be willing to pay for some within the Web. 
    • The networks must be seen as exclusive and fulfilling a niche requirement.

     
    Alternative markets - real world markets for selling virtual goods.  This already occurs in some online gaming and SecondLife with the cost of real estate in SL being thousands of dollars and charges made per year for maintenance and running costs.  
    • This works similar to micropayment system - social network users must still be able to participate well and buy and sell if it suits them.

     
    Brokering of trust - selling expertise is an age old way of generating revenue.  Social networking may be a good avenue to bring parties together with the network taking a cut. 
    • Trust must be built up within the expert>customer and the network>expert relationship.

     
    Negotiation of Community - needs of people within communities change constantly - if social networking sites can work with those changes and provide for them - perhaps with spin off networks users need and be willing to pay for.
    • This would mean total flexibility within structure to encompass the changing needs of communities.

     
    Data mining - collecting information about social networking users and selling it to advertisers.This could also take the form of the social networks selling “polling rights” to market research companies.
    • Privacy can be an issue here - a bit like the telemarketing issues on telephone services.
      As soon as people feel that trust has been broken there will be problems with accessing personal details.

     

    Social networks are difficult to monetize because they are a new and distinct form of media. Even as part of the web, users of the sites look at and experience them differently.  Most users of social networking sites don’t use the sites for making transactions they are just there - browsing, playing games, socialising, communicating, sharing their pictures, music and videos.  They are too busy being social to focus on any activities that might be turned in to cash for the social network they are using. On the other hand, because they are new and evolving is it difficult to pin all social networks to a business model, or to business models that have been used in the past? Perhaps the key to social networks being sustained is their evolution with the needs of the communities using them and growing businesses through keeping a large volume of their members interested in what they are doing?

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