15 Oct 2014

The Next Generation of Social Networks


As yet, there is no foolproof way to monetize social capital.

If there were, Ello would be well on its way to financial success. The upstart social networking site set the internet abuzz recently by introducing an ad-free platform, and the sheer amount of attention it has since received suggests that social media users are increasingly attracted to the idea of such a model. But funding it without advertising’s help won’t be easy.

Christian Camerota sat down with two digital marketing experts, Harvard Business School professors John Deighton and Sunil Gupta, for their insights into the next generation of social networks, and what kind of network they’d build with unlimited funding.

CC: How native is advertising to the social media space? Is the recent interest in Ello a response to an oversaturation of advertising on other social platforms?

JD: For me, the question is not “Would people like a less intrusive social network than Facebook?” Of course they would. Do they want it enough to pay for it? Probably not, as long as there is a giant global community (Facebook), with a billion monthly active members, including that high school exchange student who they lost touch with when they went back to Bolivia. And that one’s free.

SG: I think it is a response to oversaturation, with Facebook being the real culprit. While social networks claim to be enabling great social causes, users are starting to understand they’re being milked indirectly for money. There’s a sense of betrayal, a feeling that “you didn’t tell me what you were going to do with me and now you’re making billions of dollars off my data.” It’s hard to go into the mind of Ello’s founder [Paul Budnitz], but my guess is that they genuinely believe there is a backlash and they’re filling a need in the marketplace. The challenge for them is: how do they survive as a business after attracting a user base? Those are two very different things.

CC: How financially viable is a social network without advertising? How realistic is that proposition?

SG: If I’m a young person, I want scale. You’re not running these networks for them to make money, you’re running them for an exit strategy. Many VCs are thinking the same way. Historically in the internet era, the notion for startups has been to build a large customer base and monetize it through advertising. But it’s hard to name more than two companies that have done this successfully. If Google and Facebook are taking up a big chunk of ad revenue, there’s not much left, even for the Twitters of the world. Increasingly, we’re seeing a shift in the business model from advertising to a subscription model (think Hulu Plus, Pandora, Dropbox, etc.). Ello is operating on more of a freemium model, where you pay for upgraded features. But they face the same burden of proof for users before they’ll be willing to pay: are enough of my friends there to make a switch worthwhile?

JD: Advertising is not the only way to achieve a profitable exit, just the most reliable way to date. Large social networks are very expensive to run. Some say that servers don’t scale very well, and it costs nearly as much to serve the ten millionth member as the millionth. Little networks like LiveJournal exist, but they don’t grow into Facebook any more than beetles grow to the size of elephants – bigness requires a different metabolic principle. I believe that principle for social networks involves selling access to members based on their personal information. Subscription and freemium models get talked about, but even Wikipedia can’t make such models work.

“A social network that doesn’t somehow commoditize users, like an elephant-sized beetle, needs a metabolic principle not found on this planet to survive.”

CC: So what fate does Ello face? Any advice for them?

JD: Call me cynical, but Ello is funded by investors, not altruists. The first outside investor put in $435,000 and took a seat on the board. That is a very small stake, and perhaps their idea of a return is just the publicity. But the small stake will burn out by December if growth is anything like the claimed rate, and at that point a real investment will be needed and more seats on the board will be demanded. The board will need to monetize the membership in whatever fashion ensures a profitable return of capital for the venture fund’s investors. So my advice, if they believe Ello is still viable by then, is to buy Budnitz out. A social network that doesn’t somehow commoditize users, like an elephant-sized beetle, needs a metabolic principle not found on this planet to survive.

SG: If you want to become big, you can’t charge people up front because they’ll be reticent to join. You rely on funding from outside sources and then at some point you need to turn back to the users, like Wikipedia, and say “we need your help.” You might be somewhere between an NPR model, where the service you’re providing is good for the user and for society so people donate to keep it going, and a subscription model.

CC: If someone gave you an unlimited supply of VC money and told you to start a viable social network, what would it look like? What would it do differently?

SG: I wouldn’t build a social network for the masses because I think that space is difficult to capture given Facebook’s dominance and the presence of network effects. Before you go to a party, you generally want to know who is going to be there. But I do think there are specialized networks that would generate huge value. Rather than a gathering place, you create an exclusive club and the exclusivity lowers the number of people you need and allows you to charge them for it.

Let’s say you build an invitation-only social network for high net-worth individuals. American Express could probably do it for their platinum card members. If I’m a platinum card member, the kind of hotels and travel experiences I look for are very different than what’s available on TripAdvisor for a 26-year-old backpacker. I might be willing to pay quite a bit for a service that caters to my needs and puts me in touch with other similarly-minded people. The key is to identify what the value is to your customer and build your business to serve that need.

JD: I’d want to deliver something more addictive than self-expression. There are some things but, for good reason, they are all illegal.

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