The idea that online social networks will make money selling eyeballs (advertising) or products is missing the entire value proposition of a social network. The real opportunity is in harnessing the rich data that is created by those participating in conversations and interacting with each other. I recently finished some research on two amazing social networks in the healthcare space – Sermo and PatientsLikeMe – that seems to have figured this out.
The model itself is not complex; both communities commercialize their value of relationship data by aggregating and anonymizing it, and then finding third parties that benefit from, and are willing to pay for the rich data created by the community. In the case of these healthcare communities, the third parties are pharmaceuticals, insurance companies, and financial services firms. Both companies do this in a completely transparent way that is clear to users. Unlike the traditional advertising model, the conversations and interactions create the value, not the number of members. If you think about traditional Web metrics such as hits or unique visitors as a measure of success, neither Sermo nor PatientsLikeMe would rank very high.
Now to Facebook – often balked at for its $10-$15 billion estimated valuation, and derided for its failure with the Beacon advertising platform – the social network has yet to identify a solid business model. The company recently announced a small analytic feature that presents aggregated, anonymous user data that could in fact be extremely valuable to companies. The Facebook Lexicon launched with little fanfare, but effectively allows users to chart “buzz” or the viral popularity of various terms (warning: this very cool tool has the potential to impede work productivity).
From Facebook:
“Lexicon pulls from the wealth of data on Facebook without collecting any personal information in order to respect everyone’s privacy. The Wall is a really interesting place to look for buzz, because when one person writes a post on a friend’s or a group’s Wall, tens, hundreds, or even thousands of people might see it; those viewers may read, digest, and pass on that information, spreading it virally. So when my friend Kasey wrote on my friend Blaise’s Wall saying how she really liked the movie Juno, I saw her post and knew I had to see it for myself. It seems like a lot of users share her sentiments; excitement about the movie grew significantly when it was released in early December.”
To demonstrate, I’ve used Lexicon to plot Juno, against two other big films: I Am Legend, and No Country for Old Men. Clearly, the relative viral buzz around this movie was huge.
Source: Facebook Lexicon
I’ve commented before about the idea of a “promotional economy” or “influence economy” that is extremely lucrative for marketers. Often this economy is difficult to measure using traditional ad metrics, but services like Lexicon could solve this problem. I see a definite opportunity to mine and analyze other relationship data to produce company reports for marketers. To me this seems like a no-brainer. As Large Company X, I would love to pay Facebook to track the buzz on various key words, total positive comments made about my brand versus negative comments, number and type of groups affiliated with my brand or target audience, relationship graphs that track how people affiliated with my brand are related, and so on. As a user, I wouldn’t particularly care about the data mining as long as my personal information remains private, the site remains free to use, and I’m not affronted by useless advertising. For a company like Facebook, the possibilities seem enormous.
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Its a good article, and well written. Personally i think you summed up the entire article when you wrote “This is a no brainer.”
We all know that social networks are great for the ‘viral buzz’ they can potentially create about commercial products. And that is precisely the reason Facebook’s estimated value is $15 mil (probably more by now), and that also the reason why Microsoft bought a chunk of it for $240 mil. But that was in October.
So this whole article is a no-brainer. It was only a matter of time before someone came up with a program that could analyze the data on a different level than traditional means of advertising.
Comment by kev - April 29, 2008 11:06 pm
Great post, Naumi. Social networks should start considering their data as a valuable resource, versus purely looking for ways to make money off of their users directly. People have been ignoring ads for a long time now.
Comment by Amanie Ismail - April 30, 2008 9:41 am
I generally agree with you here Naumi but have to take exception to the completely negative tone around advertising. There is nothing wrong with advertising when it is well targetted and brings value. In my facebook profile I indicate that I’m an avid mountain biker. A couple of weeks ago I was presented a facebook ad for a Mountain Bike tour company called “Sacred Rides”. The timing was perfect, the ad was well targetted, and I liked the offer. I purchased a trip. The experience was not intrusive. Happy customer….happy advertiser. I agree with your comments about the value of the data but don’t discount other value components in the total package. My two cents.
Comment by Paul Barter - April 30, 2008 3:36 pm
Thanks for the comments. Incidentally, PatientsLikeMe expands on their business model in a response to my post on their blog:
http://blog.patientslikeme.com/2008/04/30/wikinomics-blog-praises-patientslikeme-business-model/
Paul I agree, advertising is not totally doomed, but I do think a lot users are resistent to having ads on their communications platforms. I don’t know, maybe its the expectation of privacy and the need for productivity that drives it, but for me advertising via phone, e-mail, or in this case social network just seems more intrusive. The example you give of a very targeted biking ad is great, and if all ads were that bang-on we wouldn’t care - as you say; happy customer, happy advertiser. Unfortunatley, I think there’s a ways to go in terms of optimizing delivery because it seems to me that for every useful tip and well-targeted online ad, there is still a great deal of spam.
Comment by Naumi Haque - May 8, 2008 12:06 pm