Monetizing the Crowd
This is part two of a multi-part series on the next generation of internet communications. In this article, I will be exploring the problems with internet business models.
Unless you are a multi-national bank, there is something seriously wrong with having a business model that does not produce any income. Running a business or organization requires money and, although profit is not always the motive, some form of revenue is important for sustaining almost any endeavor.
The exception to this rule is, of course, the internet. Throughout its commercial history, profit has been an sufficient, but not necessary, condition to the perpetuation of cyberspace.
In the 1990s, the Internet (big “I”) was hot stuff; the ‘net was new, fresh and the wave of the future. Entrepreneurs were springing forth with great ideas like “it’s a business, and it’s on the internet”, and venture capitalists were offering copious amounts of cash to fund these brilliant ideas. Of course, almost all of these companies had the same shortcoming: revenue. After several years of failed expectations, the bubble burst on the internet boom and sanity began to make a comeback.
There were some suvivors from the burst — Amazon.com is still going strong; eBay limps along. What sets these survivors apart, though, is that they are retail outlets; what Amazon and eBay, along with many other internet-based online, is merely a replication of traditional retail outlets. What these companies offer is substantially lower overhead and the ability to provide rapid and meaningful data processing.
The origins of the internet trace all the way back to California, where many early users shared the same communal, free spirit. Software was shared freely, ideas were to flow. Commercial application of the network was not on the forefront, although businesses were beginning to recognize the power of the medium. Many of the tools we take for granted today — such as email, the world wide web — were not created to make money but to solve a problem or utilize the network.
While internet users created a culture based on the free exchange of ideas, the networks cost real money to operate. Major corporations such as Cisco, IBM, Sun, Microsoft, Novell and others all made substantial fortunes from the development of the hardware and software necessary for the networks to function. These companies realized early on that networking technology had an important place in the commercial sector and rushed to develop products to best serve this new market.
What does all this have to do with today’s social media tools? The social media tools, like the “.com” businesses of the 1990s, are at the convergence of the free spirit history of the internet and the entrepreneurial spirit of the individual. Where social media sites differ from the failed businesses of the 1990s is the expectations; social media sites are not expected to turn a quick profit. The pressure to turn a profit of any kind, however, is mounting.
For social media sites, the greatest value they offer offer is their massive user base. With thousands upon thousands of users, social media sites become more popular because they are already popular. Likewise, a significant decline in the popularity of the service will only feedback on itself, causing further declines. The volatility of these services makes them very sensitive to any sudden change, restricting what the companies can do.
Facebook has worked hard to try and monetize itself, but its attempts also highlight the significant challenges these applications face. There have been multiple instances of Facebook users revolting against the changes made by the company, such as changes in the Terms of Service, content layout changes, third-party connectivity tools, and so forth. After every unpopular change, users cancel (or at least threaten to cancel) their accounts. Most of the time, the company responds to its users and rolls back some or all of the changes and is able to retain much of its goodwill.
By contrast, Twitter has stated that it is not worried about making money at the present time. According to the company’s website, while Twitter is exploring a number of business models, it is currently focused on providing the best user experience possible and growing its user base. With significant venture capital money in the bank and relatively low overhead, Twitter can afford to take this tact for the immediate future.
Can these tools function without a business model? Perhaps. Wikipedia, for example, does not have a revenue-generation model, yet it continues to exist thanks to the support of donors. Conceivably, Twitter could continue using a similar donation model, but the costs of maintaing the service may prove to great for this model to succeed. Should any of these companies impose a subscription model, they risk driving away a number of their users, causing the user-exodus loop that will prove fatal.
The oft-cited solution to these, and any web-based enterprise, is to finance the companies with advertising revenue. The problem with this approach is two-fold. First, there is a finite supply of advertisers. Second, and much more significant, is the overall apathy the target audience has towards advertising. The twenty- and thirty-somethings that predominate social media sites are largely immune to advertising. In either case, advertising does not equate to free money; advertisers are buying access to a user base and an image. The companies that rely upon their sponsors risk becoming beholden to them, and this type of corporatism does not sit well with the majority of internet users.
In the first part of this series, I asked the question of whether or not social media companies will persist. While they will certainly be around for the short-term, their long term survival will depend, in part, on their ability to balance the desire of users to have access to the plethora of free services that the internet has to offer with the pragmatic need for operating capital. The 1990s demonstrated that hype and popularity are not enough. So far this century, the problem remains unsolved.
