There have been rumors circulating over the past month about Playfish, the second largest Facebook Platform developer, being acquired by Electronic Arts. This morning the news was confirmed via a press release stating that:

EA has acquired Playfish for approximately US$275 million in cash and approximately $US25 million in equity retention arrangements. In addition, the sellers are entitled to additional variable cash consideration, up to a maximum of US$100 million, contingent upon the achievement of certain performance milestones through December 31, 2011.

The company, which was funded by Accel Partners, has been a dominant force in the social gaming space, second only to Zynga, which has been the subject of substantial criticism recently. This is a relatively quick exit for the company which is only two and a half years old. The company currently has approximately 60 million monthly active users and growing steadily.

This acquisition is clearly a testament to how hot the social gaming space has become. With approximately three times the number of users, Zynga would be worth approximately $1.2 billion if we were to consider all other things equal aside from the company’s number of users.

What Bebo has done with its game platform is integrate it with several of its existing features, such as chat, messages and other forms of notifications. This means that users can do things like challenge other users to a game directly from their chat window. It also means that developers have more immediate access to users for the purpose of encouraging them to return to their games.

Ultimately it means more monetization opportunities for Bebo and developers. With Bebo enabling game integration on a more ubiquitous level, developers can better gauge their own expectations of their reach across Bebo’s platform. For users, the games are more seamless and tied in directly with their Bebo experience. Whether or not users will appreciate this level of interactivity is to be determined on an individual level. But a significant portion of social network users enjoy wasting time with casual gaming.

The social factor is meant to further increase user engagement on Bebo’s site, essentially turning it into a social gaming platform. With this type of implementation, Bebo is separating its capacity to appeal to a wider pool of application developers and appealing heavily to game publishers. So far this has been the more lucrative route to go, especially for those social networks seeking additional and more direct monetization opportunities with end users.

hi5 has taken a similar approach to its social network, building out its platform on an administrative level for games to plug into. The presence of its virtual currency provides a leveling factor for marketplace exchanges within its social gaming environment, giving hi5 more control over the platform in its entirety. Friendster too is looking for a more direct form of integrated game play as well, combining several aspects of casual gaming and social networking.

Considering the moves by Bebo, hi5 and others, the growing desire to improve on many aspects of Facebook’s own application platform involve the top-down approach. Facebook has been surrounded with expectations of a similar platform roll out, but the regulations regarding such an approach would conflict with some existing terms for app developers, among other things.

With Facebook’s own recent changes to its terms policy for its platform and rapid game platform integration from several of Facebook’s competitors, the question of how Facebook can improve its own platform for monetization and the establishment of social platform standards remains partially unanswered.

A new report published by eMarketer today suggests that one of the best ways brands can capture the attention of internet users is by “providing relevant news and analysis” as well as providing “new ideas and thinking”. In other words, brands need to educate the user. By providing educational content, the theory is that internet users will reciprocate by providing support to the brands that educate them.

The one flaw with this survey? When was the last time that a human could rationally explain why they purchased something? Robert Cialdini’s “Influence: The Psychology of Persuasion” discusses some of the methods that can be used to influence consumers. Never does Cialdini go and poll consumers as a method for proving how something can influence a user’s purchase decision.

This doesn’t mean that this data is horrible though. Educating users simply works. The most popular articles that we’ve written over the years are those that are educational. Since the cost of content production has dropped dramatically over the years, it almost makes sense for large brands to develop ongoing media channels that they use to educate users.

While there are clear issues surrounding biased data coming from brands, investing in educational content makes a ton of sense. Those companies who spend tens or hundreds of millions on advertising each year would be much better to create their own media entities since the costs of running media enterprises are so cheap.

I’ll end my rant about investing in media companies though as there are numerous other activities that are relevant to internet users, as surfaced through this eMarketer survey. Discounts, for example, trumped every other activity as consumers are looking to save money. Also of interest in the eMarketer survey was the finding that family members and close friends are the best sources for information on purchase decisions.

While numerous social media companies have been working on turning that information into cash, the most effective systems to date are those platforms which enable communication among our closest relationships. You can check out the eMarketer findings for more information.

In an interview with Xconomy, Mussie Shore, one of the developers behind Google Friend Connect, says that “8 million communities have formed with Friend Connect”. What do those communities consist of? The same widget which shows up in the sidebar of this site. The number is massive considering that Facebook Connect is now on “tens of thousands” of websites. I’ve written about the service extensively since it first launched and as of now, it’s being hailed as a great success.

Friend Connect Powers The Long Tail

It’s an amazing number: 8 million communities. However what does that mean and how does that compare to the thousands of communities powered by Facebook Connect? For the most part, it simply means that Friend Connect communities are much smaller than their Facebook counterparts. That also means that there’s a greater likelihood that the communities could simply shift to other platforms, such as Facebook.

Why would a community with 50 members have any real concern about shifting to a new platform that provides more functionality or simply looks better? My guess is that they wouldn’t which is why Facebook still has a long way to go on the social front. The greatest issue that the company has is developing an accurate image of the global social graph, something that Facebook has been extremely effective at accomplishing.

Can Google Take On Facebook?

The bigger issue at hand is Google’s attempt to develop social services that compete with Facebook. As Eric Schmidt recently noted at the Gartner Symposium/ITxpo Orlando, learning how to rank socially relevant data “is the great challenge of the age.” In order to make that information more relevant, Google will be forced to organize all the social information they have access to.

The only problem is that Google’s social data is split among multiple products, the primary two being: Google Profiles and Orkut (which I haven’t used since I was 20). None of the services have anything close to an accurate image of my social graph. The easiest way for Google to get access to that data would be to implement Facebook Connect, however that would be somewhat of an admission of defeat.

For now the company has a great start with over 8 million Friend Connect communities and a solid profiles product. Google has a long way to go if they’re going to get access to all of our social information though.

If you have a lot of traffic, you instantly get a large valuation in the internet industry but what if your service stops working as it’s supposed to? Digg had a novel solution to the social discovery issue: let users vote on the articles they like most. It’s an effective model however it is most effective at doing one thing: determining what content its community likes most. Want to know what the general web likes or what various segments of the internet likes? You won’t be able to find that out with Digg.

Community Moderation Is Crowd Sourced Editorial

What’s the difference between a digital media company which creates editorial content and a platform which lets the users determine what content to serve up? Well nothing actually if you consider Alley Insider’s latest valuations of Gawker Media and Digg accurate. They currently value both companies at $190 million. Digg has a much easier business model though as they let the community generate all the content.

The result is that numerous startups have been created around community moderated content, all attempting to go after various verticals. The aggregator model is excellent if you are a fan of the people aggregating the content. Unfortunately though Digg doesn’t really solve the greater relevance problem facing the social web, although they were previously hyped as though they would solve that problem.

We Still Want Smart Aggregation

It still takes way too much work to sift through all the user generated content on the web. While the social streams are becoming public, developers are still struggling to generate effective algorithms which cut out the noise. Often times we turn to editors to find the most effective content on the web. That’s what keeps blogs alive, right? Other times we turn to the community.

Perhaps these two models will serve as the most effective social discovery systems for the next few years. As Erick Schonfeld of Techcrunch regularly complains: there’s still nothing out there to cut down on the noise. All I see popping up is more service to help me visualize the noise and to those services providers I say: thanks but no thanks. Why do I need a more creative way for illustrating the fact that I can’t consume the most relevant information streaming around the web?

What’s The Solution?

I wish I could present the solution to the problem but alas I can’t, I’m a mere blogger. However there are now countless ways to find the most “interesting” content on the web but none of them work perfectly for me. Do you know of a solution to the problem? How long do you think it will be before we come up with a way to filter through all the social media content being generated on the web?

The Future of Social Media Monetization

While performance and brand marketing have been long-standing online business models, virtual currency has recently captured the most interest of both developers and users alike. But of the three revenue streams, virtual currency may be the hardest to successfully manage.

Virtual Currency

Virtual currency is the most public example of successful social media monetization, with social game developers selling virtual items directly to consumers. Companies like Zynga, Playdom, Playfish, The Broth, Serious Gaming and hundreds of others are completely re-writing the playbook for online gaming success. Freemium is the standard business model, whereby users play freely and only pay to upgrade their experience through virtual items focused on improving game performance or self-expression. Now many of the most recognized names in console and mobile gaming are entering the space as well.

Revenues across social games today are estimated well north of $500M to $800M*** (excluding Asia), making it the largest segment of social media monetization. Success here is “hit” driven and requires managing the balance between user engagement, monetization and viral/social growth. As a result, while there are many attempts at making a “hit” social game, without a lot of investment in engineering and design, getting to meaningful revenue is difficult. In order to generate $100K to $1M a month, a game needs to reach 100K-2M daily active users, which requires a true understanding of game mechanics, social/viral tuning and marketing arbitrage. This has resulted in a high concentration of virtual currency revenue among the top social game developers due to the financial and headcount investment required to succeed.

Complexity aside, the tools available to analyze and monetize the virtual currency space are well developed. There are three main drivers for virtual currency monetization: offers and surveys, mobile payments and direct payments via credit card or paypal. The players in this space include Offerpal, SuperRewards, Zong, Boku, Peanut Labs and many others. By facilitating non-credit card payments via offers and mobile, a much younger generation of users are now able to actively play social games and still upgrade their experience through non-traditional payments. This has been one of the major drivers of the success of the industry.

Another driver of success has been the continued growth of online casual gaming, which has now exploded across social media sites. It’s no surprise that many of the top social games have been in specific genres (farming, restaurants, community chat) that focus on nurturing and growing a product or business through social interaction with friends versus the typical console game which focuses on battling/competing with other gamers.

The entire social gaming industry is just a few years old and has already become a huge component of social media monetization. But is this truly the most attractive business segment of social media? Where should developers and publishers in social media focus their efforts and time? I break down the numbers and make a judgment call below.

Today, without question, the most heavily invested and fastest growing segment of social media monetization is virtual currency. The massive success of Zynga, Playfish, Playdom and others have charted a path for developers of social games and gifting. This market is expected to grow from $1B in the U.S. in 2010 to $1.5B in 2011 to $2.4B by 2013. Meanwhile, the social media ad market in the U.S. is expected to reach $1.3B in 2010 but only grow to $1.4B in 2011. That’s a difference of 50% year-over-year (YoY) growth for virtual currency versus 8% YoY for expected social media advertising.

With this growth, it’s hard to argue that virtual currency isn’t the future of social media revenue and that developers and publishers should focus all their efforts here. That said, over the long haul I absolutely believe brand advertising will lead social media monetization, and companies not investing in working with brand advertisers today will miss the biggest opportunity within social media for the future.

To believe it, you have to assume two things. First, that social media will comprise the vast majority of total online engagement over the next 5-7 years, and become the initial point of entry for a major portion of online activity. Already, services like Facebook, MySpace and Twitter are material sources of traffic for publishers, with Facebook the top traffic driver for sites such as PerezHilton, CafeMom and EVite. Facebook Connect and Friend Connect have been adopted by more than 15,000 sites, and frankly there’s no reason why every site looking to drive meaningful free traffic through social awareness wouldn’t adopt these services as well. Doing so enables social media across the entire web.

Second, that the vast volume of brand advertising spent on non-online media (TV, radio, print) will finally come online. The recession has dramatically accelerated the drop in spend on non-online media in comparison to online. With more than $300B in U.S. advertising spend alone (http://bit.ly/1NR4im), at $28B in the U.S., online marketing is only 9% of the total. At just 15% of the market, online spending could quickly increase to $45B over the course of the next five years, much of that driven by the transition of brand advertising from off to online.

So long as social media use continues its unabated growth, it’s not difficult to assume social media advertising will comprise a material portion of that $45B, much of it driven by brand marketing based on the aforementioned offline transition. It would only take 10% of online spend to be social media focused ($4.5B) to almost double the expected size of virtual currency ($2.4B) by 2013. Compare that to the nearly 40% of online spending focused on search marketing today, with the increasing use of social media as a top traffic driver for sites, and that 10% estimate seems conservative.

Simply put, brand marketing has a high probability of being a much bigger opportunity than virtual currency in the space and deserves real focus from developers and publishers given it’s true potential within social media.

Sources

*** Estimate based on Zynga $150M + Playdom $50M-$70M + Playfish $30-$50M + Others Social Game providers $75M-$100M + Facebook Gifts $50M + Other Social Networks virtual currency (Hi5, MyYearbook, Bebo, MySpace) $50M and Piper Jaffrey estimate (http://bit.ly/IKdvm)

Let’s be honest, listening to people talk about tweeting for 8 hours gets kind of annoying. Given that I had never previously attended a Twitter conference I thought I would at least give one a shot. Thankfully the people over at Modern Media brought a Twitter conference to D.C. and it wasn’t as hype-filled as one would expect. At the end of the day though what we’re always listening for is valuable anecdotes and Twitter is the perfect platform for sharing those.

This afternoon Rohit Bhargava wrote, “Tweeting can be like putting $$ in a tip jar when no one is looking. You won’t always get credit for your own brilliance.” It’s a true statement and hundreds of these anecdotes streamed through Twitter throughout the day. Unlike a large portion of the attendees who were glued to their favorite Twitter desktop client throughout the day, I opted out of the background chatter for the most part.

I also happened to miss the keynotes from Laura Fitton and Craig Newmark and all the morning panels. However spending at least a few hours in a Twitter conference is plenty of sampling time. So what was my biggest takeaway? It wasn’t about Twitter. It was that rather than printing out entire conference program guides which can cost you thousands of dollars, you can use bookmarks and save a bundle! The other lesson is related to how Twitter data is being archived.

There are countless products that are each storing all of the tweets coming through the public Twitter stream. How that information is accessed depends on each product’s implementation. The most obvious system for storing and accessing a large data set is Hadoop, which is how most of the companies are now storing their data. However one company I spoke to built their own proprietary system which essentially organizes data based on the expected queries from users. A third company which had an iPhone application decided to cache information locally on the iPhone.

While non-developers may not understand the challenge of storing extremely large data sets, this new ocean of data presents some exciting new issues. While large companies like Facebook, Twitter, and Google are attempting to tackle these issues the applications built on top of them are also facing similar challenges. Anyways, enough about the technical issues of building scalable Twitter applications.

The real question to ask is: has Twitter finally jumped the shark? In the last panel of the day, Steve Rubel asked “Where is Twitter going to get its next million users?” Clay Johnson said it was the exact opposite and that “Twitter could be the next email”. Yes, the traffic charts of Twitter may suggest that Twitter could have already jumped the shark but a product that has brought together a large number of people together at events around the world, couldn’t already have jumped the shark, could it?

At the Web 2.0 Summit in San Francisco, MySpace CEO Owen Van Natta announced a number of new MySpace Music products. One of the most significant products is MySpace Music Videos which not only brings back music videos but also ironically heavily resembles the design styling of the MTV website. While the Financial Times may be convinced by Owen Van Natta’s statement that “Facebook is not our competition”, we aren’t.

MySpace is still focused on supporting and expanding the developer platform as well as performing a greater push for MySpace ID, both of which are direct competition to Facebook. Embracing the company’s primary strength, music, is not a bad idea though, especially if Van Natta is going to create the image that instantaneous change is taking place at the rapidly declining social network.

This evening MySpace announced a number of new products to further emphasize this renewed focus on music with the launch of an Artist Dashboard and Music Videos. The company is also integrating with iTunes to enable users to purchase songs directly after listening to them. There are significant upgrades and while we aren’t sure what’s next, we’d hope to see a further embrace of music.

By launching music blogs and generating a community around the company’s massive music library would create a lot of value. Additionally, acquiring a service like Blip.fm, or building one in house to let users share the music they’re listening to would make a lot of sense. MTV used music to launch a youth destination site revolving around culture.

If MySpace were to become the user-powered MTV, I think they’d have a shot at turning the business around. However if the company continues to focus on becoming an identity provider and the center of users’ online identity, we’ll have the luxury of watching the ship sink. Tonight’s announcements are a beacon in a sea of negative chatter. We’re hoping that the company stays the course and tosses all the excess for the sharks to pick at.

The Future of Social Media Monetization

Last year (even six months ago) most questioned whether social media could deliver meaningful business results. Whether it was the daily concern over Facebook’s revenue or the questioned utility of social applications, the general consensus was the entire social media industry was hard to monetize.

Today, the huge success of social games, the increasing number of brand marketers using social media and the myriad of business targets that social media leaders are pursuing (payments, e-commerce, search, etc.) are referenced daily. Add to that, Facebook recently announced turning the corner on cash flow. The truth is, there is A LOT of money being made in social media today, in fact, I estimate it’s over $2 billion in 2009 alone (although one recent report projected this at closer to $1 billion). The only question is which model will be most successful and where to focus efforts within the space.

To date there are three basic revenue models in social media (which I’m defining as sites and applications focused on social interaction, communication and engagement, including Facebook, MySpace, Bebo, hi5, Orkut, RockYou, Slide, Imeem, iLike, Flixster and countless others):

• Performance marketing
• Brand advertising
• Virtual currency

For the sake of simplicity around market-sizing, I’m focusing on U.S. based social media companies.

Let’s start by looking at each business segment more closely.

Performance Marketing

Performance marketing is made up of CPA and CPC-based marketing offers from a huge swath of direct response advertisers including ringtone providers, eCommerce sites, online education sites and wherever lead generation exists (games, auto, finance, etc). Marketing spend is focused on the largest aggregators of impressions, which includes ad networks, exchanges and large publishers themselves. Consensus estimates of this market is currently north of $500M-$600M* for 2009 on social media sites/applications alone.

The drivers of this industry are dead simple. If an impression generates a successful lead, the advertiser will pay a percentage of that transaction to drive volume of impressions. Many performance marketing campaigns in social media are actually paid out on a CPM basis, ranging between $.50 to $2, to capture top impressions and are increasingly global in nature (think places like Greece, Latin America and Southeast Asia), making these campaigns really attractive to U.S. based social media sites with large international traffic. Growth of performance revenue directly scales with number of impressions. As a result, thousands of developers are able to drive meaningful revenue with social sites and applications focused on delivering impressions alone.

Since much of the performance marketing spend goes through the social networks themselves (e.g. Facebook’s self-service system or the Fox Audience Network), through socially focused ad networks (RockYou, Cubics, AdParlor), or via network optimizers (Rubicon, Pubmatic) it’s as simple as adding an ad tag to a page to build meaningful revenue. Given the simplicity of the business model (increase impressions = more revenues), performance marketing serves as the foundation for social media monetization, and it’s the first opportunity most developers take on to generate sales.

Now let’s take a closer look at brand advertising in social media.

Brand Advertising

Brand advertising is driven by selling directly to media and creative agencies such as McCann Worldwide, Mindshare, OMD and MediaVest to name a few. The brand advertisers they represent for social media campaigns now include some of the best known across industries such as entertainment, consumer packaged goods, automotive, retail and food & beverage. At RockYou, I’ve been lucky enough to work with brands like Axe, Volkswagen, Ford, Gillette, Dawn, Sony Entertainment and dozens of others top brands in just this past year.

Well designed brand campaigns in social media take the traditional advertising goals of building and defining a brand or product and combine it with the viral engagement of social media platforms. By delivering wide awareness of a user’s interaction with brand campaigns across his/her entire network of friends (true “buzz”/ viral marketing), social media campaigns have raised the bar of brand-driven results beyond what print, television and content-site digital campaigns can do. Think of the difference between a fan on Facebook versus an email address. When a fan interacts with a brand message or campaign, his/her friends are notified of the fan’s activity with the brand. When a user responds to an email campaign, only the receiver of the response is made aware of the activity.

The tools available on social media for advertisers mirror what you’d find on any website, IAB standard banners, rich media, video, takeovers, etc. As a result, contrary to what most think, CPMs can actually be fairly high on social media pages, between $2-$10 CPM, depending on the targeting, rich media components and level of customization of the campaign. Click-through rates, which many assume are really poor within social media, average between 0.1% to 0.3% in our experience, which is equivalent to that of the average website. In addition, both Facebook’s Fan pages and Twitter accounts are fast becoming standard marketing vehicles for brands, products and artists alike. Click-throughs on Facebook fan pages are much higher than the normal email marketing campaign, with some estimates at higher than 6%. Given the sustainable value of a fan or follower (an advertiser can broadcast to both on a continued basis just like email), and the viral/social awareness a fan or follower generates when responding to a campaign, it’s no surprise that advertisers are actively investing in the space.

We estimate the spend here between $400-$500M** for 2009 across social media sites, which makes brand advertising a material part, but the smallest segment of industry-wide revenue. Success with brand campaigns requires a publisher to have enough reach to deliver measurable results and a material upfront investment on direct sales, sales support, PR, marketing and operations. Brand advertising revenue scales with the number of direct sales reps, while the revenue per rep increases with the experience of the reps, the innovation of the ad products and the recognition of the publisher’s own brand. This makes brand advertising an attractive revenue base, but harder to scale.

In cases where a single social media publisher can’t deliver enough volume to interest brands on their own, or don’t have the resources to build up a direct sales force, there are a number of ad reps in the space who aggregate publishers and manage the sales efforts for them. These include companies like Federated Media, Appsavvy and Alloy Media Marketing. Working with ad reps gives social media publishers a real opportunity to understand what it takes to work with agencies and brands and build a brand advertising business. With this experience and broader reach, brand advertising can become a meaningful source of revenue for developers.

In my next post, I’ll touch on the most referenced and successful business model for social media, virtual currency and some of the complexities in succeeding in the space.

Sources
*Estimate based on Facebook $200M + MySpace $250M (assuming 50% performance vs brand–see here) + Other Networks & Social applications $50-$100M

** Estimate based on Facebook $125M + MySpace $250M + Other Networks & Social Applications ($50-$75M)

I asked John Cahill why they’d launch on MySpace prior to going live on Facebook and his response was that after surveying the company’s audience, they found that it was much more in line with the demographics of MySpace. The company will also be launching a Facebook application in the first quarter of next year. Cahill also told us that Meez is actually the primary social network for many of their users.

Rather than going to MySpace or Facebook, many Meez users are connecting with their real-world friends through the site. While that may be the case, the company is now going after a broader audience which uses Facebook and MySpace as their primary social networks. The company has no option but to expand where users are going and despite fierce competition, Meez will enter a world where 3 million daily active users, not monthly users, is not uncommon among game developers.

Despite the upward battle for new users, Meez has optimized the company for profitability and long-term user retention.