PREDICTION: Social Networks Will Make More Money Off Site vs On
by Raj Kapoor.

Social networks are here to stay…100s of millions of consumers now use them as an indispensible tool to stay current with friends and interests. There has been a lot of debate on how they can make money. Let’s keep in mind that they ARE making money today (facebook over $300M annual revenue and LinkedIn well over $100M) - more than most internet sites - but just not a lot on a per-user basis.

I believe this is because the traditional ad model doesn’t work well here - social networks are a communications platform at the core.

People log on daily to check messages, photos, and videos that were added by interesting people for them to view. They are not coming to view content as much as people would have hoped, nor are they using it as a main portal or launching point for all web activities (Google won that so far…)

Communications sites have never monetized well because the consumer is focused on communication and is not going to be diverted by ads.

I experienced this firsthand running Snapfish and trying ad sales for 6 years against online personal photo pages. We got advertising up to 10% of revenue but that was about it.

Why? Lack of performance and attention from users… they were too busy viewing photos vs clicking on ads. Many social networks suffer the same issues as shown by their dismal click thru rates.

THE DATA ECONOMY:

That said, I do believe there’s a big opportunity - it’s in the Data that is captured explicitly (entering info on yourself in your profile) and implicitly (the groups you join, the content of the messages you send each other). In some social nets like Facebook and LinkedIn, the data is very deep and for the most part true. The profile page itself is a treasure trove of information on age, gender, location, interests, work experience, favorite movies, tv, etc - all the attributes a great brand marketer wants to target when reaching an audience.

The advertiser may not have measurable success reaching the user in the social network, but if they had access to the data when the user is on other sites - more conducive to engagement with ads - the advertiser would be in nirvana.

The data economy is developing fast where data is decoupled from ad inventory and used to target audiences where ever they are (Mayfield companies Audience Science, Adchemy, and Rubicon Project are leading the charge here). I think the big social networks are aware of this but are treading carefully given the privacy concerns. I do believe when they find the right mix of user privacy and sharing of this data, they can provide it to advertisers, networks, and publishers and profit handsomely from it. They can make more money on a user by charging a tax for the data each time its used vs the pageviews from that user on their site.

Let’s do the math and make some assumptions to illustrate:

I used the following estimates on ad impressions/user/mo on top social networks:
- Facebook: 356
- Tagged: 387
- Myspace: 452
….Avg: 403

…And I assume $.50 as the assumption for eCPM (which I believe maybe high). Thus, on average a social network makes $.20 per user per month on ads on their site.

USING SOCIAL NETWORK DATA TO MAKE MONEY OUTSIDE THE SOCIAL NETWORK

Now, let’s look at how many ad impressions the typical internet user encounters in a month - I’ve found it to be about 1,650 per month. Let’s also assume the following:

- 50% of these impressions could be targeted using the vast amounts of profile and friend data from SNS
- $2 eCPM for such a data targeted ad
- the social network keeps 15% of this revenue for its data (which seems like the going rate talking to data players).

That’s about $.25 per user per month. So, if my assumptions hold true, then a social network can monetize their users $.25 offsite vs $.20 onsite….

Social networks will make money on their site - thru ads, virtual goods, etc - but the real big opportunity is freeing all the user data and enabling it to target them wherever they are on the web.

WHY YOU SHOULD CHARGE MONEY SOONER RATHER THAN LATER
by Matt Mickiewicz

Just because you’ve got a good idea doesn’t mean people will pay for it.
Just because a product or service is useful, doesn’t mean it will make a great business.

What ultimately determines the success or failure of most businesses is whether customers will pay for the product or service – or in very rare cases, whether the company manages to build critical mass and sell to a large acquirer.

With that in mind, you should start charging money as soon as possible. Charge money even if your product or service is super-early stage. There are enough early adopters out there that you’ll always find customers willing to pay you - if you’re delivering enough value.

HOW I TESTED “STICKINESS” BY CHARGING $10:

Let me give you a concrete example…
The idea for 99designs.com, which is now the largest crowdsourcing marketplace for graphic design, began its life in the SitePoint Forums, a community for Web Professionals.

In the early days, designers started playing “Photoshop Tennis” with each other, essentially holding an online competition to test their skills against other designers. Eventually, this evolved into contests where an entrepreneur offered a cash prize for whoever could create the best design for their particular needs.

As a first test of whether this could be a business, we tacked in a $10 listing fee to post a thread in the Forums. We didn’t have any software to facilitate the experience, just a separate forum called “Design Contests”.

Despite the fee, entrepreneurs found tremendous value in being able to connect with designers and see multiple design options for their particular project, before choosing a favorite. Listing volume continued to grow until the “Design Contests” sub-forum became the most popular area of our Community.

We quickly realized that our forum, which was based on vBulletin, was not an ideal solution to accommodate these design projects, and what we needed was a basic Web Application.

In the space of just a couple of months, with one designer & one developer, we hacked together v1.0 of the Design Contests Marketplace, gave it a separate tab of SitePoint, and doubled the listing fee to $20. Despite some initial protests, the idea of crowdsourcing graphic design was so powerful and so appealing, that volume continued to grow month by month throughout 2007.

…WITH REAL REVENUE, I COULD BUILD A REAL BUSINESS:

With a small, but healthy stream of revenue, we found it all the easier to invest additional time & development resources into creating 99designs which launched on February 2008 and is now a successful multi-million dollar marketplace.

These small, incremental steps – which allowed us to fail “cheaply” at any point – proved out our business model, customer demand, and allowed us to re-invest back into the business. We were able to maintain profit margins the entire time, and therefore took on only minimal financial risk.

We built a company based on data & results (people spending money with us, and a continually increasing stream of listings) rather than strongly held opinions and theories.

TEST ASSUMPTIONS EARLY. FAIL CHEAPLY - NO ONE WANTS TO FIND OUT CUSTOMERS AREN’T WILLING TO PAY ONCE MILLIONS WERE SPENT BUILDING IT…

Test your ideas & assumptions early and often, and find out whether or not customers will spend money with you as soon as humanly possible, because customers, not the coolness of your product or service, will ultimately determine your success.

“…Regular sex can make you a better worker bee. The dopamine rush from sex improves creativity making you a better problem solver. A boost of oxytocin and vasopressin generate feelings of trust, making you more likely to be a team player. And, a boost in testosterone can make you more confident and competitive.”

Sounds to me like if you want your business to succeed, then both you and your co-workers should be getting a regular dose of Love Potion #9.

Former Under the Radar presenter, and professional social network/ Silicon Valley icon, LinkedIn, announced today that they’ve named Jeff Weiner as new CEO, replacing founder Reid Hoffman. Reid will will remain executive chairman.

Weiner, a former executive-in-residence at executive in residence at Accel Partners and Greylock Partners, had served as LinkedIn’s interim president since January.

“Over the past six months, Jeff has done an exceptional job leading the company and I look forward to continuing the work that we have begun together,” said Hoffman.

LinkedIn has secured more than $100 million in funding since its inception, has over 42 million members, and posted a profit in 2008.

Source.

Since the economy dove into the dumps, the Silicon Valley fairytale of huge valuations for startups that acquired users by giving everything away for free (thinking advertising was the one-way street to the revenue promised land) is over.

It’s been over since Sand Hill Road had a “come to jesus” moment with its funded startups - and the message was heard loud and clear across the startup world: cut costs, generate revenue, and keep a safe amount of money in the bank at all times.

Now let’s counter that message with the mantra that a recession is the best time to start a startup.

So for those of you who’ve taken the plunge, and didn’t accept tens of millions of VC dollars before the collapse, how do you generate revenue while keeping costs low in order to build a resilient startup with long-term potential a profitable future?

Last night’s Dealmaker Media Strategy Series (hosted at Morgenthaler) brought together veteran entrepreneurs and VCs to discuss just that. (A big thanks to Manatt, Phelps & Phillips and Microsoft BizSpark for sponsoring this event, too!)

Manish Chandra, CEO, Kaboodle moderated the discussion asking some great questions, including:

“If you were to give the Twitter team advice for turning on short-term revenue, what would you say?”

The speakers included:
Karl Mehta, Founder & CEO, Playspan
Lance Tokuda, CEO, RockYou
Munjal Shah, CEO, Like.com
Rebecca Lynn, Principal, Morgenthaler Ventures

Some Highlights from the Conversation:

* Smart Revenue vs. the Quick Buck: Driving revenues in the short term without abandoning your focus:

“When the economy collapsed, we decided to focus on releases that could make us revenue within the next six months, if not - it was canned.” Karl Mehta.

“…If someone is willing to give you money right now, take it. Don’t fear diluting your stake in the business and refuse investment if someone is willing to give you a cheque. What’s worth more: a bankrupt startup founder or a founder with a startup that’s alive?” - Munjal Shah

“A sure fire way to revenue is by building something people are already paying for, but making it better, faster, cheaper and more compelling than anyone else has to date. You don’t all have to be YouTube’s.” Rebecca Lynn.

…Karl also pointed to an example from one of the attendees who took corporate investment in hopes it would fund their larger goals, but it came with so many development deliverables for the funder, it drove his entire company down the wrong path for nine months, losing precious product development time.

* New Ways to Monetize Your Product: Is virtual currency the savior? Are there other new revenue channels you’re not tapping?

…Karl, Lance and Munjal all agreed strongly that virtual goods are a proven way to revenue, pointing to the long-standing adoption of virtual goods in Asia over the past 7+ years.

…Freemium, subscription, lead generation, revenue shares, etc.

* Beyond the Ad: For ad-driven startups, what more can you do when advertising is down? Is it all or nothing at all?

…Lance argued strongly that unless you have a top 20 Comscore rating - the chances of generating enough ad revenue to keep your business afloat are bleak.

“No one should rely only on ad dollars. You need other revenue streams such as subscriptions, premium content, etc.

…….

Join us at the next Strategy Series (we host them in the Bay Area and LA!) Want to stay up to date - sign up here

Following on the success of the Wall Street Meltdown parodies, I wrote Mad Avenue Blues. Like Wall Street Meltdown and WSM Redux (both on YouTube), the new video takes a popular song and substitutes industry-specific lyrics. Only instead of finance, Mad Avenue Blues is about the media/advertising world and the impact to the traditional models brought about by the accelerating migration to digital.

While the dream of scoring an outrageously successful partnership with a market goliath is enticing, the odds are, it ain’t gonna happen. From unequal bargaining power to rights of first refusal, partnership land mines are one of the most misunderstood and underrated topics in the startup world.

The round table conversation was anchored by Christina Glorioso, VP, Marketing Partnerships, MTV Networks, Kara Nortman, SVP of Publishing, Citysearch, David O. Sacks, CEO, Geni and Yammer, Dmitry Shapiro, CEO, Veoh , and James Citron, CEO, Mogreet.

The debate around rights of first refusal, bargaining rights, partnership incentives, risks of being bogged by bureaucracy, etc was joined by all attendees, including LA PR all-star Nicole Jordan and GRP Partners’ Mark Suster.

Attendees included:
* Greg Johnson, Executive Creative Director & Head of Digital, William Morris Agency
* Richard Wolpert, Managing Director, The Mail Room Fund
* Whitney Howard, VP Corporate Development Global Digital Business, Sony Music Entertainment
* Damon D’Amore, President and Founder, Delta Echo Interactive
* Tom Dare, GM and COO, Tsavo Media
* Kelly Merryman, Content Acquisition, Netflix
* Hale Boggs, Partner, Manatt, Phelps & Phillips LLP
* Scott Kerfoot, West Region Strategy Director, Microsoft
* Abdul Khan, CEO, I Beat You

…And more. Be sure to join us again in July!

Thanks again to our Dealmaker LA sponsors: CoreObjects, Manatt, Microsoft BizSpark, Clearstone Venture Partners, GRP Partners, Mailroom Fund, Rustic Canyon Partners, Media Temple and TechZulu!

Among them are Neil Young, CEO of iPhone game developer phenom, ngmoco and Jane McGonigal, Director of game R&D, Institute for the Future and Bart Decrem, Chief executive officer, Tapulous (Tap Tap Revenge, anyone?.

Some of the people listed are responsible for literally shaping the future of business and entertainment through videogame theory and understanding the ‘culture of play,’ but some of the others’ creativity is shown by identifying something much smaller: something fun and addictive - like touching your screen to the pulsing beat of Lady Gaga.

Who’s missing from the list?
Check it out: The 10 Most Creative People in Video Games

99Designs connects clients to a community of nearly 40,000 designers. Essentially, it enables crowdsourced design. In just 16 months, over $5 million dollars (yes, real dollars) has been exchanged in their design-work marketplace. Mixergy has a great interview with Matt about how he and his team achieved this here.

Today, Matt gave us the head’s up that his next (ie: 3rd venture) is now in Beta: Flippa.

Keep in mind in this case Beta means Beta. Matt and team are testing out the functionality of this site, so the content you’ll see is all placeholder. As they says on the Flippa blog:

“We’ve been slaving away on Flippa.com for a long time, so now it’s your turn to break it – and remember, nothing is real, all the listings are fictional (for now!).”

What’s Flippa About?
Just as 99Designs is a marketplace for graphic design such as logos and graphic design, Flippa will be a marketplace for websites. I imagine anyone who wants a small website for a project, business, event, blog, etc would be a potential bidder/buyer.

Their experience in online marketplaces (buying and selling real goods with real money) shows when you register and start filling in a beta profile account. Immediately, I was promoted with tips to positively affect my “Trust Rating” in the community:

Individual “trust factors” affect your overall trust rating. The trust factors which make up your trust rating are listed below.

You should aim for a 100% trust rating in order to be as successful as possible in Flippa. Having a low trust rating reduces the confidence other users may have in pursuing a transaction with you. Having a high trust rating increases your likelihood of participating in the Flippa auction house successfully.

Beta Invite: Get cracking, here.

Essentially, Mark says you’re more likely to meet potential business partners and investors at networking events, so instead of feeling like the only pitching mound is a VC boardroom, be prepared to give a cocktail party pitch.

Similar to an elevator pitch, Mark outlined the following tips using a coffee company idea as an example… fitting since GRP was an early investor in Starbucks:

* Define the problem.
* Define the solution.
* Know the target market and be able to express the market opportunity.
* And….

* Energy and enthusiasm about your idea. If you don’t come off excited about the opportunity, how do you expect others to?

* Be human… Don’t hid behind buzz words and industry jargon. Being over technical can make a VC fear you’re over-compensating for something else (like a lack of solid business understanding).

* Say what you want… What’s your “ask?” Do you want introductions, investment dollars, advice? No one’s going to turn around and make offers to help you if they don’t know what you’re looking for (even in my experience, I can’t count the number of times I’ve had to say, “soooo… what do you want from me?”)

Watch the video: