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The economics of social networking

By March 1, 2006No Comments3 min read

Social networking (you know myspace, facebook, etc.) has become one of the most popular sectors on the web lately. With traffic growing at such a fast rate, it seems like the early entrants were plagued with the lack of any previous examples to learn from. It was their missteps that created the current market for social networking. New entrants are popping up here and there, and quickly gaining on the old incumbents; does friendster even matter anymore?So why have a few of these emerging networks taken off, whereas others have fallen by the wayside? Well to simplify the argument, we can use one word: focus. Now I’m sure I can already hear the whining coming in of “how can you say focus is the indicator, look at myspace?” Well to that I respond that focus is in fact what catapulted myspace to popularity. Its initial focus (and they might argue current as well) was on music. By helping kids connect with the little known groups they liked, they helped these bands promote themselves nationwide, and seeing as we were all kids at one point, we know how kids delineate themselves along musical lines. Case in point the cliques of Goths, rockers, gangstas, etc.Look at facebook; they also aligned themselves with a focus: college kids. Their success lay in their keeping it exclusive to college kids at first (so they would feel both inclusive and exclusive at the same time). Xanga has taken off by targeting high school kids, same concept.Friendster targeted everyone, where are they today? Struggling to get a buyer and stay afloat. Where did they go wrong? The very beginning in my opinion, I mean c’mon they never had a clear focus, never had a good way of monetizing their immense eyeballs other than generically targeted ads. Then they suddenly became that guy in the room who used to be cool, but no one wants to be seen with anymore. Alas they are a lost cause. If I were a party interested in purchasing them, I would have to think long and hard about how I could build my OWN friendster in 6 months with 1/5th the money, and have as many subscribers in 12 months as they do after 4 years.Now as far as monetizing the concept, I’m going to pick on myspace for a bit, if only because they seem to me like the cool kid with lots of friends who hasn’t really amounted to much, but they’ve got a rich father who supports them. If I were running myspace, I would immediately launch a tier of premium services: let people license exclusive songs for playback on their ipod and their myspace page, sell cheap multimedia stuff that other companies are making money off of for people to put on their pages ($1/week for special flash games, stuff like that). They would bring in easily another $100 million right there in revenue if 5% of their users bought them. Where I would bring in the most revenue for myspace: data mining. There are literally billions of dollars to be made by becoming the central place for marketers to find out about GenX, y, and Z or whatever they are calling kids these days. Fastest way to tap them: targetted music recommendations. How do you gather the data for this fast? Look at what bands these people are friends with or linking to, and find similar bands whose labels are willing to pony up the dough.Instant hit factory.Myspace (and friendster, facebook, etc.) has to figure out how to maximize their transaction revenue. They have to figure out how to make the most $ from each kb of data they send out, because at the core that is their business, monetizing data, whether Rupert Murdoch likes to think of it that way or not.p.s. can anyone tell me why my tags are repeating themselves below? i’m using wp and ultimate tag warrior