Social networks are rapidly becoming one of the primary drivers of mobile data traffic. The question for social networks, mobile operators and content providers is whether they will be able to monetise their growing user bases and increasing traffic?
A significant challenge for social networking sites in general is that the business model remains largely unproved. Mobile advertising was initially hailed as a promising revenue stream for social networks, but continues to generate relatively little revenue income for the ecosystem as a whole. One problem has been that most advertisers have been reluctant to invest significant amounts in an untested medium, particularly in the current economic climate, in which the need to demonstrate return on investment is key and there is limited room for experimentation. Another issue is that click-through rates from mobile advertisements have generally been disappointing. As a result, the advertising revenue from social networking sites will be limited, and only the largest sites, or those attracting a group of users with a focused interest, are likely to survive on advertising alone in the medium-to-long term.
Advertising can, however, successfully supplement a business model based on micropayments. Typically, the micropayment model revolves around offering a core promise and an enjoyable experience for no charge, while making money around the edges, through the sale of premium goods and services, such as virtual accessories or gifts or access to premium content (such as user profiles).
You might ask yourself, “Why would anyone pay for clothing or accessories for a virtual alter ego (an avatar)?” It would seem that, in virtual life as in real life, people care about how they are perceived and, as successful social networking sites have demonstrated, are willing to pay to achieve the image they desire, particularly in a social networking or multiplayer gaming environment, where self-expression is a fundamental part of the user experience.
So how does the business model work in practice? Earlier this week, I spoke with Mark Curtis, CEO of Flirtomatic, a cross-platform, hybrid dating–social networking service, that offers profile search, live chat and user ratings. Flirtomatic has about 155 000 unique visitors to its mobile site each month in the UK, and the company generated GBP2 million in revenue in the UK in 2008.
Flirtomatic offers free registration and access, generating revenue through a combination of advertising (which accounts for about 25%) and the sale of premium content and services (which accounts for about 75%). Figure 1 describes Flirtomatic’s value chain.
Figure 1: Flirtomatic’s value chain [Source: Analysys Mason, 2009]
Flirtomatic’s revenue generation is complex. As Curtis explained, “Revenue generation on social networking sites is not a two-horse race between advertising and the sale of virtual goods, as some people are led to believe. Revenue breaks down into discrete subsets.” Of the revenue generated by Flirtomatic from premium content, only 30% comes from the sale of virtual goods (such as e-flowers); the majority comes from value-added services, including users paying to see who has rated them and to delete their worst ratings, and to advertise their profiles on the service.
Social networks provide a unique forum in which to market virtual goods and services not only by linking users to digital content, but also by allowing users to share their preferences with their friends or even to promote new services. The spontaneous nature of communications within social networks makes it a challenge to find the right context for paid-for and advertising-funded content and services. For this reason, it will be difficult to leverage the viral qualities of social networks without seeming intrusive, although social networks that have evolved around a common interest will find it easier to integrate paid-for and ad-funded content. For Flirtomatic, the fact that its premium services successfully allow users to differentiate themselves and represent perceived value-add has been key to its success so far; this will also be true for other social networks looking to monetise themselves through micropayments as they try to stay ahead of the competition in this increasingly competitive space.
To learn more about Flirtomatic’s business model and the issues around monetising social networking, please see the full case study: Flirtomatic monetises social networking.