Social Media and Revenues: Where’s the Profit?

On: October 31, 2010
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About Onur Yilmaz
I have a BA in Film & Culture from the University of Amsterdam, and now follow the New Media masters program.

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http://bumptiousness.wordpress.com    

The information economy that the Internet has facilitated has given rise to some interesting new problems for entrepreneurs and investors as well as webdesigners and creators. When your product is dislocated from material instances, how do you identify demand or a target audience? How do you market and define your service within a dense field of competing, free alternatives? How do you monetize your product in an environment where there is no scarcity?

The answer of Web 2.0 seemed to be: provide services, not products. Build a large userbase, and the money will follow. However, as the utopian visions fade away and reality sets in, it seems that turning a profit is not as simple as just attracting users. The latest, most visible example in the struggle for a working business model is Digg.com.

Digg had been mired in controversy among the social network circle for a while already. As a site built around the idea of a community submitting stories and voting on them, the biggest point of criticism levelled against Digg was its undemocratic system. A handful of power users had become so adept at gaming the system that they were responsible for the majority of frontpage stories, often promoting their own websites or services. However, the redesign implemented earlier this year seems to have broken the idea of a community driven aggregator altogether.

In a bid to cater to major publishers- and thus secure income streams- the new Digg has revamped its frontpage so that publishers can directly submit stories. The redesign also made previous functions harder to access and the general usability of the site suffered. As a result, Digg has had a 30% decline in traffic since September. This seems to be only the beginning, as new scandals showing fake accounts boosting stories further hurt Digg’s image and damage the goodwill of its community. This decline is directly mirrored in more material ways; a third of Digg’s workforce has ben let go in the same period.

Other social media are also struggling to turn a profit. Despite its widespread use and popularity, Youtube is yet to make a profit- something that is expected to happen for the first time this year. Even Facebook, which has been very aggressive in its monetizing schemes, made a net profit of only “tens of millions” last year, a strange proposition for a company that is estimated to be worth several billion. In fact, this is the very issue with social media and monetizing schemes: their worth is almost exclusively speculative. Investors see large amounts of users and traffic in terms of customers. This is a correct view to a certain extent: the products of a social network service are its users; its clients are corporations. However, the reality of the situation shows that users do not equate to customers and a userbase cannot be directly monetized.

Other avenues for income are left largely unexplored. Reddit.com has appealed directly to its users for financial support, drawing on the sense of community they have managed to foster. The move is ambitious and seems to be better suited to the community driven format then more classical, ad driven models. There have not been any reports yet however about the success or profitability of the model.

However, to get to the point where the community is dedicated enough to directly support a service seems as difficult a prospect as finding a working revenue model. A more interesting question might well be: why are the current major players where they are now, instead of their many competitors? Facebook was not the first social networking site around. Why has hi5 for instance failed to enjoy similar popularity? Is it a question of front end design? Is it usability? Or maybe just clever marketing and a heaping of luck? These questions are important if these social networks and Web 2.0 services wish to remain relevant and profitable. If your service is built on the users, what happens if your users decide to migrate to the next hip thing? The story of Myspace paints a bleak picture for the Facebook’s and Digg’s of today: as it fades away into obscurity, it has still failed to turn a profit for its parent company.

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