Brave new world online

Social networking hubs are booming, but will these new sites make enough money for their owners to survive?

by Deborah Bonnello
Last Updated: 23 Jul 2013

The second, post-Creation chapter in the story of the internet is in full flow. The Web 2.0 boom, as it's being called around the world, refers to new services that "let people collaborate and share information online in a new way", according to Wikipedia (itself a product of the Web 2.0 boom). The way in which people use the web has shifted fundamentally and social networking hubs such as MySpace, Cyworld and Bebo are at the centre of the maelstrom. The growth of broadband internet access is the single most important factor driving Web 2.0 because it signals a richer, more interactive experience for internet users.

Nigel Morris, chief executive of global digital advertising agency Isobar, says: "MySpace is the new cider. When I was a teenager, the only way I really found to express myself was through a bottle of cider. What kids are able to do now is use a MySpace or a Bebo to do that. Social networking sites are a massive platform for that culture of global expression."

Since Rupert Murdoch's acquisition of networking giant MySpace for £333 million in July last year, the sector has continued to grow exponentially.

Murdoch's investment was just one of many: Yahoo! bought Flickr and has now launched Yahoo360; Amazon has invested in 43 Things; UK broadcasting giant ITV bought online networking site Friends Reunited in December last year for £120 million.

At the time of writing, Viacom is understood to be considering a bid for Bebo, and Bebo's receipt of $15 million of funding from venture capital company Benchmark Capital in June this year is just the latest in a string of investments in social networks by venture capitalists. "MySpace and Bebo are now the fifth and sixth biggest brands online in terms of web pages viewed - ahead of more established brands such as the BBC and Microsoft. Both are harnessing and driving the under-21 market's appetite for online interaction," says a report from web monitoring service Hitwise.

Social networking sites such as MySpace, Orkut (Brazil), CyWorld (South Korea), Faceparty and Bebo are online communities of users that provide applications for people to build their own spaces on the web. Video, music and other rich media are all part of the user-generated content world that people create to represent themselves online and to reach other users.

The participative media model changes the rules of the game, with people pulling in media that they want, rather than media owners pushing it out on them. User-generated content is free for the host platform as it is created voluntarily by users as a means of entertainment and self-expression.

There are also huge aggregators of content online, such as YouTube and Google Video, that bring together both 'edited' content from the outside world, such as TV ads and clips from films and videos, and 'unedited' content produced by people and then uploaded. The social networking model is expanding out of the internet - a few of the social networking sites, including MySpace, Bebo and Faceparty, are available on mobile and Viacom's MTV has just announced the launch of Flux, which will see user-generated content expand on to television.

A quick look at the numbers shows the significance of some of these networks.

MySpace says that it adds 230,000 new members to its network each day and is pushing 100 million members worldwide. On 19 July 2005, the day Murdoch announced he was buying the operator, it had only a quarter of that user base, with 23 million users. Orkut is the biggest social networking brand in Brazil, with a unique audience of 8.3 million people in June 2006 (62% of the active internet population), according to Hitwise. In South Korea, Cyworld claims that about a third of the region's 48 million population are members.

So is this the beginning of a boom or a bubble ready to burst? It's obvious what's in it for the users, but will these new sites make enough money for their owners to survive? There is a clear benefit to having a big audience, anywhere, and social networking sites, or companies that have just acquired them, are now looking for a way to make money out of these audiences. Janet Goldsmith, co-managing director of media consultancy Mediatique and former managing director of Universal Studios Networks, says: "These sites are not necessarily providing commercial value at the moment, but what they do is give an insight into where readership and audiences are going because people are going there and interacting in a different way."

Subscriptions and advertising are the main commercial models through which social hubs can make money. Subscriptions tend to be less popular than advertising revenue as a commercial route because online audiences are used to getting their content for free. In 2002, Friends Reunited made 95% of its revenues from subscriptions; people had to pay to access other users on the site. But since then it has developed an advertising strategy and the contribution of subscriptions to overall revenues has dropped to 46%. LinkedIn, which is aimed at a more mature business audience, also relies on some subscription payments from members, as does Faceparty.

Matt Nash, head of sales and business development at Faceparty, says: "To create and sustain a Faceparty membership is free, but we also offer a subscription package called Cool Tools. This is hugely popular with our members and makes several millions of pounds for the business." However, Michael Birch, founder and chief executive of Bebo, says that his service will always be free to users.

Goldsmith predicts: "I think this will prove the funding model for all of these sites, but whether it is display advertising or a much more targeted advertising solution, I don't know. Video advertising will be more prevalent; these things are largely going to be advertising-supported because people are getting all this content for free - why should they start paying for it?"

Morris at Isobar agrees: "When you've got lots of people congregating, then that in effect is an asset. Brands are going to want and need to become part of that."

It's not only youth audiences who are generating their own content. Older audiences are also becoming involved and reachable by brands via myriad sites such as LinkedIn and the job-hunting site Simplyhired. "While user-generated content is popular among young users, it is certainly not exclusively their domain," says Heather Hopkins, director of research at Hitwise UK.

More than three-quarters of visitors to Tripadvisor over four weeks during July and August were 25 or older, with more than 18% aged 55 or over.

So far, brands have held back from advertising on social network sites because they can't control the content and don't want their brands to be associated with negative or risque entertainment. The traditional online advertising model of banner advertising is used by most sites and brands have to be careful how they approach consumers in a more anarchic environment without alienating them. "Social networking is evolving into what's called 'engagement marketing', where we engage the user in an interaction with a product or brand," says Birch.

The amount of personal information held within social hubs means brands can target their consumers better because they know more about them, thereby increasing the efficiency of their marketing budgets. The $900 million deal that Google has just signed with MySpace to provide search and keyword advertising across the Fox Interactive Media Network signals the increasing significance of search advertising on these platforms, due to their targeting capability. "This agreement demonstrates our commitment to bring the same innovation to monetising user-generated content that we brought to search advertising," says Omid Kordestani, senior vice-president of global sales and business development at Google.

But the more conventional online advertising models aside, there's more that can be done. "There's a really interesting opportunity for brands to create their own space in social networking sites," says Hopkins. "They have to do it very carefully to be sure they're doing it properly. It means they have the opportunity to engage with their consumers."

Social networks are attracting major advertisers such as Procter & Gamble, Volvo and NBC. Brands create their own pages on social hubs and can talk to consumers on a more personal level. Procter & Gamble, for example, used MySpace to launch Secret Sparkle, a deodorant for 16-to-24-year-old girls and women by linking the product to the home pages of musicians that used MySpace.

"We have launched an 'Official Groups' section," says Nash at Faceparty.

"Brands can get involved with Faceparty and access over 3.7 million 16-to-24-year-olds by creating 'Official Groups' with us. Sony BMG has set up an 'Official Group' in our music section to promote Christina Aguilera and Pink."

Brands can also create 'skins' that people use to build their pages.

For the launch of Cars in Ireland, Disney Pixar created a skin for people to use to build their homepage, which spread to thousands of sites. "Doing sponsored skins is another way a brand can reach out," says Birch.

This demonstrates how the content that brands circulate has to be of use or interest to the consumer. Increasingly, brands are creating viral advertisements that they then place on YouTube. Users can pass them on to their friends and the message spreads. A video of Nike-branded footage of footballer Ronaldinho, for example, was seeded in Spain as a piece of viral marketing and reached the Orkut community site in Brazil, from where it spread across the web. It cost Nike absolutely nothing in media costs, whereas to run the advertisement on TV would have cost millions.

Social networks also give brands access to the creativity of users, which they can harness to their own advantage. US retailer Wal-Mart launched The Hub in July in a bid to reach out to fashion-conscious youths. The network encourages them to create their own videos with the lure of the winners ending up on a Wal-Mart TV commercial.

The expansion of social networking applications on to television increases its commercial potential. Viacom's MTV, for example, has long had its hand in user-generated content, and MTV Flux allows members to upload their content on to the TV channel. "Where we're migrating to in Flux is giving our audiences control over the complete cross-platform channel," explains Angel Gambino, vice-president of commercial, strategy and digital media at MTV. "They get to decide not only what the schedule looks like, but what content is worthy of TV."

Gambino says that MTV hopes Flux will offer new ways in for advertisers and allow brands to harness the creativity of users; meanwhile, the broadcaster charges for the texts that users send and is creating virtual partnerships with retailers. "If a Dolce & Gabbana or a Levi's comes out with a new pair of jeans or shirt, then you would be able to buy that within a digital shop for your avatar (a virtual 'you' that users create online) to wear and you can buy that item for yourself too," she says.

The possibilities, at this juncture, seem endless and the business winners in the world of social networks will be those who innovate and experiment, leaving aside traditional marketing and business models to embrace this brave new world.

YOUTUBE VS MYSPACE (THREE MONTHS TO 31 JULY 2006)

Share of Daily reach Users/
global internet (per m) members
visits/day
YouTube 3.9% +155% 20m/month
MySpace 3.35% +9% 100m
Source: Alexa, Nielsen/NetRatings.

VIRTUAL MARKETING

Avatars - a virtual alter ego created by computer users to represent themselves online - are the ultimate consumer group for marketers seeking new opportunities in cyberspace. The growth in popularity of online communities and internet forums has provided avatars with their natural environment, from fantasy settings such as World of Warcraft to more prosaic arenas such as myspace.com, where members share photos, journals and interests with other users. In these venues, avatars effectively operate as idealised projections of their real-life creators, interacting, engaging and forming relationships with other avatars. And unlike their creators, their aspirations (and therefore purchasing power) are virtually unrestrained by real-life inhibitions such as age, height, weight and attractiveness.

Millions are members of these virtual communities and many already spend significant sums of money purchasing goods and services for their avatars, creating a shadow economy of virtual products paid for with real money.

Secondlife.com, for example, allows its members to make money by becoming virtual tattooists, tour guides, jewellery makers and wedding planners.

The website boasts: "Thousands of residents are making part or all of their real-life income from their Second Life businesses."

But marketers are already exploring how they can take it a step further by marketing branded goods directly to the avatars themselves. Companies such as Dolce & Gabbana or Nike could design clothing and accessories exclusively for purchase in the virtual world. They then may explore ways of creating links between cyberspace and the real world by, say, offering vouchers for purchasers of virtual goods that can be used to obtain discounts on physical products. This autumn, meez.com, which specialises in helping users create avatars that can be transported for use on other sites, will launch a promotional code system that will enable someone who buys a pair of branded shoes in the real world to automatically acquire a pair in the virtual world.

It doesn't stop there. According to Angel Gambino, vice-president of commercial, strategy and digital media at MTV, popular avatars have the potential selling power of celebrities in the real world. "Avatars may be able to gain sponsorship in the way that film stars and athletes gain sponsorship," she explains.

An avatar that becomes a cyberspace celebrity will be an obvious target for brands eager to build on the proven marketability of stars, and users will be able to purchase the 'loves' (lists of favourite things) of these virtual celebrities.

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