Sunday, September 27, 2009

Peabody, Jarvis, and the New Sacred Cows

Bo Peabody has a nice piece in the WaPo about the business models of Social Networks.

He's a bit more dour about their monetization schemes than I would venture, but generally is in the ballpark.
A visit from the pope may attract a large audience, but it's not a great place to make money. Likewise, social networks can successfully bring people together, but don't expect them to turn a profit
Peabody cites examples of the failure of both advertising models on social networks, and the inability of social networks to get subscribers to pay for their services. Peabody cites the experience of Tripod (a once moderately sized social network which Peabody created), and reveals that the ad revenue generated on the site was never a fraction of a percent of that which Google hauls in with targeted search ads.

This is not necessarily a failure of a social networking ad model, but a failure of the size and intelligence of the social network. I imagine that Facebook's targeted ads, based on the intelligence and the size of the network, can one day generate a decent amount of ad revenue. But neither Facebook nor Google, nor whatever comes next will generate ad revenue akin to what we were used to from the bloated an inefficient media channels of the 20th century. As long as distribution channels are relying on that outdated benchmark, they're going to be disappointed by the amount of revenue their ads generate. From my post on the idea of "Innovative Deflation":
We're told to believe in our future in a knowledge based economy, but nobody has really figured out how to make real money of it. Of those who are making money off of it (Craigslist, Google), they are making pennies per dollar in the old markets that they've upset or practically eliminated with their innovation. This isn't because we haven't found the right monetization scheme yet. It is because innovation is leading to efficiency and not growth and that is exerting deflationary pressure on bloated industries.
As far as getting paid subscribers to generate revenue for a social networking site, even the slightest barrier to entry can hinder the growth of any given social network, and this is a kiss of death in a highly competitive market. Price always trends towards the marginal cost, and for social network sites, the marginal cost is practically less than zero! The value of the system increases with each additional subscriber.

Now Peabody warns:
We need to learn from the first dot-com bust, when services that benefited society disappeared just because they didn't make money. Imagine a world without social networks, in which I could not use Facebook to share hundreds of pictures of my infant son with his grandparents and the citizens of Iran could not use Twitter to challenge their political system. If we focus simply on a profit-and-loss equation, there is a real chance we will eventually lose these invaluable services.
This is alarmist to the extreme. Venture capitalists *do* need to learn from the first dot-com bust that many things on the Internet provide value without providing profit. It's the nature of non-rival goods ("bits-not-atoms", Jeff Jarvis would say). If Facebook collapses under the weight of its own walled garden (*cough* *cough*... MySpace), something will pop up to replace it. It may be a knockoff site, it may be an open source platform, it may be nothing more than a set of APIs and open protocols, but the genie isn't getting stuffed back into the bottle any time soon. If social networking has taught us anything it's that people are motivated to create and share for reasons far beyond profit, and in a world of information abundance (as opposed to the material scarcity of the real world), they will do it for no charge.

This brings to mind Jeff Jarvis' recent SideWiki jihad. Jarvis thinks that Google SideWiki has centralized power, not distributed it. The fact is, SideWiki has moved power away from his site and out to the readers (who can use SideWiki to comment on his site, as well as grant or remove authority of SideWiki posts by voting them up or down--the classic crowdsourced form of editorializing known as a "reputation system"). He's on the receiving end of the same treatment he's been advocating against old media, and doesn't much like the perceived loss of control he had previously exercised over his site.

It feels like we're retracing our steps. The Internet has consistently produced results along the following lines:

1) It preys on the inefficiency of old media
2) It moves control, power, and authority to the end user/edge of the network
3) It promotes/enables collaboration at nearly no cost
4) It removes scarcity from the Supply-and-Demand equation where bits-not-atoms are concerned.
5) It allows the crowd to control your brand

That certain Internet tools are subject to the same combat in which they dispatched their 20th century counterparts shouldn't surprise them. It amazes me how quickly some people can free themselves of one outmoded mindset, adopt some new gewgaw as revolutionary, and then immediately fall back into protectionist mode of their *new* sacred cow. Both Peabody and Jarvis, even armed with powerful observations and keen insight into new media, seem to be flirting with this temptation.