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Wisdom for Commercialisation of Social Networking Websites

The $US900 million ($A1.18 billion) deal for MySpace, announced on 7 August 2006, between News Corp and Google is a milestone in the history of the commercialisation and monetising of social networking websites.

How did we get to such nine and ten figure numbers?

The Deal

First here are the key reported deal points:
  • In 2005 News Corp bought MySpace paying $US585 million when MySpace had 45 million registered users. Also vying for the asset was Viacom. MySpace had been established by a Los Angeles Internet marketing company, Intermix Media, Inc. Intermix states on its website that it began in 1999 as a network of content sites offering entertainment, humor, and community and that it virally marketed its brands and their message.
  • After acquisition MySpace's registered user numbers continued to grow exponentially. Currently there are 103,103,710 members.
  • In 2006 Google agreed to pay News Corp's Fox Interactive Media up to $US900 million, over almost four years from 2007 to 2010, for the right to sell ads on Fox's sites, subject to Fox meeting traffic targets.
    • Presumably Google was very much attracted by the number of eyeballs on MySpace.
    • Also note that "Fox was the top-rating TV network for American adults aged 18 to 49 in the last season". This is according to Neil Chenoweth, writing in The Weekend Australian Financial Review on 12-13 August 2006 at page 12. The article is astutely headlined "Murdoch carves winners from US culture".
    • Chenoweth, a Murdoch watcher and indeed Murdoch biographer, also notes "The Fox News audience is 75 per cent higher than that of CNN, its nearest rival..." and "News Corp's core US operations... account for more than 75 per cent of the group's operating profit."
  • Google will also provide its search engine to MySpace and Fox Interactive Media's other sites, such as games site IGN, sport site Scout.com and movie site Rottentomatoes.com. News's main sports site, Fox Sports, has been excluded because it has an existing deal with Microsoft.
  • The deal reserves the right of News Corp to sell display advertising directly, the deal only covers text-based search and keyword advertising.

The Context - Competition and Business Models

Now let's note some aspects and statistics regarding some markets (broadly defined) relevant to the deal.
Who are the players in the social networking market? Wikipedia contains a useful list of social networking websites. Among them are LinkedIn.com for business networking and CV marketing, Reunion.com for contacting friends and family, and Flickr.com for photo sharing.
Interestingly, not listed is YouTube about which valuations of over $US1 billion are now being mentioned. YouTube is free and filled with videos, taken off television, DVD or on personal video cameras. It's popular with teenagers as well as corporates using online video to promote their latest offerings. Sequoia Capital, a venture capital company, has invested $US11.5 million in YouTube. Unlike Napster and Kazza, it seems YouTube imposes  copyright law restraints on users. They also impose a policy restricting erotica. Such regulation of copyright or erotic material exist no doubt for several reasons. One reason undoubtedly is that it reflects YouTube's vision of how to grow its online social network.
What is the level of investment in social networking? Paidcontent.org, a US Website focused on the economics of content, reports the following statistics for venture capital deals in the 12 months to June 2006:
  • Social Networking: 21 companies, total: $95.8 million, 8 undisclosed
  • Business Social Networking: 3 companies; total: $21 million, 1 undisclosed
  • Video Sharing: 14 companies; total: $60.2 million, 5 undisclosed
  • Photo Sharing: 8 companies; total: $68.26 million, none undisclosed
  • Mobile Social Media: 13 companies; total: $67.35 million; 2 undisclosed
What are the business models for Web ventures? For the commercialisation of social networking Websites, and for that matter Websites generally, online advertising-supported sites have been at the fore of the available business models for many years. Nonetheless viable, but less often, are alternatives such as subscription sites (where users pay a subscription fee for access) and transaction sites (eg where users get service for a fee). Online advertising revenue is not low lying fruit. Getting it is complex and the field has diverged into several options, eg:
  • Google Adsense or similar offerings for Website operators,
  • "intelligent text" offerings for Website operators, eg as marketed by Vibrant,
  • media portfolio offers by major players such as News Corp, NineMSN, F2 and Telstra/Sensis; each says give us your money and we'll give you exposure across our portfolio of online properties, and
  • the "affiliate" arrangements model (whether as a list of links or with a banner); a sort of you scratch my back and I'll scratch yours approach involving collaboration paid or free of charge between like-minded sites. You see this in blogs which mention their "favourite blogs" or lists of links on high traffic websites.
In matters for publishing clients and for Internet ventures by clients, this year at Dilanchian we've taken a closer look at some of these models. This has led to enquiries into numbers.

How big and where is the advertising revenue pie? The Audit Bureau of Verification Services provides this market data:

In Australia in the 2004-2005 financial year online advertising revenue grew 62.7% to reach $A488 million. The finance industry continued to be the top spender in the general advertising category with the recruitment sector maintaining its number one position for classifieds.
More recently, total online expenditure for the second quarter of 2006 topped $226 million, representing growth of 59.4% over the past 12 months. General online advertising grew 32.2% to be worth $A76 million in the quarter. Classifieds online advertising grew 8.1% to $A67 million and search and directory grew 9.9% to $A83 million.

The Background

How do you "regulate" social networking? The evolution of online social networking has involved many attempts to make it work. Could people come together and rule themselves? Many thought not in the 1990s, hence Apple Computer and others designed online chat sites on which they imposed heavy restrictions on what users could say and do. Maybe the market was not ready, maybe the restrictions did not help, but the sites failed to draw a sufficient crowd.
 
Now, with users unleashed to do it for themselves, commentators have referred to online social networking websites as the wisdom of the crowds in operation. They are doing it for themselves at MySpace. The site has an anarchic and user-generated look; its not what you'd expect to see designed by a corporate committee. It's not pretty, but it's drawing the crowd.
Web 2.0 moves eyeballs away from some types of sites (eg push media, corporate style, information silo or "me to" brochureware sites) and towards sites with:
  • dynamic content, RSS feeds, tagging, mash-ups, collaborative content creation (eg as on Wikipedia),
  • participatory or interactive facilities (feedback loops, forums, message boards, rating or voting options, polls and chatrooms),
  • places to "window shop" while communicating with others (an example might be Trade Me, the New Zealand auction site bought by Fairfax for $625 million in 2006), and
  • a culture of "user-generated content welcome here!".
In his widely quoted 30 September 2005 seminal article titled What is Web 2.0, Tim O'Reilly included a side bar titled "The Architecture of Participation". There he expressed the net effect of the above:
 
One of the key lessons of the Web 2.0 era is this: Users add value. But only a small percentage of users will go to the trouble of adding value to your application via explicit means. Therefore, Web 2.0 companies set inclusive defaults for aggregating user data and building value as a side-effect of ordinary use of the application.  ...they build systems that get better the more people use them.
 
As the Internet began to be commercialised as a platform in the early 1990s, there was already in existence from the 1980s some guidance on how to make an online social networking facility work on a long-term basis. I'll close on this as it puts the "overnight success" of online social networking into a historical context and in doing also helps explain why MySpace works.

How to Grow Social Networking

In developing a website, blog or extranet perhaps you have struggled with what to say in the "terms and conditions" notice. It is in such areas that you come face to face with the need to make decisions that regulate user activity. This is not a new problem.
In the early 1990s there was a San Francisco Bay Area online network known as The WELL, and it still continues. The WELL was a beehive of creativity. It's shadow falls to this day on online social networking. Here's an extract from Wikipedia on the history of The Well:
 
The WELL was started by Stewart Brand and Larry Brilliant in 1985, and the name is partially a reference to some of Brand's earlier projects, including the Whole Earth Catalog. ... Notable items in WELL history include being the forum through which John Perry Barlow, John Gilmore, and Mitch Kapor, the founders of the Electronic Frontier Foundation, met. Howard Rheingold, an early and very active member, was inspired to write his book The Virtual Community by his experience on the WELL.
 
Now here's my take from a lawyer's perspective. John Coates was for six years the marketing director and conference manager for The WELL. Distilling from that experience Coates set out the principles(1) below for building an "online community". I came across them reading the Bay Area Macintosh Users Group journal bought in San Jose in 1994. The Coates principles struck me at the time as being insightful. Today, as Web 2.0 and online social networking develop at an extraordinary pace, I value the Coates principles as the wisdom of the crowd.
  1. The currency is human attention. Work with it. Discourage abuse of it.
  2. You are in the relationship business.
  3. Welcome newcomers. Help them find their place.
  4. Show by example.
  5. Strive to influence and persuade.
  6. Have a big fuse. Never let the bottom drop out.
  7. Use a light touch. Don't be authoritarian.
  8. Affirm people. Encourage them to open up.
  9. Expect ferment. Allow some tumbling.
  10. Leave room in the rules for judgment calls.
  11. Fight for tolerance.
  12. Encourage personal and professional overlap.
  13. Don't give in to tyranny by individual or group.
  14. Encourage face-to-face encounters.
  15. Help it be "women-friendly".
  16. It isn't just you: let the people help shape it.
  17. Be part of the community.
(1) John Coates, "Cyberspace Innkeeping: Building an Online Community" from Bay Area Macintosh Users Group, Spring 1994 Newsletter p. 310.

 


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