What’s next for social media business models? – Metcalfe, Mobile, Messaging and Control

This past week I received 2 emails which made me think I should explore the next thing for social media business models. The first was an invite to the ad-free social media network ‘Ello’. The site boasts that it is ad-free won’t harvest your data and sell to any other third party. It even points a finger at mainstream social media in its manifesto stating in its first line that ‘your social network is owned by advertisers’. After just 10 minutes on the site you can see that it was designed to be simple with features similar to Twitter but the ability to sort your feed into ‘friends’ and ‘noise’ (I like this!). You can post text, pictures and videos with no restriction characters but as of yet there is no ‘retweet’ function. Having only 1 friend on it there was not much going on and the format kind of reminded me of old Bulletin Board Services (BBS) pre-World Wide Web with graphics.

The second email was from LinkedIn which in the context of Ello’s finger pointing at mainstream social sites seemed very timely. In short, the email asked rhetorically ‘who owns all of the content you post on LinkedIn? You do, and you always have’. Specifically it pointed to individuals’ control over their data – ‘We’ll always ask your permission before using your content in third-party ads, publications, or websites’, data history– ‘If you delete something from our platform, we won’t use it anymore.’ and content ownership – ‘We don’t own or have exclusive rights to your content’. These changes as well as changes to LinkedIn’s privacy seem to be a response to mainstream allegations of misuse of personal data.

The invite to Ello and LinkedIn’s message of privacy reassurance are evidence of the old adage associated with mainstream social media that ‘you are the product not the customer’. It is also an indication that the associated business model of ‘selling’ user data to advertisers may be under threat. Whilst this may not be a serious threat yet, there are alternative business models for social media networks which may form the basis of successful social media businesses in the future.

1) Freemium based model

Freemium is a recognised revenue model in which a basic service/product is offered with new features attracting a fee. Many newspapers and apps have taken this model to firstly drive scale with the free offering and monetise from the user base who place value in and extended service. This is Ello’s business model. Its basic features are free, as the social site becomes more popular they will offer new features for a subscription payment.

Whilst this has been very successful with other digital businesses (particularly those which are sticky with users like LinkedIn) I feel this will be difficult for Ello compete with mainstream social media which is free. Firstly, Facebook and Twitter currently offer a much superior ‘free’ user experience compared to Ello (despite the advertising) and secondly, the critical mass of users that makes those social sites sticky will be very difficult to replicate. I would like to believe that people will pay for features in a social network (e.g. the ability to retweet, the ability to play games) but unless data privacy is so important to the social media using individual I fear it is destined to remain a niche.

2) Community based model

The idea that a social media network could be as important to the world as an encyclopaedia like Wikipedia is plausible. Social media networks offer users a way to connect with their friends, acquaintances, thought leaders and the rest, which in a digital age could be thought of as a necessity. Wikipedia’s business model is donation based. It is free to all to use but asks for periodic donations and volunteering to ensure its site is up to date. The site’s CEO Jimmy Wales has previously said the encyclopaedia has a staff of only 35 people.

I think this is a plausible option for social media in the future. The trouble with this however is the ability to scale into a large enough network from scratch – enter Metcalfe’s Law. Metcalfe’s Law states that the value of a network is proportional to the square of the number of connected users of the system. As with Ello, there would need to be a migration from mainstream social media to create a network of any great value. One possible solution to this could be for Wikipedia to expand its offering to include a social network. There are enough users of the encyclopaedia to plausibly convert them to a social network. But don’t hold your breath, Jimmy Wales has other ambitions (charity phone networks with The People’s Operator) and supporting a social media network appears to be a step removed from its core.

3) Messaging models

The most significant change to social media business models will come from messaging services which are already replacing the forum style of social networking offered by Facebook and others. It is not uncommon to find people below the age of 30 using messaging services like Snapchat, Whatsapp, WeChat, Line and Instagram in place of Facebook. Half of the top 10 messaging apps have more that 300 million users which compared to Facebook’s 1.2 Billion users is as sizeable threat to the social network – luckily Facebook owns Whatsapp (+500M users), Instagram and Facebook Messenger (+200M users each).

Of the messenger apps 2 out of the top 10 have quantified revenue models. In 2013 Line had reported earnings of $335 million in revenue driven largely from the sales of sponsored stickers and KakaoTalk. despite its small user base was the second highest-grossing app with $204 million in revenue from in-app games and upgrades. Other services are adopting these and other models are Viber and Tango which partnered with Twitter’s MoPub in December 2014.

Regardless of the prevailing business model – social is evolving with data privacy, mobile and messaging are putting pressure on the existing ad funded models of mainstream social sites. I believe the formula for success of future social networks rests on the ability for the network to connect users first and foremost, to provide a superior mobile experience, offer a cross platform messaging capability and provide users control over their data.

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