How do you monetize a social network?

The disruptive power and inherent social value of Social Media is self-evident but what about the economic potential of social networks?

Is it really possible to monetize these newly crowned behemoths of the web? Or, was Bo Peabody right when he proclaimed that “Facebook and Twitter will always be a crappy businesses” because the social web is not a media platform it’s a communications platform?

Let’s find out by re-examining the earlier ideas of Who profits from the 6 degrees of separation and why Analog Dollars equal Digital Pennies.

Earlier this week BusinessInsider published a chart displaying the latest ARPU figures for Top 5 web properties (e.g Google, Facebook, Yahoo…). I’ve extended that concept to include the broader categories of web properties that have managed to secure higher levels of ARPU than Google (e.g. The Share Trading Sites) even if they have significantly lower volumes of monthly traffic.

As you can see in the chart above Social networks are the least economically viable business model on the internet today. Even the online Newspapers for all their bad press recently are in better economic shape than the Social Networks. So what do the Social Networks have to do to evolve into a higher plane economic existence?

They begin by thinking beyond the limitations of the Internet.

As you can see in the chart above what I have done is to extend the linear Digital Pennies to Digital Dollars Model by adding a new dimension – Traffic.

Consider this is a visualisation tool. In a number of cases (e.g. Google) the overall position has been slightly exaggerated to allow me to display the overall pattern without cluttering the matrix by having multiple brands in each segment. Where possible I have utilised examples from the Media, Telecoms, IT and Banking Sectors.

As you can see the most successful business model in the matrix is Visa’s global credit and debit card network. It is the only organisation that has successfully  combined over a Billion customers with hundreds if not thousands of dollars in average revenues (i.e. transactions) per month from each customer .

To illustrate just how much of a disparity there is between the web and the “real world” consider this: Google’s Global revenues in 2007 represented less than 4% of Visa’s Credit Card Transaction revenues in the USA for the same period.

Indeed there are more Visa Cards than personal computers in the world.

But – and this is a very big but - as I have said before there are 4 times more Mobile Phones in the world than there are Visa cards and that’s why the Mobile Web represents such a tremendous growth opportunity for Google and the Social Networks.

But the real challenge  is to not just about expanding their traffic volumes by operating across that mobile network. The real challenge for the Social Networks is to grow their share of the customers wallet so they are dealing in Digital Dollars and not just accumulating Digital Pennies.

To do this they need to turn traffic into customers and that as Google has found out  with the Nexus One is easier said than done. (e.g. 1 Million iPhones vs 0.135 Million of the Nexus One)

News this week that Facebook has recently applied for a trademark for its virtual currency platform (Facebook Credits) is of course a step in the right direction for the world’s biggest social network and it will be interesting to see if some of the others follow suit. As you know in the past we have examined a whole range of ways to monetize a social network. We have explored the options for Social Networks to evolve from being just a Games and Advertising Platform into Banks, Insurance Companies, Mobile Phone Networks , Investment Networks, Property Owners and Retailers.

In each case I have explored options that assume the online traffic is of little value unless you can find ways to monetize that traffic in the real world.

What the above matrix tells us is the sites with smaller volumes of traffic (i.e. the Traders and the SaaS) have significantly higher ARPU’s than the mega networks (i.e. Google and the Social Networks). This would suggest the road to being the profit leader may be more about having loyal customers than large volumes of “free” traffic. Premium beats Freemium every time.

“Somehow, in our zeal to blast out messages to as many people as possible, we overlook that all businesses exist on sales.” – Retail Touch Points

The mistake we make when we attempt to frame social media as mass media marketplace is to assume that 100-400 Million in monthly traffic translates into a mass audience. In reality they translate into 100- 400 Million individual and highly personalised nodes scattered across a global network consisting of an infinite collection of possible connections.

That’s why I suspect social networks will always struggle to monetize their potential value of their networks. The potential value of the network is assumed to be the monetization of the total number of nodes. The real value can be counted in the permutations attributed to the relative quality of the connections spreading across the network.

Until we find a way of gathering metrics to measure monitor and mange these dynamic connections it will be virtually impossible to determine the true potential, and therefore the accurate market value, of any social network.

“In 1992, anthropologist Robin Dunbar posited that primates have neurobiologically-based limits to the size of their social networks. For humans, “Dunbar’s Number” is 150. This is exemplified by the fact that the most popular social networking site on the planet now has more than 400 million users, yet the average number of “friends” a person has is only 130 and only a small percentage of those “friends” actually communicate with one another.” – What If Metcalfe’s Law Is Wrong?

In the end I suspect that Bo Peabody is probably right and there are much easier ways of profiting from the Six Degrees of Separation than attempting to measure monitor and manage an infinite number of network connections and social relationships.

But having said that anyone who can  discover how to profit from measuring monitoring and managing an infinite number of network connections and social relationships will surely become the “VISA” of the Mobile Web.

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Tagged: Advertising Revenues, Facebook, Google, LinkedIn, MySpace, Six Degree of Separation, Social Media, Visa

Posted in: Advertising, Mobile Web, Social Networks