nuance intelligence

It has taken me the better part of a decade, but I finally think the Economist might understand a thing or two about the business of digital media. Throughout the 90′s and into this century, it seemed they were late to the table, with obvious observations that hit the newsstands six months after they hit the digital zeitgeist.  Living outside the echo chamber, they provide good triangulation and outsiders’ detachment, as demonstrated by this week’s piece on the business of social networks.

As fits their milieu, they cover the battle of the titans with some accuracy, but miss the nuance of how social networks create value in a more distributed way.

The piece compares social networks with webmail, seeing tremendous utility, but no direct revenue stream, making the former as much as a must-have as the latter for the major media brands.  They buoy their non-monetization with a quote from Google’s Sergei Brin regarding efforts on in-house Orkut as well as AdSense-friendly MySpace,

“social networking inventory as a whole” was proving problematic and that the “monetisation work we were doing there didn’t pan out as well as we had hoped.”

The go on to reference Facebook’s difficulties with monetization, highlighting the well-known Beacon debacle. Analysis continues:

The problem with today’s social networks is that they are often closed to the outside web. The big networks have decided to be “open” toward independent programmers, to encourage them to write fun new software for them. But they are reluctant to become equally open towards their users, because the networks’ lofty valuations depend on maximising their page views—so they maintain a tight grip on their users’ information, to ensure that they keep coming back. As a result, avid internet users often maintain separate accounts on several social networks, instant-messaging services, photo-sharing and blogging sites, and usually cannot even send simple messages from one to the other. They must invite the same friends to each service separately. It is a drag.

The article then develops a direct connection to their webmail metaphor, by pointing out the value of two important trends:

1. the use of OpenID and OpenSocial to allow the management of mulitple social networks, a trend that is evolving with the release of the frameworks to make this work, and
2. implicit social networks, including email traffic, calendar appointments and instant message sessions, build the same value and plug into existing work flow without asking for more individual social network management.

They neglect to reference the recent purchase by Dun & Bradstreet of Visible Path, which builds on the power of D&B’s Hoovers brand to bring the implicit social network into the D&B business info empire, and offering maybe the most serious threat to business social networking leader LinkedIN.

The Economist closes the piece by suggesting “social networking may end up being everywhere and nowhere,” meaning that if online social networks becomes ubiquitous and minimally profitable, they will become an enabling technology for other business results.

What’s the nuance? In the case of the business of social networking, there are many moving pieces. First of all, LinkedIN is widely reported to be profitable on revenues around $100 million in 2007. Which points to a key principle of social networking: in order for it to remain relevant in our busy lives, there must be some practical outcome. LinkedIN works because people find new clients, jobs, employees and other important business connections.

The second issue the Economist didn’t factor is the balkanization of social networks. While growth at MySpace and Facebook has flattened (is it possible that everyone from age 12 – 20 already has an account?), Ning, one of many providers of white-label social networks, just announced their 200,000 social network. These networks demonstrate that small, vertical (and private, in some cases) social networks will gain a toe-hold, even if a minuscule fraction of them thrive six months after they are launched. The success of these networks carry a different business metric than that the goliaths Facebook and MySpace.  When engaged as part of an integral media package, socnets can help deliver the ‘stickiness’ that so many digitial media gurus promise, but few deliver.

Thirdly, the synthesis of the previous two points presents a scenario being developed by pioneers (and hometown heroes) GenGreen, who intend to combine online social media (which includes social networking functionality) with localization of content and commerce, creating a new media brand for the sustainably conscious set.  Elite social networks for the top tier in many different societies are springing up as well.

All that is to say that the Economist’s view, as should be expected, should prove accurate for the community who does their math in the 9-figure range. But business models abound to monetize social networks in innovative ways at a much smaller scale, on the long tail, when entrepreneurs can provide and clearly communicate substantive value to users.