How to Monetize Social Networks

As comScore and others have reported, we are spending far more time on social networking sites than on any other sites or web activities today. From eMarketer today:

Time spent on social networking sites is increasing steadily, taking users’ attention away from sites such as portals. According to comScore, the top 20% of social network users visit networking sites 2.4 times per day, on average, and spend 31 minutes on them—twice as long as the same users spend with e-mail or instant messaging. And that, in turn, means more time with ads.

The problem is, this inventory is sub-optimal for display and text advertising. The same article discussed the challenges of low CPM inventory. Users are too engaged in social communications and games to click away on ads. Also, when we are reading about friends, we are not demonstrating intent like we do in a search query, so ad targeting is harder.

The truth is that we do demonstrate intent, authority and endorsement while on social networks. We demonstrate who our closest friends are, we share links to goods and services we like, we click on links shared to us by friends we trust. We throw off all sorts of useful data for ad targeting. But social networking site inventory is not the inventory on which to display such targeted ads.

The solution here is to use social networking data and re-target existing customers, prospects, and friends of prospects. This allows highly relevant ads to be delivered to customers on inventory less likely to be interrupting task-based or conversational behavior. Media6Degrees, a Venrock portfolio company, is doing exactly this. And they are not dependent on a single social network, but instead have amassed a meta view of our connections on the web. They are building custom audiences for brands that are highly scaleable. The 50 or so advertisers who have used them have seen dramatic results. There are others working on the same problem. 33Across and Lotome are focused on a similar problem. And I wouldn’t be surprised to see Facebook launch social ads on an AdSense-type distributed platform in the future.

The Book Industry is in Trouble. But Piracy is Just a Symptom.

Randall Stross has an article in the NYT this morning suggesting that the book industry may soon get “Napsterized” — suffer the disastrous fate of the music industry, all because of piracy. This article performs revisionist history on the explicit actions of the music industry underlying its decline. Piracy has been a convenient culprit for media industries as their distribution shifts to digital, but it is not the only cause of their problems. It is largely a symptom of traditional market issues.

In the physical goods world, media companies maintain a monopoly over the distribution of their content. They control who can sell it, they price it at whatever level they deem appropriate and they determine if and when a consumer can buy it (think release windows). As all media goes digital, this monopoly quickly melts away. The content owner cannot control distribution (it’s too easy to copy a digital good) and as such they cannot control availability. When this control erodes, pricing pressure follows as consumers have a choice between buying and stealing.

The music industry, after the emergence of MP3 encoding in 1996, did not internalize this fundamental change. They believed they could maintain their monopoly on distribution by suing consumers who engaged in piracy, controlling release windows and limiting licenses to only a few digital outlets at the same prices of the physical goods. Consumers inherently knew that the digital good should be less expensive than the physical one (there are no hard good costs, after all) and demanded widespread access to digital downloads. It took the music industry seven long years until they broadly licensed Apple in 2003 with their full catalogs. In that time, consumers found the alternative — Napster, Gnutella and Bit Torrent. By the time iTunes took off, it was too late.

The book industry, with all this learning behind it, is making similar (but not identical) mistakes. They have licensed some of their catalog to a few eBook retailers. But there are still millions of titles not available for legitimate download. In addition, they have tried to hold pricing for the eBook at the same level as the physical book. Jeff Bezos knows consumers expect to pay less. So he subsidizes the price of eBooks in order to get the price to about $10 a book. When free is a few clicks away, convenience rules. The publishers should flood the market with their entire catalogs and price them at dramatically low prices. There should be hundreds of places to buy them online. They should make it painfully easy to buy an eBook, even risking the cannibalization of their physical books. They need to make the legitimate good superior to the pirated one.

The digital future for all media companies is likely a smaller market with inferior economics than the monopoly physical one they enjoyed for decades. To survive in this new world will require lower cost structures. But the result of not embracing this future are clear: just ask the music industry.

The Impact of Social Media on the Enterprise

For decades, companies have been defining the channels their customers must use to contact them. Social media challenges the long-held notion that companies control the conversation. “We are available by phone weekdays from 9am until 4pm Eastern Standard Time” is quickly becoming a thing of the past. “We will attempt to answer the emails we receive within 48 hours, but times vary based on incoming volume” will be no more.

In a world where any customer can, in seconds, tweet or post to Facebook a pithy product review or share an experience they had with a brand, companies are forced to entirely rethink how they interact with their customers. Step one, probably the hardest step, is realizing they are no longer in control. The power of social media has empowered the consumer to reach literally hundreds or thousands of people in seconds. And because we know a consumer’s closest friends are three to five times more likely to share the same preferences for products and brands, this newfound power is not to be underestimated.

Sure companies have Facebook pages and Twitter accounts. Yes, a few thousand companies are already searching Twitter for mentions and engaging customers. This is but a start. The real transformation happens when the companies let go of the conversation and instead work to nurture it. The brands who offer tools to their customers to increase the amount of conversation and encourage their customers to discuss the pros and cons of their products will be the winners who emerge from this disruptive time.

Companies like Get Satisfaction and UserVoice offer tools that change the balance of power between a company and its customers. Get Satisfaction has a fantastic manifesto, or “Company-Customer Pact” (http://getsatisfaction.com/ccpact), which defines a new relationship between a brand and its customers, encouraging public dialog, warts and all, but expecting productive discussion in return for the company’s helpful engagement.

While product forums from companies like Jive Software have been around for many years, I believe public conversations about brands will now be distributed in nature, spread across the web into thousands of tiny corners. The challenge for companies is figuring out how to manage this. A conversation could start with a tweet, be directed to a help forum, be responded to in email, updated in a blog post, and then broadcast on Facebook. How will this be tracked, measured and monitored? This market is ripe with opportunity for both brands and software platforms built to nurture the distributed web-wide conversation. And brands who are seen supporting a public dialog will engender more respect from their customers than those who turn a blind eye to it, or worse, try to shut it down. Ultimately, companies become more customer-centric from this disruption. I am sure United Airlines wishes they had just paid for the passenger’s guitar they broke now that the music video he recorded chronicling the ordeal spread virally and has been viewed more than five million times!

The company/customer relationship is but one relationship forever changed by social media. Similar transformations are happening between companies and their employees and companies and their vendors. New companies and tools will emerge to address these situations. At Venrock, we are looking for the entrepreneurs that are pioneering this space and embracing this opportunity. I would appreciate your point of view.

(This post appeared on Fast Company.)