Monetizing Social Networks – Part 1

June 11, 2008 at 9:19 pm 2 comments

Aside from focusing on emerging technologies such as SaaS, Web 2.0/3.0, Cloud Computing, etc within Patni, I am also tasked with creating the appropriate conditions for Patni to enter the animation and gaming space. As part of those efforts, I regularly keep up with the latest happenings in social media and social gaming and how companies can monetize social networks.

Social networks are everywhere. Every day, new companies are springing up that have some sort of a business model centered around social networking – whether it be online or mobile. The challenge is that most of the established social networks, such as Facebook and MySpace are finding it really hard to actually make any real money from all these people that are members of their site. What started off as relying heavily on an advertising model is very quickly becoming a barrier for these social networking sites for many reasons, one of them being that majority of the customers on these sites are much more interested in viewing pictures and profiles rather than viewing ads. Also, often times, the wrong ads are being displayed to the wrong audience.

It is clear that new, alternative monetization strategies need to emerge if companies developing online social networks are to become profitable. This is the first part of a multi-part series where I will discuss the various monetization strategies that are being used by innovative businesses to generate revenue.

The first of these new mechanisms is virtual goods. What exactly are virtual goods? They are essentially items that you can buy in an online community of game in exchange for fake money or credits that you earn for participation in the online community or for playing the game. Yes, you are right. In essence, virtual goods are nothing but binary 1’s and 0’s stored in a database with your user name or user id as a foreign key. But people are spending real money to buy these fake items online. Lots of real money! How much?

  • Habbo Hotel has over 75 million registered avatars in 29 countries and 90% of their $60 million+ yearly revenue comes from virtual goods.
  • Tencent is one of the largest Internet portals in China with over 250 million active user accounts. They generated $100 million+ in Q1 of 2007 and over 65% of their revenue comes from virtual goods.

So the main question that comes to mind is – Why on earth would anyone spend REAL money to buy FAKE goods online? Quite a few reasons:

  • Engaging At A Higher Level: Anyone can send a wink or a nudge to someone for free. But on an online dating site for example, spending real money to send a fake rose or some other virtual item to the one I am interested in shows that person that I am actually interested enough in that person to spend real money to send her something she will appreciate – a virtual rose. It shows that I am willing to set myself apart from many others to do something special. And at the end of the day, whether it be online community members or gamers, many of us want to feel a higher level of emotional connection and virtual goods allow us to achieve that.
  • Showcasing My Popularity: For gamers, it’s a great thing to be able to showcase all the things I’ve been able to buy or win as a result of my superior game play. Being a better player than others means earning more credits or virtual cash, with which I can shower myself with more online bling, which might not be available to other players, thus resulting in me being the object of their envy.
  • Creating Value: If I can spend $20 and get 20,000 credits, which in turn allows me to get additional features in an online community or a brand new sword in an online game, then that might entice me to spend another 10 hours playing that game, bringing me a certain amount of happiness that I might not be able to get if I spent half that money ($10) to go watch a movie. So in essence, the virtual sword is creating real value for me in terms of enjoyment and experience.

The net of it is that virtual goods are spreading from MMOG communities to online social networking applications and social gaming environments. If you are in to social gaming, I would be curious to hear your thoughts on virtual currencies and virtual goods and if you think that they are the next big thing in social media monetization.

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Entry filed under: Marketing, Web 2.0. Tags: , , .

SaaS: A Boon Or A Curse For ISVs? Monetizing Social Networks – Part 2

2 Comments Add your own

  • 1. Pras Sarkar  |  June 12, 2008 at 3:01 am

    You bring up some interesting points.

    Another point to note is that virtual goods are also amassed (bought/earned) for the simple reason of bartering. Many cases in the virtual world Second Life illustrate how people buy land to later sell it for a profit (of fake value).

    This leads one to think that there may be a possibility that fake goods hold intrinsic value (even if not directly comparable to real value).

    Reply
  • 2. Landon Hoover  |  June 12, 2008 at 11:07 pm

    I enjoyed this post and am sincerely looking forward to the rest in this series. I hope that in this series you discuss some of the resources, as well as the strategies you mentioned. If you could identify some resources that can help SaaS, gaming, Web 2.0, etc. companies can utilize to better monetize their ideas, that would be fantastic. A great place to start could be with eVapt (www.eVapt.com), but I would love to hear your input on alternative resources as well!

    Reply

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