Social Media Economics Part 2

Now I originally wrote about this dynamic effect here - but here it is again, following my realisation from the Great Social Media Expert debate that some of the hard economics underpinning (and even contradicting!) the Social Media evangelical fluffiness may be worth exposing, even for other - ahem - Experts (Part 1 is over here).

Firstly, its a fairly well know phenomenon that the average user puts a huge amount of effort into setting up their social network in the early days, but that - for the majority - the usage decays over time. (Twitter stats suggest that about 10% are superusers, the rest are extremely occasional. Anyway, the first graph below shows an estimated mean tailoff curve with c 10% being very active. (Yes, its a power law.....)



Now transpose this onto a standard growth S curve (see blue line below). What happens is that as growth of users rises and their activity is at its highest. the red curve - tota transcation son the network - goes through the roof. This has 2 impacts:

- The cost of operations rises geometrically faster than the user base increases (especially if its a high transaction system like say Twitter, so there is huge early pressure on ite infrastructure) - see he beginning of the Red curve
- The temptation is to think that the opportunity to monetise by putting Ads on all those transactions is exaggerated, as once growth starts to level out and the existing users start to drop off their initial peaks, transactions decline rapidly

In parallel with the levelling off of user visits comes the realisation that pure social net Ad revenue CPMs are in the pennies, as so many other SocNets create more inventory than the existing budgets could possibly fill. Initially there is a rush to the Big Beasts - say Facebook, but that creates all sorts of problems - see Beacon, travails of.....

I have an new hypothesis therefore - that walled garden pure play SocNets will prove to be uneconomic, and will shift to open "pure play" - think web, email - to get low value commodity scale benefits, and also to niche higher value plays.

By the way, the time to sell one of these f*ckers is just before the red line peaks - ie when new user growth is starting to tail off but traffic is still going strong so the buyer is bamboozled into continual massive growth projections. At the time I wrote the original article I was commenting on the Bebo sale, and I noted that:

There's a deja vu here. Time Warner bought AOL at the peak of the Web 1.0 bubble , AOL has bought Bebo at the top of this one. Soon after the Time Warner purchase the dotcom game collapsed, I suspect that buying Bebo has marked the top of the silly SocNet valuation season.

Was true re Facebook, but with all the hype re Twitter, I now wonder........