Why (Consumer) Social Media is a crappy business

Bo Peabody, writing in SAI, makes a number of good arguments as to why Social Media makes for a lousy standalone consumer business. As he points out, its a case of mistaken metrics.

The venture capital community is enamored because social networks grow fast and growing fast is a very difficult thing to do. Venture capitalists have never liked content networks because of the costs associated with creating the content. Social networks present the perfect solution to that problem. The content on social networks is created for free by people who derive some other psychic or social benefit from creating it.

Here are the main points from his argument:

What all these businesses have in common is that they are based on people communicating with each other.

They are communications businesses. Communications businesses are very rarely, if ever, good places to advertise. However, they are really interesting and necessary products, and on the Web they may be the most interesting and necessary products.


What about other forms of revenue beyond advertising?

Indeed, most communications businesses charge users for their services. Telephone companies have made a lot of money for a long time charging consumers to express themselves and communicate with each other efficiently, privately and in multiple formats. Does charging users make sense for Tripod, Facebook and Twitter, the communications businesses of the Web? We tried this at Tripod back in the mid-nineties and many others have tried it since then. It doesn’t work. The barriers to entry for Web-based communications businesses are so low and the switching costs for consumers so minute that charging uses will never amount to much revenue.


What about direct to consumer revenue streams beyond subscriptions, like verified accounts, virtual goods, and commerce?

In the same way that the fundamental nature of social networks as communications products renders them subpar advertising venues, monetization schemes based on extracting money from the social networkers themselves faces yet another problem resident in the fabric of social networks: what I call the “ubiquity paradox”. The value of social networks is their ubiquity. What makes Facebook such an incredibly fun and useful experience is that virtually everyone is on it. Any monetization efforts are going to drive some users away and that will in turn erode value for the users that remain. Most of the moneymaking ideas contemplated by Facebook are good ones and I think many of them could work. But all of them require Facebook to get more commercial and more intrusive, and therefore less personal. This will result in a smaller Facebook.


What about selling data from the “social graph” as Twitter recently did to Google and Facebook?

I don’t know a lot about the business of selling data, but I do know that there is a lot of valuable data created on social networks. But my hunch is that once users know revenue is being generated by selling their personal data or data associated with their actions, they aren’t likely to rejoice. If social networks can sell data in a way that feels harmless to users perhaps they can make some money, but not a lot of money and certainly not enough to justify the values placed on them today.

Now Peabody makes one point which is useful to keep in mind:

Search engines are amazing businesses, much better than most media and communications businesses. However, they are an anomaly. Media companies and the venture capital community have been chasing the next “search engine” business model for over ten years; this elusive creature that creates highly valuable advertising inventory without the costs associated with actually creating content, and has the financial and cultural profile befitting a public company.

The fervent hope is that just because we are replacing Search with Social Media as a way of finding things, that the same transfer of spot Ads can happen. We don't believe it will, as the output is not the same and doesn't really support Ads.

We couldn't put it better ourselves, so we didnt - As readers of this blog will know, we agree - and have made these points for 3 years or so (and in some detail - just search for Freeconomcs on this blog). To us, Social media is like email - essential, but no one will pay for it directly. And we think the despreate attempts to sell off the social graph will rebound in spades, probably leading to regulation (as is happening with the banking industry already)

Incidentally, our view is that no one will pay for generic consumer Social Media - niche media with valuable content, or content that has value by being rare, and business social media are different things entirely