July 28th, 2006

MySpace’s Business Model Conundrum

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I’ve been predicting for a while that companies would find ways to leverage the community marketing power of social networking sites like MySpace without the network seeing any financial benefit. Here’s a perfect example (via The Economist):

MySpace seems to offer a chance for companies to take their marketing into new, potentially more lucrative territory, by becoming, in effect, members of their customers’ network of “friends”. A growing number of firms have established their own pages on MySpace, to which users can link. In the process, some are getting into bed with some unlikely partners. Earlier this year, for example, Unilever, a consumer-goods giant, hooked up with Christine Dolce to promote Axe, a deodorant. Ms Dolce, who goes by the alias ForBiddeN, boasts around 900,000 “friends” who link to her MySpace page. Bleached, buxom and with impressive marketing savvy, she is arguably the most successful brand to emerge from MySpace, and has already launched a line of clothing.

That made her perfect, Unilever concluded, to draw in the 18- to 24-year-old lustful lads to whom Axe is shamelessly marketed. So Ms Dolce hosted an interactive game, called “Gamekillers”, based around dating tips and designed subtly to promote Axe. Some 75,000 MySpacers signed up for it.

It’s not clear whether MySpace is getting any revenue from ForBiddeN’s Axe deal or any of the ads she runs for her own products. My guess is if they are, it’s not a significant percentage of the total dollars in play (please let me know if you’ve heard otherwise).

The risk to MySpace and other social networks is that savvy users like ForBiddeN will monetize the attention of other MySpace users and cut MySpace out of the loop.

MySpace is serving ads on ForBiddenN’s page:

Forbidden - Christine Dolce

But I’ll bet Christine Dolce’s own ads are getting a lot more attention:


Forbidden Pherlure

So what if MySpace tries to strong arm their way into the loop?

The users will just go elsewhere. Ask Friendster. (Or MySpace users who found their accounts missing.)

There is also an opportunity for ad networks to cut out the social network middleman — uEndorse, for example, is creating an ad channel that allows social network users to chose ads that appear on their pages and to endorse those commercial messages.

As I’ve said before, I think the big opportunity is in giving users a piece of the action.

Users will increasingly want to monetize rather than BE monetized.

Donna Bogatin (one of my favorite skeptic bloggers) does some back of the envelop math to estimate that MySpace is currently able to squeeze about $2 out of each user on average:

Using very rounded numbers, here is a “quick and dirty” analysis:

* MySpace 2005 acquisition price: $580 million
* MySpace 2006 “friends” user base: 100 million
* MySpace 2006 ad revenues: $200 million

MySpace acquisition price reflects an approximate multiple of $5-$6 per “riend.”

MySpace is currently generating approximately $2 in revenue per “friend.”

This assumes, of course, that MySpace is able to act as the intermediary for each user’s attention…but when you live by the “users in control” sword…

UPDATE

According to the WSJ:

Popular members like Ms. Dolce represent something of a dilemma for MySpace. The site says it has no problem with the photographs and content on Ms. Dolce’s page, which, while racy, stop short of being pornographic. Recently, however, MySpace, which is owned by News Corp., has been working to promote a family-friendly image to appeal to potential advertisers — some of whom could be leery of sexually suggestive pages like Ms. Dolce’s.

Ms. Dolce’s commercial deals have occasionally run afoul of MySpace’s rules. The service doesn’t allow using the network for direct commercial gain; because of the site’s regulations, Ms. Dolce is prohibited from sending mass messages to her MySpace friends about the products she’s paid to endorse.

And yet Dolce is running ads for her own products on her MySpace page.

Why is it that information on the economics of MySpace is always so sketchy and fuzzy?

  • I gave up preaching this a while back. To get off "user generated" sites like Myspace, they need to know a lot more than a few HTML codes, which is about where they are now. They are still on training wheels. Paid hosting still needs to be streamlined for ordinary people. First, we need to simplify the domain registration process. Site5.com is doing a great job I think w/ a pretty simple control panel, but it's nowhere near as easy as Myspace. I think they are about to integrate domain registrations in with their backstage/control panel software, so that might be the next step. Meanwhile, the Myspace kids are now learning to share "codes" to add style to their pages. They can cut and paste, that's about it. That's as DIY as they get. On top of that, most of them can't read, spell or form a complete sentence. I'm sure you will get plenty of hits to this page for "myspace codes" and I promise you will get comments like, "I don't understand anything you said." Why bother explaining to them why they need to monetize traffic? They don't get it. So I think there will always be some form of "Myspace" for all the "Dummies" out there.

  • CT
    How long before we have a social network that works on the Flickr model, where there are no ads, free accounts with limited functionality, and paid accounts where the users can insert their own ads, stores, and attempts to get famous?


    In many ways that is what Yahoo! already tries to do with geocities (and many others have done in the past - Portals and web hosts used that model as well).

    What MySpace (or any social network) provides at the moment is the eyeballs. This works great for the Christine Dolce's of the world who leverage their "attributes" to sell something, but for most, it would be a very insular pitch (limited largely to their friends). Fact is the social network in the form of MySpace is in many ways the web 2 version of the portal and they face many of the same challenges. The "friends" on MySpace are very tenuous bonds that many, if not most, will have no qualms about breaking as they either get older or find new places to go (in fact the Dolce's of the world probably inhabit more networks than MySpace already which will inevitably lead to another problem for social networks).

  • How long before we have a social network that works on the Flickr model, where there are no ads, free accounts with limited functionality, and paid accounts where the users can insert their own ads, stores, and attempts to get famous?

  • Frank, thanks for the clarification. What you are aiming to do is provide what MySpace and others don't currently provide, which is user control over the commercial messsages.

  • Thanks for the mention. Just wanted to point out that we actually do not cut out the social network and in fact for the most part, especially given MySpace's recent crackdown on jscript widgets, need the social network in order to provide the services.

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