Fair Trade: An Argument for Rewarding Users on Social Nets

Frank Kochenash, the head of Strategy and Insights in Avenue A | Razorfish’s Seattle office, authored one of the more thought provoking pieces in our 2008 Digital Outlook Report.  Frank addressed the role users will play as advertising models evolve on social networks.  Specifically, how users should be compensated as the economic models on these properties mature.  Frank’s insights…

Traffic on social networking sites is booming and user-generated content is proliferating. A recent study by Nokia forecasts that 25% of all Web content will be user-generated by 2012. But so far, hype seems to be outpacing genuine value creation. Sure, Facebook has a sky-high valuation, but how are advertisers, the source of Facebook’s revenue, faring? As advertisers go, so goes Facebook and social media in general. Their success is intertwined.

With all the traffic and activity, why aren’t we seeing more value creation from social influence marketing? (Also known as SIM, it’s a collective term used to encompass a variety of methods that leverage social activity to drive business results.) It’s not because of technology problems or even regulatory hurdles. Rather, value creation in social media is hindered because today’s business models aren’t creating the right conditions for growth and because there are no proven ways to measure the success of a SIM campaign. In short, it’s new, and everyone is still figuring it out.

In the Web 1.0 world, Web site owners made money in two ways. They posted content that attracted audiences, and then they sold advertising, or they sold stuff to users directly and made retail profit margins. eBay’s model is a notable departure in that it makes money by facilitating transactions between peers.

In today’s Web 2.0 world, the same business models are being tried (eBay’s peer-to-peer model largely excepted). The table on the next page highlights several SIM techniques and some challenges each faces within existing business models. To some extent, these challenges reflect the newness of SIM. On the other hand, innovation may be somewhat thwarted because the parties that control the valuable social data (social networking sites or sites hosting user-generated content) are trying to harvest the majority of the value. The problem with this, of course, is that these sites don’t really have anything to sell and, so far, advertising has been relatively ineffective.

SIM business models will evolve to become more centered on the user. As this evolution occurs—as incentives are created that compensate users for the content and audience they create—and as new, clear ways to measure SIM effectiveness are developed, there will be a new wave of innovation and marketing opportunity. By way of example, consider the following questions:

• Facebook users make Facebook valuable. Why aren’t they compensated in some way for the traffic they generate?
• YouTube users upload videos that make YouTube valuable. Why aren’t they compensated in some way for the content they provide?
• Google has a great algorithm, but it would be worthless if millions of people didn’t enter keywords and click selections every day. Why aren’t people compensated in some way for the valuable data they provide?

Of course, it could be argued that the users are compensated. Facebook users get the ability to interact on the fly with their friends, YouTube users get a wide selection of well-organized videos, and Google users get highly relevant search results. But in a world where the consumer is boss and consumer enablement continues to grow, this will change. It’s happened in other industries such as consumer credit, air travel, and retail. In all cases, as the product market matures and commoditizes, providers will strive to differentiate themselves by adding other consumer-valued features. The data in the graph below (gathered from Facebook’s Polls feature) indicates a sense of exploitation amongst social media users and an interest in being compensated for their activities.

The trend has already started and new business models are being tested. Revver pays users for the videos they upload by giving them a cut of ad revenues. Sites like favoritethingz.com and mypicklist.com pay users for endorsements. SocialVibe enables users to get points based on social activity and donate them toward chosen causes. Google is launching a competitor to Wikipedia that pays for contributions. In many ways, it’s back to the future for content—users get paid for creating content—but what about advertising? It’s not a stretch to think that sometime soon a large-scale user-advertiser exchange will be created to pay users for the advertising inventory they create. This concept has been discussed before, but the timing may now be right for it to grow.

Additionally, in as much as search is a form of user-generated content, it is not immune to these pressures. Every search term entered and every result clicked is valuable work that today is only compensated with relevant search results. This is by no means a small achievement, but as competition increases, users will expect additional differentiation from their search tools. This may be monetary rebates like credit card offers, reward points like frequent flier miles, or access to value-added services such as search results customized to the user. Already, Livesearch Club compensates users in points for search activity on Microsoft Live.

No one knows exactly what kind of business model, or models, will result, but as social networks and application makers struggle to monetize their audience and as new entrants compete aggressively for users’ time and attention, the social media business model will evolve to more explicitly provide value and differentiated benefit to the consumer.

It’s hard to anticipate specifically how this will evolve, but several developments can be expected. Social media sites will prosper more as parts of larger communities (because their valuable user data can be leveraged over more places where the audience is more receptive to marketing messages); interconnectedness and data portability between social utilities will improve; and consumer empowerment will be a key differentiator for social networks. Expect to see increased competitiveness and specialization among social media sites and utilities, each trying to differentiate the network through perks available to members. The fragmentation of social media sites implies four other effects:

1. Advertising networks that can effectively leverage social information will become marginally more important.

2. Widgets, as vehicles to carry a message effectively within and across various social media environments, will become more popular.

3. Exchanges or clearing houses will arise to provide compensation in some form (e.g., cash, rewards, points, status) for users.

4. Niche social media will become attractive places for brands to engage in SIM because relevance can be increased.

What does this mean? There are several potential ramifications for different constituencies:

Bids to monetize social activity. Marketers across the SIM landscape will need to consider whether advertising alone is the best way to monetize social activity. Is there room for paid services or subscriptions? Do loyalty programs have a place?

Increased concentration on developing SIM metrics. Advertisers will need to figure out how to measure the impact of their SIM investment and how to effectively integrate it with their other marketing activities—key metrics and benchmarks must be developed. Marketers need to prepare to deal with a fragmented spectrum of social media offerings—it’s not wise to bet on only one site. It also means preparing to identify and deal with stronger advertising networks.

Coping with empowered consumers. For publishers of social media sites, it means preparing for a world of empowered consumers who expect more perks to participate on a site and surrender valuable personal data. It means changing or adapting the business model so that they are not solely reliant on advertising for revenue.

Finding those who find can find value in SIM. For investors, it means focusing on ad networks that include social networking sites, effective widget developers, and the marketers that know how to use SIM effectively. It also means that companies and new entrants that innovate on the social media business model (not just the technology platform alone) will be new sources of value creation.

Even as social networking made arguably more headlines than any other form of online media in 2007, the advertising models that can work in that environment are still very much in their infancy. As they are built out, they will need be quid pro quo, so that consumers, not just advertisers and publishers, benefit.