You may be on Facebook, but the money's in the Long Tail

I've argued before that social networking should be a feature, not a destination, and that the one-size-fits-all model of Facebook and MySpace will eventually give way to a multitude of narrowly focused sites with social networking built in, such as the 220,000 niche networks hosted on the Ning platform.

It turns out that it's not just the experience that's better on the smaller, more focused sites: the economics work better there, too. Yesterday MySpace's parent company, News Corp, released quarterly financial results and although traffic was up on MySpace, they're having trouble making money. COO Peter Chernin said:   

We remain incredibly optimistic about social media. But there are specific challenges 1) Tons of inventory. Lack of scarcity creates a liquidity challenge. Working on bringing big brands aboard. 2) People who are visiting social networks there for different reasons, different uses. Figuring out how to target. 3) What's the value of a "friend"? Trying to figure out new metrics to communicate with marketers.

Indeed, last I checked, display ads on MySpace were going for a rock bottom $0.13 CPM (price per thousand views). Meanwhile, although Ning isn't disclosing its revenue across its entire network, I can give you a sense of it from my own robotics site hosted there, DIYDrones. The AdSense ads we run there (mostly accelerometer and other sensor parts, as per the example above) generate an average "effective CPM" (CPM after Google's cut, which can be as much as 50%) of $3.60. Before Google's cut, that's as high as $7.00.

So that's $0.13 on a general-purpose social network like MySpace and $7.00 on Long Tail social network like DIYDrones. Even with a more generous scenario--$0.50 on MySpace and $5.00 on a focused Ning site--the difference is still a factor of ten.

Sure, the traffic today is still mostly going to Facebook and MySpace. But as they struggle to target ads based on the faint signals of consumer behavior in a generic social network, the smart money is going to the niche sites, where laser-focused content and community makes targeting easy. The Long Tail of social networks isn't just more satisfying if your community is actually about something, it's richer, too.

[UPDATE: See this excellent post by a marketing strategist who reports on the disastrous results from his Facebook advertising experiments. Bottom line: it was only a $0.30 CPM and not worth even that. Tell me again why Facebook is valued at $15 billion?]

Comments

[dan]

Chris,

That is a great post. Sites like MySpace aren't getting higher CPMs because there is too much going on and they simply can't target effectively. I agree with this, and it validates your contention for smaller niche sites being richer.

However, there are some companies out there that could enable sites like MySpace to literally dissect user activity, thus enabling really specific targeting that would rival smaller sites.

I encourage you to take a look at www.lotame.com. They are creating monetization tools for the mid to long tail of social networking sites. Moving away from relevance in contextual content, to the importance of user activity, actions, and behaviors.

[Simon Owens]

I thought with adsense Google's cut is really only about 25%

[Chris Anderson]

Simon,

That's why I said "as much as" and then also did the more conservative estimate of $5 (actually $4.60 to use your 25% figure). Nobody knows exactly what Google's cut is, but my point is that even using the lower end of the range, my CPMs are ten times MySpace's.

[Avinash]

Chris,

The problem with the social networks is they have no scalable value for the end user. What do I gain from using Facebook other than silly pirate invites and endless pokes?

Ning and Squidoo and Mahalo are all human-powered, but they all suffer from Web 2.0itis. They try to bring a group of people together in a social network with a particular interest without sustainable and meaningful conversation occurring. The Internet model is stagnating.

[Jovan Petrov]

LinkedIn on the other side has a very good business model. http://is.gd/e95

[Fza]

Not to mention the fact that big sites as myspace get swamped in spam.

But I don't see the need for sites like Ning, there are already thousands of discussion sites for any subject you can think of. Companies would be better off advertising on those numerous small communities.

I personally I don't want to be hassled by companies on a "social" (which is the word they tend to forget) networking site.

[Derek Tumolo]

It's like Battelle says about the database of intentions. People don't go to facebook/myspace for easily discernible purposes, they go to socialize, and the best you can market to that is general targeting, same as any mass media.

Ning networks are like internet forums, they are highly targeted and can pull in higher cpms because of that.

Facebook promises targeting, but it can't change the goals of users on the site. They aren't researching, they're talking.

[Michael Cohn]

Google AdSense ads are supposed to be valued for clicks, not exposure. They are not branding ads, they are direct-response ads.

Are you sure all the advertisers on DIYDrones are paying on a CPM, not a CPC, basis?

Even if they are, that means that they're highly targeted. You can't meaningfully compare a highly targeted text ad to a run-of-network display ad.

[jaywood]

What's ironic is that both Facebook and MySpace started with a narrow focus -- closed college networks for Facebook and music scene for MySpace. They leveraged that early strength to become a mass market product. Will being mass market eventually undermine their value to users?

[Ariel Diaz]

Interesting post, though I must disagree with your last comment questioning Facebook's worth.

Facebook today is like Google in 1999, pre Adwords. Given the economics of website, where Total Profit = (lifetime value of user - User cost of acquisition) x Total Users, Facebook only needs to get the lifetime value slightly above zero to be extremely profitable given their large user base and negligible user cost of acquisition.

But another major point is that a large amount of Facebook's latent value is in Identity. I'm surprise how little this is discussed in the media or blogosphere, but it's an incredible valuable solution that nobody has come close to solving (OpenID doesn't work).

If you're interested, I wrote more about this latent value and why Facebook will win at
Ariel-Diaz.com

-Ariel

[greg burton]

Hi Chris,
I couldn't agree more. The reason MS and FB get such low CPM rates is that the pages are skimmed while users browse, and there's no (almost negative) affinity for the stuff that's being advertised.

When developing www.zoosse.com, we saw the social networking side of our sports portal as an integral component, but equally as important as the sports information, rules, training and competition videos, and the direct connections with the bodies that run the 67 competitive sports in the US. (Talk about Long Tails!) Zoosse puts the athlete in the hub of the sports world: friends and competitors are important, but just one of the spokes of that wheel.

We believe that the increased value of ads on "portal" sites or blended social/portal sites is driven by a number of factors:

1: The premise of the user's presence on the site in the first place - is the stuff being advertised one of the things they might be there for in the first place? (best case!)
2: The user's relationship with the subject itself - In Zoosse's case, better athletes, particularly those in sports with lower profiles, personally "own" their sports, and appreciate others who partipate in them, be they friends, competitors, suppliers, event organizers, etc.
3: The importance of the product being advertised in the user's "real" life. (athletes are always looking for the best equipment, for that "edge" in competition)
4: A perceived lack of the products and services being advertised in the users' "real" life increases the importance of the products' ads and the likeliness that they will have any influence on the user. (You can find a football in the store, but not a fencing sword!)
5: Any increased uniqueness of the community due to its size or exclusivity (cult power) is a big bonus. In sports, at least 60 of the 67 sports are considered "orphan sports".

Imagine a $100 billion market, with 120 million participants, most of whom feel underserved and frustrated.

Isn't this what the Long Tail is all about?

Greg Burton
[email protected]

[Philip Buxton]

Online ads work almost entirely in vertical channels because the value of interaction has been aligned almost entirely to direct response objectives like sales, or sales leads. The online sector still has so much work to do to convince brand advertisers - who are used to buying audience (rather than vertical channels) - that banners can have any significant impact. For mass reach media like Facebook/MySpace (or Yahoo Run-of-Site) they have a choice to make - get vertical or work hard to make the audience sell convincing to the big brand advertisers...

[Philip Buxton]

the stats here back up the argument. CPMs are inversely related to the site size (for small we can read niche or vertical...)
http://www.pubmatic.com/adpriceindex/index.html

[somewhat_agree]

I will tell you where the two tails meet. Organization of local advertising, local software developers and a local sales force behind it. I will soon give a demonstration of the entire model. That's how Google would do it, so why not?

[Marcelo IH]

Hi Chris,

I'm Brazilian and great fan of your work. First time posting here.

I really believe that's the way to get Social Networking sustaintable. I'm working on a project of niche SN that I had designed about 4 years ago, but in the lack of tools (and time) to make it happens, have waited until now. Unfortunately, Ning is not my way like you did, I think it's limited and I have another theories that I'd like to implement to have a social networking making money. If you are interested, contact me after.

But reading your post, it really made me thinking that we are living web product cycles faster than ever, and it'd continue to accelerating. But the more funny thing is that it's not a cycle with an end or "low selling" point (like common marketing cycle), but it's returning to the start point. We started all this thing in web grouping in small bunch of people using tools like e-mail groups, forums, chats, specialized page hosts (like Geocities) in a moment that no one knew what was "social networking". Now we are passing by the "hit" thing, big websites, too much people, but poor content, no focus at all. The next step is the smaller grouping again, that always had rich content and a focus, reinforced by new technologies and applications.

Regards!

[Nutrition Expert]

Trends come and go same will happen to Social Networks especially as they turn into a bulk advertising platform.

[Rob McGonigle]

You are correct about the value of targeting. There are many specialist groups on Facebook using tools generated by their open api. There are many generated by just by the active members of the Church of England for Zimbabwe support etc! This may not be valuable space but 'who's hot' targets young folk interested in appearances and 'how hot is your job title' is sponsored by a recruitment agency.

Remember that targeted ads only work when people know what the product or service is. Wider, less costly per eyeball advertising, works when introducing truly innovative products. These social sites can target an audience demographically by age, location and even sexuality.

[Carl Morris]

Can anyone confirm that Facebook does indeed run targetted ads?

I've just seen a display ad on Facebook for a "Brian Eno t-shirt" and I also happen to belong to a Facebook group called "I Know Who Brian Eno is".

My hunch is that the ad was served to me because Facebook has deduced (correctly) that I am a Brian Eno fan.

The link takes me to this rock t-shirts store which stocks a wide range of artists - djtees.com/tshop/store/listCategoriesAndProducts.asp?idCategory=3277

Or is it just coincidence that I've seen this ad?

[Maikeru76]

Long tail or Big Fat Head...

Which to use ??...

Seth Godin and you should consider a 'face-off'

Kidding...

Nice use of stats for your opinion and hope that your ideas being validated by small and big companies around the world would NOT result in you having a "Big Fat Head"...

Thank You so Much for sharing your ideas on this blog...You (and Seth) are ON my rss reader...

Keep on blogging about the trends ;)

[kabin]

thanks...
Kabin
Konteyner

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[kabin]

bookmarked this already dude great work

[Payday Loan Online]

If anything, the Internet has become even more fragmented (see YouTube) - so I wouldn't bet on a destination site. People also seem to forget that the ease of visiting the most popular site is the same as visiting the new up-and-comer, minus the excitement... In any case, content is the great constant, while the way to consume it is subject to trends and innovation which are always in flux.

[Ink Cartridge Recycling]

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Regards

Peter