Social Networks "Everywhere and Nowhere", according to The Economist

The Economist produced a damning indictment on closed-ended social networks in their article last week "Online Social Networks: Everywhere  and Nowhere".  The article compares social networking to webmail from a decade ago - a ubiquitous service that may have great utility but not a great business model.

Some of their pronouncements are a bit premature but they do make some very valid points:
- why go to so many websites to maintain connections with your fave friends and colleagues?
- conventional display advertising is challenged to breakthrough on all the big social network sites
- Facebook's Beacon has failed in its first go-around
- personal privacy has become challenged by social networks needing to broadcast all your information, in many cases whether you like it or not
- various groups (Google, Mozilla's Thunderbird) may not have a large incentive to make money off of social networking based on it being a complement to the rest of their services or the fact that they are open-source,non-profit

Let's tackle each one of these:
1) To open source or not :  I actually do believe there is a place for "walled gardens' on the web - just not in big mass collaborative settings like Facebook. In order to grow and be deemed valuable by their users and the advertisers who follow them, they will need to open up and integrate with the rest of the web and answer web user's biggest frustration - "how do I go to one place for my online socializing". Whoever moves their fastest, will get the spoils - as Google is to online search and eBay is to ecommerce so X will be to eSocializing ...could it be Google's OpenSocial work, perhaps an Apple iSocial, a Facebook Unplugged or Microsoft Browser based system? The leapfrog benefit when this happens is that an intelligent semantic web will be able to do social things we wouldn't have dreamed of in our currently splintered universe.

However, as people want more specialized socialization and privacy, niche interest-specific sites will pop up and create thriving micro-communities where people are happy to jump through hurdles to become part of the private insider clubs that will form. Witness the start of the long tail communization of the social web already by Ning's development of 200,000 clients. If Facebook becomes the Strabucks on every social corner, some of us will want Studio 51 too. 

2) Advertising issues: Conventional advertising has been a fool's game in traditional universes for awhile too...half of the pop ups, pop unders and rich media interruptions are likely clicked out of error or confusion than real interest. The type of people clicking on these ads has also proved to be a low income, promotion-hopping and inherently disloyal customer segment.  Google ads work for two reasons: a) people are searching when on Google  and if your ad is relevant to their search it may suade you into clicking and b) it's a pay per click environment. 

On social networks, the whole idea is hanging out on a virtual couch with your friends so: a) we don't want to leave the couch to go someplace else where ads might take you and b) social networks would much rather sell you sponsored and display space because of a).

The companies who are winning in a social network universe are bringing "value to the couch" - see TripAdvisor's  Where I've Been on Facebook which builds a better customer experience as opposed to shouting over the conversation. Most marketeers and agency folk have not recognized this concept yet and corporate acceptance of social networks has thus suffered.

The other pertinent stat that should keep social networks propped up until marketers figure out how to
operate in them. We spend about 20% of our media time on the web yet it receives only 8% of the media  pie. With the 20% number expected to grow, expect a building advertising tide to raise all ships.

3) Beacon's failure: granted Microsoft $12 billion valuation of Facebook put pressure for Beacon to work right out the gate, it didn't and people panned it. The idea behind it however is a powerful one - we love to talk and share information about brands and products we've purchased (Amazon has perfected this execution) . If you're just normal, you'll exchange over 50 recommendations/referrals every week. Plus, in 70% of word of mouth, we actually act on its intentions (could ads even breakthrough decimals on an action quotient?) .  Beacon failed in its execution - expect the next rendition to be closer to the vision of systemizing word of mouth value online. Even in its short history, Facebook has had a history of failing quickly, pulling back and reintroducing something better - expect a similar episode here.   

4) Privacy - as perhaps an unfortunate fact for some of us, privacy is a waning asset. If Barrack Obama's passport info  can be accessed by civil servant hobbyists, your information is a comparably easy read. As more info gets posted online, your life, personal history, family connections, financials and work history will become an open book. It may be Orwellian and certainly social networks need to deal with the short term issue (notice Facebook's calibrated privacy settings) but a decade from now, we may laugh at what information we used to hold so close to our chests. And contrary to the author's assertion, the open sourcing of information will actually make your information more accessible not less (imagine you providing an update and it being blasted to the 26 social networking sites you've signed up for  in real time).

5) Social networks as the loss leader - from a mass perspective, social network services may be the metaphoriacal "tie or socks" that you get for free alongside your bought web services ensuite "suit". Microsoft and Google's bandwidth may be able to support  such loss leadership. It's one of the reasons why I thought Facebook at $12 billion was well over-valued from the outset. Because I don't work for them, I'm less concerned about the fact that every 18-24 months, a new social network overtakes the one before it (Friendster-turned My Space turned Facebook). I'm more concerned about the fact if social networks are free and less of us are looking at corporately produced content, where will the marketing money go to sustain this web ecosystem. Will online become like the airline business where the best operated brands profit and the rest are managed by ego-driven, well-moneyed business people at a constant loss? It's an interesting question in a world where people refuse to pay for content.

A few caveats that will see new forms of revenue-friendly social networks:
- branded social and collaborative social networks/communities, witness the launch of My Starbucks
- mobile-based social networks - which approximate a real world search parallel to Google's online search
- niche social networks - I just spotted a dedicated social network for sports fishermen, niches will always be able to charge more for serving their constituents better than the big guys
- ancillary service social networks - if people won't pay for connecting to their social networks - perhaps there will be ancillary services that sit alongside them that they will pay for - MySpace is now selling music, Facebook is trying to open up a marketplace, perhaps LinkedIn will set itself up as a high end headhunter with affiliates.      

One thing I do know, every evolution of web has created winners and losers and  incorporated the wave of change before it...no different here. Social networks are a part of our life for good and it will be interesting to see which  1-2 companies at the top end and 100-150 companies at the bootstrapping end will make a good business model out of them.