A way for social networks to actually monetize [better] (holding company theory)

http://www.outrunpoker.com/blog/2008/03/a-way-for-social-networks-to-a.html

by zkinion • 18 years ago

10 21 18 years ago

symbiotic• 18 years ago

I agree that social networks need better business strategies in general, but if the advertisers are making more money than the social networking sites, why make the SN site in the first place? Why not just try to beak your way into porno, gambling, credit repair (the list goes on) business and just sell adds like everyone else?

I think the answer is that we believe SN sites should be able to make more money than these other businesses. The person who figures out how to make that happen will be rich, but I don't think the answer is to just add another business onto your SN.

zkinion9• 18 years ago

Sell ads on what? Those sites are buyers of ads. They do the conversion of traffic.

I should have made more clear that this is a longer term strategy, and yes, indeed more expertise is needed in these industries. However, what these industries do is not rocket science, and can be reproduced over time.

My point is that SN sites could eventually do the conversion of that sort of traffic themselves, and gain higher CPM In the Long Run. This process would take years, but is rewarding in the end.

rms2• 18 years ago

I understood what you're saying. I think it's a great idea.

mattmaroon4• 18 years ago

But it's not really a higher CPM at all. There's no benefit to Facebook starting a mortgage brokerage and advertising that on Facebook (which apparently isn't a very valuable seller of advertising, or they'd already have decent CPMs) over just switching to a mortgage company entirely and advertising on other social networks. Or better yet, switch to selling mortgages and advertise on sites that are valuable to mortgage brokers.

notauser2• 18 years ago

Whoops, are a few basic errors here.

He has two assumptions:

- You can make a profit in the industry of your advertisers. This is a huge if, and is impacted by scale, expertise, management focus, time/maturity, branding and many other factors.

- The return on investment you can make in industry X is higher than the return on investment you can make by expanding your operations in your current industry. This could be true for social sites, where increased investment (i.e. programmer time) might not get them many more users, but they still have to compare the possible revenue to the increased profit from firing some programmers and going into maintenance mode.

These to are the main reasons why you see companies outsourcing non-core activities (like cleaning and even product development), the markup they now have to pay on the service is lower than their internal cost of capital.

zkinion9• 18 years ago

-The SN network in this situation would be acting as a "holding" company. It does not expand into anything itself. The child companies do, and gain expertise (by possibly hiring from competitors), and also advantage by more traffic sent to them.

-That return on investment would be higher, in the long run. Yes, thats an if, but its a much better if than "social graphs completely turning around CPM for something like FB".

Those are also, by their opposite, reasons why companies consolidate and acquire...

notauser2• 18 years ago

Your first point is essentially meaningless. It makes no difference if it is a division, a child company, or part of the core business. Someone has to think about it, manage it and execute it. All this costs money which you could use elsewhere _and_ it creates potential conflicts of interests with your own business. This means that you need a really good reason to go ahead.

For an example of conflicts of interest look at the Windows/Office vertical integration and the constraints placed on Office in order to keep Windows profits high.

Your second point boils down to the fact that social networks give an awful return on investment. Could be true, but if so that's more of an argument to get out of social networks altogether and find a more profitable business.

davidmathers• 18 years ago

Fail. Econ 101: wealth is created via division of labor, not consolidation of labor.

zkinion9• 18 years ago

wealth for an entire nation/world certainly is, but not necessarily wealth for a specific company, especially in the situation I speak of.

yters• 18 years ago

Interestingly, parallel programming theory comes into play here. There is a sweet spot between completely distributing an algorithm and completely consolidating an algorithm that allows it to scale effectively with more processors.

mattmaroon4• 18 years ago

This is very silly. It's a well-known concept in the business world that companies should stick with their core competencies. Ones that try to do too many disparate things at the same time generally fail. Facebook's core competency is not selling mortgages or credit cards.

Also, if mortgage brokers are only willing to pay some portion of 14 cents CPM there, that means Facebook is creating very little value for them. Which also means that if Facebook got into the mortgage selling business, they could probably capitalize off of it in much better ways than just advertising it on their relatively worthless site.

So in essence, the only industries Facebook would benefit from entering are ones that already pay them a high CPM. But if people were paying them a high CPM, they wouldn't be in this predicament.

zkinion9• 18 years ago

"Facebook" wouldn't have to change their core competencies at all. It would have a stake in a company who's core competency is whatever that industry happens to be.

The site is indeed relatively worthless, and I doubt anybody at all is paying them a high cpm in anything. Thats the whole point, to turn low cpm into somewhat higher cpm, in the long term by capturing more of the revenue stream.

Is it fool proof? No way. Facebook or whatever, could risk losing their investment in whatever company they bring up, and also lose the opportunity cost on whatever ads they could be selling instead of sending to their own child company instead... But does it stand a better chance at making more money in the long run compared to magical BS like social graphs and social ads? Yes, I definately think so.

mattmaroon4• 18 years ago

The minute a startup starts making significant investments in mortgage brokers, credit card providers, etc., you're leaving their core competency.

I don't think you're understanding why this provides no value to anyone. You're turning Facebook into a Berkshire Hathaway of sorts, with the only coherency being that every company they buy a stake in advertises on Facebook. By that logic, why shouldn't Time Warner start buying stakes in whoever advertises on CNN? Why shouldn't everyone who sells ads do this?

Facebook gains no higher CPM from doing this either. I mean, they may make more money if these auxiliary businesses do well. But it's no more than if they kept selling ads on Facebook for 14 cents cpm, set up these side companies, and spent 14 cents cpm advertising them somewhere else. The fact that they own Facebook provides no value whatsoever for the side companies.

Effectively you're saying that any company with a non-functioning business model should just do something else too. That doesn't solve the problem.

agentbleu• 18 years ago

I have recently had the same idea and tried to execute it with as an astonishingly great failure. I have a real estate site with high traffic, I sell adverts and have adsense too. I suspected I could see directly to these visitors with another spin off that I controlled. So I built an e commerce site selling organic wine (which I suspected would be of interest to the same clientel) and advertised it prominently on the real estate site. Hardly any traffic has resulted from the advert. The bottom line is, if the advert is not on topic with the mode de operation of the user at that specific time it will be ignored.

A way for social networks to actually monetize [better] (holding company theory)

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