1. ADTELLIGENCE GmbH
Mannheim, Germany
www.adtelligence.de
info@adtelligence.de
“Cashing in” on Connections – Monetizing Today’s Social Networks
White Paper (2009)
Chapter 5 – Future Strategies for Social Networks

2. Contents
– 5. Future
5. Future Strategies for Social Networks
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3. Challenge
Innovation Footrace of Social Networks to
receive Advertising Revenues
Market Saturation Competition for User
Cut-throat
Competition for Advertising Revenues
competition
Innovation Footrace
of Social Networks
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4. Innovations
must be carried out on
Each Level of Social Networks
 In the future, business model innovations will become more important
 Global competitive pressure and faster innovation cycles lead to a development of
products and methods of offering them to create distinguishing features
Business Model
Innovation  New competitors with new software can still be possible (e.g. Twitter) – network
effects and venture capital will help
 Therefore, the direction and range of aspects of Social Networks change and partly
renew themselves in the next years
 Social Networks like Facebook and LinkedIn accelerate the innovation cycles and
Feature Innovation constantly integrate new features on their sites. Users have to get involved and are
rewarded if they stay and create their pages on their own initiative
 Incentives have to be created, the open source software development provides
examples for it
 Apart from the competition for advertising revenue, new competitors will try to
focus on single building-blocks of the value-chain (agencies or marketer buy Social
Advertising
Networks or vice versa)
Innovation  Social networks must offer the advertisers intelligent access to the user sites – new
targeting technologies will be key.
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5. Three Scenarios
Not all Social Networks head in the Same
Direction
Platform-Strategy
Possible
Strategy-
Online-Offline-
Scenarios Strategy
for Social
Networks Portfolio-Strategy
Influencing
factors
Extremely Rising cost Financial crisis Unclear willingness …
Global
elastical pressure affects of the user to pay
competition
request advertisement
negatively
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6. A Platform Strategy
Focus on open APIs
■ A platform business model focuses on the page or the proprietary offer – the added value is not
drawn from the content of the page itself but from the overall position within the market
■ That means that the offer itself (e.g.: iTunes Shop) is just part of the added value for the customer
(in the example consistent of iPod, iPod Docking Station/Boxen, iMac, etc.) and therefore it becomes more
important through the triggering of network effects
■ A Social Network turns into a platform if there is potential to interact with the site from the outside –
Open APIs play an essential role in this as well as the possibility to integrate offers from third
parties into the product range of the page
■ The key factor for sustainable success: to make users and third parties dependent on the product/content of the
platform, so that the cost to swap to another platform would be enormously
high
■ Network effects on the product-offering site (more and more programs for Windows) and on the demand site
(Windows pays off more and more through all the software) push each other – that kind
of effect could be repeated at Social Networks
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7. A Platform Strategy
Trigger for Extensive Network Effects
Schematic demonstration of network effects when opened for third parties
Users find an
attractive
offer
More features More users
on the site on the site
Incentive for
third parties
to generate
programs
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8. Social networks get a chance to charge
third parties for access to the platform
■ Third parties have to pay the operator to use the platform, though for the end-user it is
usually free
■ Features that have been implemented by third party providers will mostly be chargeable
 These could be attractive features for the user who is willing to pay for some extras
 These could also be virtual shops whose access is free of charge for the user but third
party providers can sell virtual or real products
■ The construction of additional features gets partly outsourced – which minimizes the risk of
developing wrong features, provides a perfect way to integrate advantages for the user and
earn money with it at the same time
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9. A New „Operating System“ could be
generated in the Future
 Social networks already have integrated functionalities which in the past were subject to
single programs
 Communication services such as email or chat are almost exclusively used via Social Networks by the
younger audience
 Also on the gaming side, a utilization of networks is easily observable
 Facebook, with its 3rd Party Programs, is the most advanced social network
 A social network with platform strategy can become the operating system of the net
 Further communication solutions (video, phone) as well as shop-services are possible in near future
 Also application programs (word processing operating systems) are imaginable
 For this reason, a social network would more or less provide the user with exclusive access to
all applications
 Examples from other areas are the sales force CRM “Force.com Platform,” Apple with its App-
Shop and Amazon with its 3rd party marketplace and Cloud computing-solution
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10. How to succeed with an open
and a closed Platform
Two Stories
 B2C Business model
 Traditional “Pay as you go” or “Pay per Unit” Business
model
 Due to an advantage over traditional booksellers,
 Former niche providers (simplicity of operating system
a cost benefit can be used to win over a share of
that is deliberately incompatible)
the market
 Today, the business model is continuously
 Continual innovation of products and fast entry into
foreign markets (music market) has created synergy
developing (e.g. Cloud Computing)
effects with the traditional portfolio and the
 Changing from bookseller to a global trading attractiveness of the closed system increases
platform & marketer of digital goods with many
synergy effects
 Advances in innovation at digitalizing allows transfer of
technology from computer- to music industry
 Cross-Selling Possibilities: “The shoe to the song,”
 Core competence keeps niche product in the premium
or “The cook book with the fish fingers”
segment  leadership of quality
 Third party providers take over the Long
 Model of continuous feature and innovation of product
Tail/Niche market – less margin but more
too difficult for the mass market, since the margin is not
attractive platforms – openness becomes the
high enough and exclusiveness would be lost
strategy to success
Great success with the Open Platform Great success with closed System iTunes, iPod, iMac
Great success due to “Vendor Lock-In” effects and Cross-
Mass-market and „Long Tail“ market-niches get covered subsidization  similar to the Microsoft strategy of the 90s
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11. Specialized Social Networks
The need of New Revenue Models in the
Future
 Not every social network is able to expand and become a big platform
 In particular, specialized Social Networks are restricted
 Due to a limited amount of users, the platform is less attractive to third party provider
 Only with very special and therefore expensive features, this strategy could be successful
 Additionally, the technological power to create lots of innovations is restricted for lack of revenue
 Not all specialized Social Networks will be able to survive with the help of the
introduced revenue model
 Revenues of advertisement as well as revenues from virtual goods will be small due to few users
 Not all networks are suitable for Abo- or Freemium-Models
 This is why specialized Social Networks are trying to develop new revenue models
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12. In Terms of Monetization
Specialized Social Networks will be looking for a
Link between Online- and Offline-World
…Offline Business complements Online Business
Online World Offline World
Social Network Event
Shopping
Community
Travel
…
 Usually, a specialized social network is characterized by highly active users in a certain subject
area
 The user is not only interested in the virtual world but also likes to interact with the
community and the subject in reality
 Additional ways to monetize could be created through attractive offers in the offline world
which are related to the topic of the platform and provide real interaction with like-minded
people
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13. An “Offline Strategy”
If the technological innovation is not strong
enough
…Offline business complements online business
 A combination of online and offline activity is particularly recommended to Social Networks
which have started from a niche
 Regional players like KWICK, lokalisten or Decayenne focus on different regions – that‘s why it’s a
good idea to organize regional events and encourage the community to participate.
 Schwarzekarte or Decayenne limit access to parts of their platform in order to produce exclusiveness
– that’s how they can legitimately charge higher prices at their events
 Super-regional players like Simfy.de (No. 1 music-streaming-service in Germany), or Carsablanca.de
(“Oldies” Community) also fit into this model since they are specialized in certain interests
 In addition to events, travelling and exclusive products could be offered
Especially suitable for communities with a high identification factor and a regional
focus, and/or if one cannot provide “leading edge” technology because it is too
expensive
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14. Social Networks as a pure marketing-
and R+D-Instrument
in a portfolio strategy
Often venture capitalists or corporate groups are involved in Social Networks
■ Google, Microsoft and News Corp made sure to get a high number of users when they bought or
invested in Social Networks
■ Single Social Networks are not always run as profit center
The operation costs of Social Networks are very high. In 2009, Facebook had to raise more than
€300 million in venture capital and YouTube's costs exploded due to real-time video streaming
From the perspective of a corporate group or venture capitalist, an unprofitable social network
can still be a wise strategy:
■ The ability to reach a broad scope of clients
■ New synergies and network effects between single companies rise in the portfolio: cross-selling
possibilities, scaling, mutual marketing, and even broader scopes can arise.
■ Increased market power allows control over parts of the value-added chain and trigger more network
effects
■ Startups additionally take up the role of an outsourced R&D department – they can develop
innovations very quickly and test them on the market, in order to integrate them into a corporate
group afterward
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15. An unprofitable Social Network
in a portfolio strategy aggregates and
distributes traffic for others
…and in the end it is billed below the line
Venture Capital Funds/ Holding Structure
 Social networks that are
“stuck-in-the-middle” – Social Network – aggregates & distributes Traffic on
platforms that are Information Theme- E-Commerce Advertising &
neither big nor Sites – News Portals Portals offer Marketing from 3rd
specialized – can still pages will let Users of Social matching providers
fulfill functions in a their Networks will products
information be directly receive through
greater context
pushed by RSS topics that are targeting
in Social relevant
 As network aggregator Networks
and –distributer within a
portfolio it can be of API – enables foreign suppliers to
purpose to the whole access an own website pool (see
Ebay – charging is integrated)
picture
Startup Portfolio for Innovation
 In this way, the loss of Partner
social network illustrates 3rd Providers Startup with Startup B2B Startup with
the marketing- and R+D new Feature Website
Exchange of
costs of the portfolio Information/RSS
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16. Social Networks
Three survival strategies
“Winner-takes-all” strategy, suitable for generally big,
Platform Strategy technologically innovative Social Networks with a lot of
patience
Online-Offline “Small is beautiful” strategy, suitable for Social Networks with
Strategy clear subject-/user or regional focus
“Stuck-in-the-middle” strategy, suitable for unprofitable Social
Portfolio Strategy Networks, which can demonstrate that they can be of value
in a portfolio
 Social Networks have to be successful in one of the three strategies in order to survive
 Especially the three big German Social Networks are already struggling to survive – if they
want to compete with Facebook in the platform strategy they have to increase their
innovation power considerably
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