ADTELLIGENCE GmbH
                                                        Mannheim, Germany
                              ...
Contents


– 5.   Future
  5.   Future Strategies for Social Networks




                                    www.adtellig...
Challenge
Innovation Footrace of Social Networks to
receive Advertising Revenues




Market Saturation                    ...
Innovations
   must be carried out on
   Each Level of Social Networks

                         In the future, business ...
Three Scenarios
      Not all Social Networks head in the Same
      Direction




                                       ...
A Platform Strategy
    Focus on open APIs




■   A platform business model focuses on the page or the proprietary offer ...
A Platform Strategy
Trigger for Extensive Network Effects


       Schematic demonstration of network effects when opened ...
Social networks get a chance to charge
    third parties for access to the platform




■   Third parties have to pay the ...
A New „Operating System“ could be
    generated in the Future



   Social networks already have integrated functionaliti...
How to succeed with an open
        and a closed Platform
        Two Stories




   B2C Business model
                 ...
Specialized Social Networks
    The need of New Revenue Models in the
    Future




   Not every social network is able ...
In Terms of Monetization
     Specialized Social Networks will be looking for a
     Link between Online- and Offline-Worl...
An “Offline Strategy”
    If the technological innovation is not strong
    enough

                        …Offline busin...
Social Networks as a pure marketing-
   and R+D-Instrument
   in a portfolio strategy


Often venture capitalists or corpo...
An unprofitable Social Network
        in a portfolio strategy aggregates and
        distributes traffic for others


   ...
Social Networks
    Three survival strategies




                                      “Winner-takes-all” strategy, suita...
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ADTELLIGENCE_White Paper_Monetization of Social Networks_Chapter5

  1. 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. 2. Contents – 5. Future 5. Future Strategies for Social Networks www.adtelligence.de www.adtelligence.de 2
  3. 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 www.adtelligence.de 3
  4. 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. www.adtelligence.de 4
  5. 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 www.adtelligence.de 5
  6. 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 www.adtelligence.de 6
  7. 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 www.adtelligence.de 7
  8. 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 www.adtelligence.de 8
  9. 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 www.adtelligence.de 9
  10. 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 www.adtelligence.de 10
  11. 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 www.adtelligence.de 11
  12. 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 www.adtelligence.de 12
  13. 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 www.adtelligence.de 13
  14. 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 www.adtelligence.de 14
  15. 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 www.adtelligence.de 15
  16. 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 www.adtelligence.de 16

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