Australia ROI: Investment and Revenue in Social Networks

I wrote a few paragraphs recently for The Venture Group newsletter – the pdfs from that issue are gone, but what I wrote seems to be popular. Note the top right: in the next years the market for web 2.0 companies will get standardized. It seems to me that investment companies really do want to…

I wrote a few paragraphs recently for The Venture Group newsletter – the pdfs from that issue are gone, but what I wrote seems to be popular.

Note the top right: in the next years the market for web 2.0 companies will get standardized.

It seems to me that investment companies really do want to invest in your you-beaut idea for an online community. But they only want three things: your exit strategy and your revenue stream. Well, there’s probably a third thing but I don’t know what it is.

You, of course, are creating your community with ethics, high ideals and a willingness to live on the smell of an oily rag so that you can be a beacon of light and justice and generosity in the online world. Or something like that.

Anyway I thought you might like to see the Revenue in Online Communities piece. Help you gear up for funding, and to smart mouth back those who say “but there’s no money in Web 2.0!“.

Social Networks and Online Communities
Recently, there has been a lot of talk about social networks online, in particular, YouTube (video sharing), Second Life (virtual world), MySpace (blogs) and Facebook (discoverability) sites. While there are many different types of communities online, offering different tools, it’s the sheer numbers that make the subject worthy of study. This article is a brief overview of the different business models for social networks and some examples of those revenue streams in the communities.


Whether you see Facebook as a waste of time or as a sales and marketing channel or both, their growth has been impressive. Facebook opened their membership from students to non-students exactly a year ago and have grown from 3 and half million members to well over 45 million worldwide in those 12 months. In Australia, since Facebook implemented F8 (Fate) social network application development platform in May 2007, the social network has grown to 2.1 million over-18 year old Australians. That is: they have effectively signing up 10% of the Australian population over a 7 month period. A few weeks ago, Gartner consultancy said: “By the end of 2011, 80 percent of active Internet users (and Fortune 500 enterprises) will have a ’second life,’ but not necessarily in Second Life.”

But where’s the money?

Here are examples of social networks using various models to raise revenue.

Standard Subscription
All members are charged a monthly subscription. The virtual world, World of Warcraft from Blizzard charges around $15 a month to 8 million paying subscribers. This fee is flat, for everyone, and once paid, allows access to products and services. No pay, no play. If you don’t pay you have NO product/services. It’s that simple.

Premium Subscription
Premium subscriptions may be standard (free) versus premium (fee) or they may be tiered with the variable fees giving variable access to variable products and services. The fee is usually a monthly or yearly amount and may buy access to closed *roped* off areas, the removal of ads, additional services such as in-network email, increased services that are limited in the free model. Flickr.com is one of the most popular photo sharing communities on the internet. Used by photographers – professional and amateur, with a good amount of content from mobile phones, Premium subscriptions (Flickr Pro ) cost USD$24.99 per year, can be given as a gift (uses an activation code) and increases the number of photos that can be uploaded, and the number of personal photo albums online. Second Life is free for the first basic account, second basic account is a one-off fee of 9.95. Premium accounts are $72.00 per year and gives you the right to own virtual land and a weekly stipend in Linden dollars. Linden dollars can be converted to and from $US via LindeX exchange.

Advertising tends to be tricky with social networks. The majority of the content is user generated so advertisers feel concerned about lack of control over associating the content with the brand image. Lack of trust on the part of the advertisers towards members is weighed against the need to get in front of eyeballs.
So in spite of the fact that MySpace members are mostly women 25 years and older, the market perceives MySpace to be an ‘unsound’ advertising channel, with poor control over the (mostly user generated) content. MySpace recently decided to try “roped off” areas for advertising – they call them the “well-lit” areas. Facebook had some major advertisers pull ads after they were appearing next to politically sensitive groups.

Advertising tends to be outperformed by other revenue streams. CNN Money found that MySpace makes $2.17 per member per year from advertising, whereas South Korea Telecom’s Cyworld (90% of South
Korean’s in their teens have signed up) makes $7 per user per year ($300,000 per day). However in SKTelecom’s Cyworld case, there is NO advertising, the revenue is from virtual goods.

Pixel Products or Virtual Goods
Virtual goods are made once, usually a simple image or animation, and then sold many times over. There are no manufacturing costs, no distribution costs to consider – in fact the long tail (long shelf life and
distribution cycle) is well and truly in place. Corporate (not made by users) virtual goods include ring-tones and avatars. Habbo by the Finnish company Sulake, has 80 million members in 29 countries worldwide. There are 200,000 ‘tweens’ in the Australian Habbo Hotel all of whom spend the equivalent of a movie ticket per week on their subscription and virtual goods (furniture for their Habbo room). On average, these tweens log in 5x a week. Worldwide, Habbo makes 90% of their $60+ million from virtual goods.

Please note that many game and virtual community companies ban the sale of pixel products in their End User Licence Agreement (EULA) and therefore there is a brisk ‘black market’ trade on non-affiliated sites e.g. eBay. In 2005 it was found that one server (many virtual worlds run on multiple ‘worlds’) called Norrath, for the game Everquest, had become the 61st biggest economy in the world. Very slowly the companies developing these entertainment products and services are resolving to monetise rather than ban the trade in virtual goods.

Consumer generated virtual goods is THE growth area. Second Life is almost completely member generated content. User generated houses, shopping malls, fashion, dance clubs. In some cases, the ‘users’ generating the content are big business – in Australia, Telstra has Ponderia (an Island) and ABC has an Island as well. Second Life rents out the larger blocks of land (islands) for $195 USD per month.

Brands are built around ‘tribes’. So merchandise such as Harley Davidson t-Shirts and Nike sweatshirts sell well. We are starting to see a foray into monetising members of communities who want to brand themselves with community images. T-shirt companies such as Jinx have built large satellite communities: merchandising channels to Blizzard’s World of Warcraft and other role-playing games. MySpace “Tom is my Friend” mugs, blog business cards (small cards), Second Life: the Official Guide (book) and more are available from retail chains.

Some social network developers look for a sponsorship or underwriting partner. Since Chris Anderson recommended that Ford cars underwrite a gardening site in his book, Gonzo Marketing, co-branding communities as a marketing strategy has increased. Health sites supported by external Pharmaceutical companies exist.

Revenue Share
This is the most powerful business model of the future. As the consumers are creating the products and service and are responsible for their distribution, companies are well advised to work with massive social networks to minimise the impact of the consumer-as-competitor. (old blog post)

Monetizing User Generated Content
Members like to generate their own income – and it’s a sound way to create a viral buzz about your network. eBay understood the power of peer-to-peer and make a mint brokering online auctions. User generated goods – which is pretty well anything in Second Life – can be avatar clothing, housing, artwork and ‘labouring’ jobs. Labouring jobs include being hired (oh, ok, it’s actually your avatar that is being hired) to dance at a virtual nightclub.
However while around 1.25 million US dollars is spent in Second Life during a 24 hour period, very little of that is taxed. (examples of peer to peer UGC sites with revenue here)

I was finishing it on the way to the airport riiight at Christmas, if I remember correctly, which might be why it ends so abruptly. *laughs*. And why do people always limit the amount I write *cries* it’s because I talk too much, right? Go’on you can be honest with me! πŸ˜€

Aren’t there two other ways of making money? Gated areas – or is that premium content?

Ah well, it’s here for posterity. If I find the pdf back up online, I’ll link to it. But I didn’t want to write something, all that hard work (attribute please!) and then not share it with people. That’s just not me…

PS I stuck the cartoons in.

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  1. Yes!


    The other way is ….

    Make it DO SOMETHING.

    Please, that’s all I ask. Just make a social networking tool that does something.

    For the love of god, it isn’t much. Just something small. Like, make it help me find my friends, or have a party …

    But just make a social networking tool with no freaking zombies and no dull-as-LinkedIn feature moonscape.

    I just want it to love me. Just a little.

    To get a little sugar from my social networking tool.

    oh .. oh please.

    I’ll pay. I swear I’ll pay.

  2. aye agreed. But I was listing the “hows” to charge, not “why” people will pay, hon πŸ˜‰

  3. I’ve been pondering the disconnect people have between online and just about any other medium.

    I actually doubt that most people really would pay for online content. They’ll pay for papers, magazines, books, movies, DVDs.

    But I can’t quite decide if people refuse to pay because they don’t want to, or if it’s just simply too much work to pull out the credit card. After all, I don’t have to think about whether I trust my local convenience store when I plunk down $1.80 for my sunday paper (aka. the tv guide wrapped in newsprint). But I do have to think whether I trust a site enough to hand over my credit card.

    I wonder what would happen with a ubiquitous online payment system similar to phone cards, itunes cards, etc. Disposable credit cards with $20/$50/$100 on them – no risk, tip away. What’s the worst that can happen? You lose $20, not your entire credit limit.

    Anyway, that’s my vaguely related ramble πŸ˜‰

  4. The issue is currency: what does currency mean for us? It’s a medium of exchange, a store of value etc. We just aren’t equating paying for what we value (information) with current mediums of exchange.Too hard.

    In plain English, we pay if we value it, and we have the mechanism to do so. World Internet Currency project may help (get paid virtual coins to write blog post, spend on virtual products). We’ll see – I’d blog more if I could keep SilkCharm in pixel shoes πŸ™‚

    BTW we’re about to see a lot of real world money go into this area. Including Facebook’s Peter Thiel and Acebucks.

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