Valuing Social Networking Websites

by Eric K. Clemons, Fellow

Social networks seem cutting edge. Perhaps Second Life should be viewed a replacement for travel, bigger than gaming and movies combined, the next social force, like email. Perhaps MySpace will replace the Yellow Pages, iTunes, even America’s malls as a communications mechanism, meeting place, and sales channel for America’s teenagers. Maybe even manufacturers of prosaic products like Kraft will have community websites that replace their traditional reliance upon advertising as a means of communicating with their consumers. Is this the reason the Rupert Murdoch and his News Corp recently paid more than half a billion dollars for MySpace?

The first thing to understand when trying to figure out why News Corp placed such an extraordinary valuation on MySpace is that traditional media companies are running scared — readers are abandoning newspapers for television; viewers are abandoning television for the internet, video, and gaming; and nobody seems to watch or believe advertisements and commercials any more. What do you do if you’re an advertiser and no one watches your ads? You blame the medium you’re using, and try to find another to use … in the same way … to reach the consumers who have abandoned you. How right — or wrong — is this? Social networking websites are certainly amusing and novel. But are they commercially viable, and do they contribute to the sale of products and services to be consumed here, in meatspace?

First we need to understand why people use social networking websites. Second life — by the far the most publicized of the virtual reality websites — seems somewhere between playing with dolls and watching yourself in a porno movie written by a very large committee, and it is hard for outsiders like myself to see the attraction. Likewise, websites for posting your recipes for macaroni and cheese, or for commenting on the cooking habits of others, may not be exactly my thing. But I am fascinated by many of the pictures users post on Flickr, I occasionally find the reviews on tripadvisor useful, and I find the information on food and beer rating websites a wonderful source of information when considering an unfamiliar purchase (e.g., RateBeer).

All social networking websites that attract significant traffic enjoy at least two and possibly more of the following 4 Ps:

• Personal — Users find them personally relevant.
• Participatory — Users are not only interested in the posts of others; they find opportunities to participate and post their own material.
• Plausible — They make sense. They have rules that make the behavior of other participants understandable. The rules of a game like World of Warcraft or of virtual reality may not be the same as the rules of New York or London or Beijing, but there are rules. Events are not random and therefore meaningless.
• Physical — There is at least the possibility of making the transition to meeting another member of the community here, in physical space. This may be the whole point of some websites (such as dating services) and unusual in others (virtual reality websites, where users may be anywhere on Earth), but as long as we believe we are bonding to a real person, who exists somewhere in our real world, then a transition to a physical encounter is possible.

While this may enough to ensure the existence of traffic, it does not suggest that a social networking website will generate revenues, especially revenues from advertising. A website must first develop traffic and convert that traffic into a community where users feel themselves to be members of an important, relevant, and trusted group of friends. Can such a community then be hijacked and its trust monetized to sell goods and services? Or will any attempt by advertisers and media companies to hijack them simply destroy the trust they have earned?

Along with my colleagues Steve Barnett and Arjun Appadurai, I developed a longer posting on this topic. I welcome your comments here!