03/22/08

I learned a lot at the recent O’Reilly conference, “Graphing Social Patterns.” (You may have seen my coverage of the event at my other blog, and also on my Twitter page.) But the most interesting thing that was confirmed for me personally at this event was that, for social networking to really become successful from a business standpoint, it must somehow start to enable the one big missing element so far: commerce.  Advertising is not going to cut it as a sole business model, a fact that’s becoming increasingly evident.

With clickthrough rates continuing to decline, ad spending hardly going up in the current economic environment, and the lack of ad relevancy getting talked about more and more (especially on social networks!), suddenly advertising is not seen as the panacea it once was. It would appear that commerce—selling real stuff—must be the next big thing.

An article just published in The Economist makes it clear that the current state of the social network leaves something to be desired from a business standpoint: Online Social Networks: Everywhere and Nowhere. The subtitle says it all: “Social networking will become a ubiquitous feature of online life. That does not mean it is a business.” The piece doesn’t speak explicitly of the need for commerce on social networks, but rather of the lack of profits from advertising. The implication is clear that, if these online entities exist to make money (and, after all, virtually all of them are dot-coms, not dot-orgs), they are in serious need of a business model. Or will they simply become a loss leader to something else, as web mail has become?

Charlene Li, Forrester Research analyst, said it clearly at the Graphing Social Patterns (GSP) conference: “One thing missing from social nets today is the thing that made the Internet go mainstream: shopping.” It would appear that online commerce represents the next frontier in the evolution of social networks. I’m certainly hearing the topic pop up all around me. At GSP, Ben Ling, product marketing director for Facebook’s platform, said he he thinks “transactions are part of many social interactions,” though he didn’t elaborate. One surmises Facebook is hard at work trying to figure out how it can make money from people buying and selling things on its network. Its first attempt at an ecommerce-related feature, Beacon, flopped badly due to privacy concerns. But don’t imagine it’s giving up. Nor MySpace. At GSP, Amit Kapur, COO, said it “has 150 engineers and product managers working on monetization technology.” He said nothing specific about experiments with ecommerce, choosing instead to focus on what it’s doing to woo more advertisers with its new “Hyper Targeting” ad capability. But it would be foolish to think MySpace isn’t working feverishly on ways to enable ecommerce on its network as well, to secure a juicy cut for itself.

Is commerce happening to any large extent in other social networks?  It could it be on Hi5, Orkut, or some of the others popular outside the U.S.—I don’t know. Some could probably cite examples of certain small, niche networks being set up with commerce transactional capability. (One would think Ning is trying to help its 100,000+ niche social networks monetize.) As an example, could a network of enthusiasts of a certain brand or type of collector car enable its members to buy and sell parts amongst themselves? But would the operator of such a niche site make a significant amount from the small-percentage commissions on these sales? One could assume that charging membership fees (or advertising) would be more lucrative for them.

But back to the big fish. Facebook now lists almost 20,000 applications that users can choose from to place on their profiles. (Many of these are also offered separately by their developers as widgets that can be placed on any web site or blog.) Facebook breaks these down into 22 categories, but amazingly there isn’t one called “shopping.” The closest might be a category called “Classifieds,” but most of these are more of the “personals” variety, and there are many apps on Facebook, here and in other categories, that use “virtual currency” in their transactions—not real money. A search on the keyword “eBay” pulls up 40 apps on Facebook, though the majority of these have nothing directly to do with eBay, and even seem not appropriately classsified. Only two were developed by eBay itself: one called eBay Marketplace, which has—get this—only 66 “active daily users,” and another called eBay To Go, which has only 6. At GSP, the VP of marketing at Widgetbox, Pam Webber, said that Facebook’s eBay apps are not doing well (no lie!), but added that a popular one on WidgetBox is used a lot by eBay sellers, who place it on their own web sites or blogs.

So, what’s your take on how commerce will or will not take off within social networks? Do people want to buy when they’re being social?  Do “friends” want to hawk their wares to each other?  Do they want to share shopping tips? (That seems reasonable; I’ve mentioned new purchases several times in my status updates.) Do “commercial” matters belong on Facebook or MySpace at all?  Is commerce a way social nets can finally start to make some serious money?

UPDATE (3/25/08): So, you say Amazon should be able to do something on Facebook? We’ll soon see.... Amazon launches two new apps for Facebook (Internet Retailer).