How To Monetize a Social Network: MySpace and Facebook Should Follow TenCent

Posted on March 9, 2009. Filed under: advertising, casual games, Internet, social networking, Uncategorized, video, Virtual Goods | Tags: , , , , , , , , |

“Little Joe never once gave it away
Everybody had to pay and pay”

                  — Lou Reed, Walk on the Wild Side

The consensus seems to be that social networks have a monetization problem.  On this topic, both the leading technology industry blogs and the world’s top news organizations agree.  The problem is not that these sites have no revenue.   I “guesstimate” that MySpace and Facebook have annual revenue run-rates of approximately $650mm and $450mm respectively – highly reputable numbers.  The perceived problem relates directly to revenue per user or page view, as these are two of the most heavily trafficked sites on the Internet.  As a comparison, other companies with similar usage, like Yahoo, are doing $7.2B in annual revenues.  When reporting earnings from Q4 of 2007, Google also opined on the difficulty in monetizing social networking sites.  Sergey Brin noted, “I don’t think we have the killer best way to monetize social networks yet.”

There is ample historical data that proves web sites like these are inherently difficult to monetize.  Most other online communication products have had similar struggles.  Two great examples of this: the many leading players in the Instant Messaging (IM) space (AIM, ICQ, Yahoo Messenger) and the leading free email sites (Hotmail, Yahoo Mail).  These products/sites have always had some of the lowest eCPMs on the Internet.  Many speculate that this is because the user is so heavily engaged in using the product (i.e. communicating) that they are unlikely to be distracted by or engaged in an advertising message.  Another corollary to this point is that other Internet properties offer more direct purchasing intent based on the way they aggregate users.  Example here include TheKnot for brides, TripAdvisor for travelers, and even Google, where the search query highly delineates the direct intent of the user, allowing the advertiser to find users already in the purchasing funnel.  All of these properties have incredibly high eCPMs.

0700hk

Despite this conundrum, there is a solution.  Luckily for these U.S. based companies, a Chinese company named TenCent has already paved the way by identifying the optimal way to monetize this type of product.  For those that don’t know, TenCent is the owner of the leading IM franchise in China – a product known affectionately as “QQ”.  TenCent was founded in 1998, has 355 million users,  US$1.2B in annual revenues, and a US$11.2B market capitalization.  The stock chart for the past 5 years is included in the adjacent graphic.  The two primary drivers of revenue for TenCent are digital items and casual game packages and upgrades.  Advertising, which doesn’t work well on U.S. products like IM, doesn’t work well in China either.  Advertising revenues for TenCent represent only 12% of total revenues.  Recently, I asked a leading Internet analyst which company in China is best positioned above all others?  He quickly replied “TenCent”.

The spreadsheet below tries to highlight the monetization differences between TenCent, Facebook, and MySpace.  For each we have taken our best guess at monthly unique users, monthly page views, monthly revenues, and advertising as a percentage of revenue.  For TenCent, these numbers are published.  For MySpace and Facebook we used the best information we could find and/or infer.  We then calculated effective CPM (eCPM), revenue/user, and advertising revenue per user.  Lastly, we show these same numbers for TenCent with a cost of living adjustment.  In China the cell-phone ARPU (average revenue per user) is about 1/5th of that here in the U.S., so adjusting these numbers up by 5X gives you a much better number for comparing directly with the U.S. properties. 

social-spreadsheet2

The takeaways are quite straightforward.  The amount of advertising revenue on an adjusted basis at TenCent ($2.08) is quite similar to Facebook ($2.44) and MySpace ($5.85) (some may wonder why MySpace ad revenue per user is higher than Facebook – many believe they are more aggressive with ad placement and insertion).  The key difference in this comparison is obviously the revenue TenCent generates with business models that are largely absent on both Facebook and MySpace — digital items and casual game revenue.  For every $2 of adjusted advertising revenue TenCent has per user per year, they generate $17 in other revenue streams.  Benchmark Capital has invested in two private companies in the social/virtual world space – SecondLife and Gaia Online.  In both cases, the company revenues are significant, and in both cases advertising is not the leading business model.

More supportive data comes from the three leading social network players in Japan.  Believe or not, all three companies are already public and trade on different segments of the Tokyo Stock Exchange.  You will see in the same spreadsheet that Mixi, DENA (Mobage-town), and GREE have market capitalizations of US$511MM, US$1.5B, and US$1.1B respectively, and are all very profitable.   DENA and GREE, which interestingly are more popular on mobile than on the PC, have invested heavily in these two magic business models (casual games and digital items) and have revenues per user that dwarf that of Facebook or Myspace (DENA is 10X Facebook on this metric!).  As a result, these companies sport market capitalizations per user of over $100.  Here is the big punch line: Mixi is the actual leader in the market in terms of users, is the clear leader on the PC, is the company that most resembles U.S.-based social networks, and has remained focused on advertising as its core revenue steam.  Not surprisingly, their revenues per user are a fraction of DENA and GREE, as is their market capitalization.  

At a recent public investor conference in San Francisco, Alexander Tamas, an executive associated with the leading free email service in Russia (Mail.ru), noted that his company felt that the U.S. companies have little understanding on how to monetize a product like Mail.ru, and that they were taking their clues from TenCent in China.  Most of the public market investors in the audience, who have witnessed TenCent, DENA, and GREE’s remarkable success, nodded in agreement.  Gaia also presented at this conference and the crowd was standing-room only.  The questions from the audience made it even more apparent that the buy-side investors have a strong appreciation for the digital item business model. 

It is peculiar to have a situation where the NY-centric public market investors are more open minded to a new business model prior to the entrepreneurial executives on the west coast, but that is clearly the case here.  It is not hard to see why investors like this model.  When Pony Ma, the founder of TenCent, first described the digital item model to me five years ago I was blown away.  He was selling virtual clothes and accessories for digital avatars that represented his users online.  Think about it; this is a beautifully high gross margin business with very low marginal costs.  He even told me he thought digital shirts should deteriorate over time like real ones.  Pure genius. 

sunglassesIt is my perception that most U.S. executives have trouble conceiving and believing in the digital item model.  For starters, they simply think it’s strange.  “Why would someone buy clothes for their virtual avatar?  That’s weird.”  What they fail to realize is that U.S. consumers pay for “virtual” things all the time.  In the attached picture you see a pair of expensive Chanel sunglasses that retail for $329.  If you removed the Chanel logo from them, and offered them for $50 cheaper, you could not sell a pair.  Not one.  Why?  People are buying an image that they want to project about themselves.  Without the logo, they fail to make that statement.  The same is true for watches, clothes, cars, sodas, beers, cell phones, and many more items.  People care greatly about how they are perceived, and are willing to part with big bucks to achieve it.  Digital items are merely the same phenomenon online.

Another reason that digital items are a great monetization model for a social network is congruence of fit with the core activity of the site.  We already discussed how for TheKnot, the decision to come to the site is very consistent with identifying exactly “who” the advertiser is trying to reach and at “what time”.  For social networking sites, one of the key “experiences” of users is self-expression.  Think about it: is the Facebook news feed more about the reader or the poster?  Isn’t someone’s MySpace page all about self-expression?  If people are there to represent and express themselves, shouldn’t you build a business model that charges for the ability to better differentiate oneself?  Shouldn’t you also charge for ego-gratification on a sliding scale (the bigger the ego, the more the charge)?

These same executives like to believe that digital items are distinctly an Asian phenomenon – a convenient theory will prove to be a dangerous rationalization over time.  Here are some numbers from a U.S. corporation.  As I mentioned we are investors in LindenLab and their leading vitual world, SecondLife.  In SecondLife, the users are the ones that get to sell digital goods (rather than the company as in TenCent’s case).  Linden makes its money providing the platform services underneath this powerful economy.  At this moment in time, the economy inside of SecondLife – the amount of digital goods and services – sold each year between SecondLife users, is over a US$450mm annual run rate.  Of this, developers are realizing over $100MM in real profits extracted from Linden’s in-world to real-world currency exchange.  And keep in mind that SecondLife has much fewer users than either Facebook or MySpace.

Another interesting data point exists in the Facebook and MySpace application developer programs.  Best I can tell, the startups that are generating the most revenue on top of either platform are either selling digital items/avatars, or providing casual game packages — the exact two business models that are the drivers at TenCent, DENA, and GREE.  This is hardly a coincidence.

Despite these arguments and the fact that others have also been arguing this same point, it would be surprising if either MySpace or Facebook move in this direction.  First, they would need to have executive buy-in, which is not obvious at this point.  Second, they would need to hire people with experience in executing against this model.  Like any other endeavor in life, there are right ways and wrong ways to exploit these models, and there are already many experts in the field of digital items and casual games.  Lastly, they would need to prioritize this direction over other programs.  Currently, MySpace seems extremely focused on music, and Facebook on user-based communications.

The good news is that if they ever get around to deploying these models, they will not have trouble convincing Wall Street it’s a good idea – Wall Street is already there.

(follow me on twitter)

More Information:

Wikipedia on TenCent
TenCent IR About Page
TenCent IR Investor Intro
Stock Information and Company Financials on Mixi
Stock Information and Company Financials on DENA
Stock Information and Company Financials on GREE

In addition to these, most of the large US investment banks are covering TenCent, DENA, and GREE with English based research.  If you have a relationship with one of these banks, you can likely ask for their reports.

 

 

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104 Responses to “How To Monetize a Social Network: MySpace and Facebook Should Follow TenCent”

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Lots has been said on Monetizing social networks. but little has been said on monetizing social activity of members. members are doing many social activities like commenting, bloging, article writing, posting videos, photos, making friends, networking with people. It is these activities that make a social network big. also people are talking about monetizing from these networks for revenues for the social networks. But really speaking why no one has spoken about monetizing the members who are doing these activities.

Once such monetizing is done this could be a good stream of income generation for members, and they can use this money for further online purchases.

at http://www.funbyu.com one such effort is being made

[…] we compete for status through our purchases of accessories, clothes and homes in meatspace we will probably continue to purchase virtual accessories in Second Life, though I can’t say I fully understand this […]

[…] Tencent makes a lot of money through QQ and their other on-line properties.  The haul comes from tight integration of virtual currency and micro-transactions through casual games. Act local. Be freemium and use virtual currency to make money. 4. Yarrgh, Piracy. Even if some […]

[…] B (2009) How To Monetize a Social Network: MySpace and Facebook Should Follow TenCent [Online] Available: […]

[…] we compete for status through our purchases of accessories, clothes and homes in meatspace we will probably continue to purchase virtual accessories in Second Life, though I can’t say I fully understand this […]

Great information and break down. Its going to be exciting to see what the next best thing really is.

[…] How to Monetize a Social Network […]

[…] How to Monetize a Social Network […]

[…] Bill Gurley recently had a great post about how TenCent has been able to monetize through the use of digital goods and games. […]

That a cool pair of shades ha..

Interesting article. I wasn’t aware that LindenLabs was so profitable – it feels to me that the reason there is that SecondLife is both a social community but also a market – it’s lowered the bar to content creation and so a lot of users make the leap to become creators/merchants.

A network which internalises value chains can satisfy user needs and make money in the way that a community of general users (or worse, a narrow interest group) can’t. Forgive the plug but we’ve written on this in detail on our Keplar (UK digital consultancy) blog.

thanx for sharing this useful info with all of us here. Very interesting indeed!

[…] Virtual Goods – In a recent post, Benchmark Capital Partner Bill Gurley wrote a fantastic piece on how MySpace and Facebook should monetize: sell stuff online. Twitter could build a marketplace […]

This statement from the author sums it all up succinctly and incisively. ‘Another reason that digital items are a great monetization model for a social network is congruence of fit with the core activity of the site.’ Bravo!

Digital Items and Casual Games??
Well I definitely think FaceBook has stepped up the anty on Casual Games. Just look at their viral online poker game. Everyone I know is on. And the genius behind the game is that you can pay money to buy chips (but are not required to in order to play) it makes the game more attractive and remain “Free”. Ive also noticed digital beginning to make an appearance too. Looks like Facebook is indeed following some of tencents methods

[…] Tencent’s Monetization a Model This interesting post suggests that China’s IM social network Tencent be a model that Facebook and MySpace copy. The stats? “TenCent was founded in 1998, has 355 million users, US$1.2B in annual revenues, […]

We might be talking the same direction but coming at it from different starting points. Your reference to the Channel sunglasses as the medium for self-expression is where the cross pollenization occurs (see here: http://energyit.blogspot.com/2009_06_01_archive.html).
Well written stuff on your part.

Great post, I agree. I think a great addition that might help others would be learning how to outsource. It’s really helped my business. I found a free outsourcing mini coarse and I learned a lot from it. It’s amazing what you can do when you can hire someone for $4 per hour to help you run your business. http://virtualadministrativeassistant.info/minicourse/index.html

Great post, I agree. I think a great addition that might help others would be learning how to outsource. It’s really helped my business. I found a free outsourcing mini coarse and I learned a lot from it. It’s amazing what you can do when you can hire someone for $4 per hour to help you run your business. outsourcing strategies

VIRTUAL GOODS: NOT THE SAME IN USA

Great post Bill. One point – even though you and several others say that we buy virtual goods when we buy a branded product, it’s just not the same as buying a virtual good in the form of digital media. Take a look at the post from Robert E (March 10, 2009) – in Asia virtual goods are consumed in a different way.

We would love to see a virtual goods economy on FB, My Space etc.

Can you recommend an expert in the field of digital goods and virtual currency?

[…] Capitalist Bill Gurley sees this phenomenon as the answer to the monetization problems faced by Facebook, MySpace, and other top social networks which are struggling to meet revenue […]

Interesting that you point out TripAdvisor. The transaction model vs. advertising model was proven by TripAdvisor, Travel Zoo and other media (like NYT travel) to be in favor of advertising.

One would have thought that such a highly targeted audience ready to spend money, with hotel booking sites paying 10% would be an open and shut case for transaction. But the opposite has happened. Advertising wins. Ask Kayak.

[…] direction is clear, a new payment solution is needed to cater to the new online economy. Below are 10 reasons why merchants should start considering EazyMo as an addition to their […]

Here’s the problem with social networking sites and in particular myspace and maybe to a lesser extent facebook. A significant portion of their users don’t have a wallet to speak of.

We’ve seen this before at theglobe, geocities, etc.

These companies grow at a fantastic rate, because they are giving something away for free. Once that value prop changes – either through subscription, advertising or even buying digital goods, they leave – because someone else will give it away for free or because there is a cooler site that will ultimately have to deal with the same problem.

hmmm previously i would have agreed with others that this revenue model only works on sites predisposed to asian culture. after reading this i realize that there are millions of dollars of virtual goods being sold on myspace. i’m thinking specifically about myspace backgrounds and customizations. if you change your perspective about what is a virtual good and think about what would sell to the audience (virtual clothes for tencent and backgrounds for myspace) then there seems to be much more possibility for social networks to sell stuff besides low cpm ads.

The title of this post caught my attention on your sidebar, while reading a different post . . . glad I found it. Excellent write-up Bill . . . thanks for taking the time to share your insight . . . you are the man. Take care.

[…] How to monetize social media – Tencent example […]

Pay-Per-Chat is about connecting consumers with advertisers in the most efficient and cost effective way possible, and the answer to effectively monetizing social networks.

“if you removed the Chanel logo from them, and offered them for $50 cheaper, you could not sell a pair. Not one. Why…”
Nice perception. I agree with your analysis here. Imagine all the money folks in the “gold exchange” get selling virtual items in MMO’s. Folks sure love their epic items on their virtual self. It looks good.
Mr.Leo
:: http://blogs.myspace.com/cypk

bill, thanks for sharing great insights and numbers too!

Excellent post as I’m very familiar with item-basd models. I also agree that implementing the model at Facebook would pose serious challnges.
So, why did Cyworld fail so miserably in the US (apart from its bubble-gum kitch design)?
Cyworld is a company that has management buy-in and and knows (if not invented) about item-based models.
What does it tell us about the potential adoption (and attitude towards) of the model by US end-users?
Simon, Seoul
simonb7@hotmail.com

[…] Cómo monetizar una red social? […]

ThoughtPickers Blog >> The (endless) Web Monetization Summary Table!…

The six main monetization methods are listed in our humongous table below. In this table, we will be discussing, in details and with examples, how intrusive, successful and viable each of the monetization methods is in order to help companies, and star…

[…] purveyor of virtual goods, and noted venture capitalist Bill Gurley provides an excellent analysis on why U.S. social networks like Facebook and MySpace should follow TenCent’s lead and […]

nemiso의 생각…

How To Monetize a Social Network: MySpace and Facebook Should Follow TenCent « abovethecrowd.com무섭구나 중국이.. 우리나라도 한때는 앞서 있었는데 이제는 그냥 시장규모에 밀려버리는 듯……

[…] toepassingen uit te sluiten. Wanneer we kijken naar welke netwerken goed geld verdienen (lees ook de uitgebreide post op abovethecrowd) lijkt de keuze dan ook een logische. Het geld zit niet zozeer in betaalde brandpages, banners of […]

I like the graph. That is the ideal way for it to go. In a step pattern….
http://www.secretminisiteturnkeyformula.blogspot.com/
it really is trial in error of what works and what doesn’t so you test and keep what works and what doesn’t you drop it if you cannot improvise on so you create your own formula…

[…] How To Monetize a Social Network: MySpace and Facebook Should Follow TenCent « abovethecrowd.com (tags: business social media vc) […]

[…] Monetize Social Network There is ample historical data that proves web sites like these are inherently difficult to monetize.  Most other online communication products have had similar struggles.  Two great examples of this: the many leading players in the Instant Messaging (IM) space (AIM, ICQ, Yahoo Messenger) and the leading free email sites (Hotmail, Yahoo Mail).  These products/sites have always had some of the lowest eCPMs on the Internet. […]

[…] compete for status through our purchases of accessories, clothes and homes in meatspace we will probably continue to purchase virtual accessories in Second Life, though I can’t say I fully understand this […]

[…] Games and other social applications that run on Facebook are enjoying a swift rise in revenue in recent times and it is not from banners or advertising. The rise in revenue is primarily because a small percentage of players are paying to buy virtual goods or upgraded features. There have been many precedents set in China, most particularly Tencent, that show just how powerful the model can be. […]

Great post, but doesn’t Facebook already have digital items?

[…] we compete for status through our purchases of accessories, clothes and homes in meatspace we will probably continue to purchase virtual accessories in Second Life, though I can’t say I fully understand this […]

[…] we compete for status through our purchases of accessories, clothes and homes in meatspace we will probably continue to purchase virtual accessories in Second Life, though I can’t say I fully understand this […]

[…] we compete for status through our purchases of accessories, clothes and homes in meatspace we will probably continue to purchase virtual accessories in Second Life, though I can’t say I fully understand this […]

[…] we compete for status through our purchases of accessories, clothes and homes in meatspace we will probably continue to purchase virtual accessories in Second Life, though I can’t say I fully understand this […]

[…] we compete for status through our purchases of accessories, clothes and homes in meatspace we will probably continue to purchase virtual accessories in Second Life, though I can’t say I fully understand this […]

I liked the lou reed old school quote. Im a lou reed classic rock fan too. 🙂

[…] contrast with Facebook /Myspace /Orkut, all of which are struggling to monetize their users. Bill Gurley outlines how Tencent makes money: [Pony Ma, Tencent founder was] selling virtual clothes and accessories for digital avatars that […]

[…] MySpace, Tuenti y el pastel que no se están comiendo” basado en un del artículo de Bill Gurley tengo una opinión absolutamente contraria. ¿Qués es más intrusivo para un usuario de Tuenti? […]

This is the model that Virtual Greats has taken on with a vengence: see http://www.virtualgreats.com/

Agree with Robert. Westerners are a very different bunch that Asians. Try selling a virtual t-shirt to an Aussie. Yeah right! Not a chance. Not even for tweens. Upgrades that provide new functionality yes, definitely. But virtual clothes no.

[…] of online companies, especially those with a community aspect, like gaming, and social networks. In How to Monetize a Social Network, he points out the success of companies like China’s TenCent, which generates nearly $900 million in […]

[…] The monetization focus in social media has focused on advertising, which Blossom says has it’s place when endorsements are built based on real relationships,  but he says “the essence of advertising is self-promotion in contexts that the advertiser doesn’t own.”  Namely, the advertiser must give up control and let the community grow.  Nothing strangles organic growth better than being smothered (see failed relationships…).  Blossom gives the example of a good, organic consumer relationship by citing story of the Grateful Dead.  The Dead encouraged their fans to tape their concerts and share them with each other (in direct violation of copyright) so that a community could (pardon the pun) blossom around the music. […]

[…] Of course, Gurley’s firm, Benchmark Capital, has funded Second Life and Gaia, two worlds heavily dependent on virtual goods, and has at least one related investment, the infrastructure platform company Gigya. But his arguments make a lot of sense. Check it out in How to Monetize a Social Network. […]

[…] Virtual Goods – In a recent post, Benchmark Capital Partner Bill Gurley wrote a fantastic piece on how MySpace and Facebook should monetize: sell stuff online. Twitter could build a marketplace […]

[…] One of the impediments to Capitalism 2.0, as we’ve discussed quite a bit in the past, is Investment 1.0. Here’s an example. […]

Glad to read that US investors are getting to realize that SNS have ways to monetize!

The “virtual” term is a struggle only for generations seeing a dichotomy between analog and digital, young people do not even see the point.

We have published reports on both Tencent and Cyworld and done dozens on presentations on this topic comparing Facebook, Tencent, Mixi, Gree, Mobile Game Town and Cyworld, many of which you can find at http://www.plus8star.com and on http://www.slideshare.com/plus8star.

I hope you will find them useful!

[…] Bill Gurley recently had a great post about how TenCent has been able to monetize through the use of digital goods and games. […]

Great article and good to read that US investors are waking up and getting to realize that SNS have ways to monetize.

We have published reports on both Tencent and Cyworld and done dozens on presentations on this topic comparing Facebook, Tencent, Mixi, Gree, Mobile Game Town and Cyworld, many of which you can find at http://www.plus8star.com and on http://www.slideshare.com/plus8star.
The “virtual” term is a struggle only for generations making dichotomy between analog and digital, young people do not even see the point ^_^;

Would be great to get in touch – my contact is benjamin [at] plus8star.com

[…] One of the obstacles to Capitalism 2.0, as we’ve discussed quite a bit in the past, is Investment 1.0. Here’s an example. […]

[…] Monetising Social Networks: by Bill Gurley. Learnings from Tencent in China. […]

[…] interesante, documentado y riguroso como el del Venture Capitalist Bill Gurley en su blog “above the crowd” en relación a la monetización de las redes sociales. Os recomiendo encarecidamente su […]

[…] View original here:  How To Monetize a Social Network: MySpace and Facebook Should … […]

Great Article!
St Bosseratti
myspace.com/cityofsmoke

[…] Tencent’s Monetization a Model This interesting post suggests that China’s IM social network Tencent be a model that Facebook and MySpace copy. The stats? “TenCent was founded in 1998, has 355 million users, US$1.2B in annual revenues, […]

Thanks for sharing this post.. I firmly believe that one should make the best out of social networking sites.. Great post.very insightful..

Excellent content and straightforward discussion theme – thanks!

great blog..in this current economic climate you need to take advantage of any revenue you can get..
http://afiliateprogramsmadeeasy.blogspot.com/

Nice post. Good information. Thanks.

[…] How To Monetize a Social Network: MySpace and Facebook Should Follow TenCent – abovethecrowd.com […]

[…] post by Bill Gurley of Benchmark in the US gives a great comparative analyis of how social media sites […]

Wow, great post! I know very well how people will buy digital products for their VL – it can be a very fertile market indeed.

saw this article on how some companies are monetizing on Twitter.

http://url360.Me/1iH

Nice summary, Bill. What’s even more interesting to me is that you were beating this drum at LAST year’s GS conference too, and here we still are, with remarkably little movement among key players around this issue. I suspect that the current economic climate is finally hastening a shift in interest from pure ad models toward “pay-for-n” models.

Interesting and well documented thesis. I’m not sure that feeding America’s obsession (or coming obsession) with virtual objects is an ethical option now–especially given that folks are barely scraping by now and that mentality may just be what got us in this sinkhole in the first place. Something to consider…

[…] Original post: How To Monetize a Social Network: MySpace and Facebook Should … […]

Just a note. 10 Cent in mandarin chinese is a homonym for “stylish” or even “avant garde”. It’s a good chuckle for their users.

Haven’t read in full yet. Will do. But are Social Networks hurting for money? Are the millions and billions earned not enough? Sounds like greed to me and we all know what that leads to, now don’t we? Why not discourse on smth more appropriate, updated and effective such as Monetizing the Social Network going through the current financial crisis? Now that would be a deed! Don’t mean to be rude…looks like you have worked hard, very hard on your write up. As I said, I will read.

This is the best article I’ve ever seen on monetizing Social Media platforms. By far, the best.

I think the idea of people paying more for personalize pages is something I’ve been advocating for, for a while. Why not pay Facebook an extra 1,000 a year for a custom page? Or maybe 5,000 for no ads?

Being one-way minded isn’t going to help. Especially their (Facebook) strict policies on advertising. Why not pay more for special features?

Why not make games apart of the platform that people can pay for? The ideas are endless but I think, as the article stated, US companies are too narrow.

Go Eastern companies, lead the way! As for me and my properties, we will follow the great examples of the East. 🙂

[…] How To Monetize a Social Network: MySpace and Facebook Should Follow TenCent – […]

[…] [ Delicious/tag/myspace ] How To Monetize a Social Network: MySpace and Facebook Should Follow TenCent ” abovethecrowd.c… […]

I work as a backend programmer at Tencent (in China) and have put lots of information about Tencent on my personal website:

http://www.startinchina.com/tencent_qq.html

I think this is relevant to some of the stuff you talk about and definitely interesting if you want to learn more about Tencent.

[…] How To Monetize a Social Network: MySpace and Facebook Should Follow TenCent “Little Joe never once gave it away Everybody had to pay and pay”                   — Lou […] […]

Good writeup Bill. Eric Ries from IMVU recently wrote a good post about how we all buy virtual goods: http://startuplessonslearned.blogspot.com/2009/02/you-buy-virtual-goods.html

We’re working to enable this model for our customers (Comcast, NBC, Hearst, etc.) – currently around “attention” currency, but next with real currency. http://www.bunchball.com/customers/

Bill – What if Facebook leveraged users’ increasing trust with each others’ profiles to become a better PayPal? I’d be more inclined to buy a used car from someone I’d never met if I could see his Facebook page. Bet this is the foundation of the Oodle deal too. Seems like a good fee business buried in there.

Great Research, coverage and analysis Bill. I think applications which provide a great service and is of value will be the ones which will be able to monetize social networks

Does it occur to anyone that one can’t monetize something that almost no one is willing to pay for? This is a non-problem that has no solution.

Looking at the revenue from custom ring tones, it seems people find such services valuable.

Interstingly Eric Schmidt in his interview with Charlie Rose talks about micropayments (eg. digital items) and subscriptions (eg. casual games) as the viable models for sites that do not have 20B uniques. You may be on to something here. I wrote about it on my blog at http://www.rajajasti.com/2009/03/10/monetizing-the-web/.

[…] Bill Gurley, a VC at benchmark capital, wrote an interesting post on monetizing the social networks. He thinks social networking sites such as facebook and myspace […]

[…] first: How To Monetize A Social Network: MySpace And Facebook Should Follow TenCent looks at how Chinese social networking company TenCent totally gets the “because […]

Simple but thought-provoking. Ego-driven purchases are always easier to rationalize for the buyer.

Thanks Bill for the great analysis.

A couple of additional thoughts/comments:

So far the “accessory” sub-category of digital items has much more of mass-adoption in asian cultures and the question is how/when that translate into US. I think ofSecondLife and Gaia as more “vertical networks” compared to say QQ, MobageTown or Facebook.

Billing ability remains a challenge for mass-adoption in US: CCard/PayPal/etc does not cover large group of teens and and mobile billing (premium sms) is expensive and coverage still fragmented work-in-progress (prepaid, 2nd Tier carriers). QQ in contrast had/has better coverage thru partnership w (China) mobile + ability to purchase “coins” thru other channels (retail,etc)

I think I’d argue that the billing problem, especially for teens, is rapidly being addressed through a wide variety of options, whether it’s more complete mobile solutions, offer systems such as OfferPal, or prepaid cards like the Meez card at Best Buy – it’s not as monolithic as it is in other countries, but we don’t see that issue as the overwhelming road block anymore

Sean Ryan
Loki Partners

Very thoughtful analysis and commentary here, thanks.

As you point out 3rd party app providers on platforms like Facebook (particularly in casual games) have revenue models which more closely mirror the Asian SNS companies. It would be interesting to layer the large ones (SGN, Zynga, et al) on top of FB and examine monetization per user on an ecosystem level.

Great analysis Bill. What’s clear is that this revenue model could successfully be applied to most large community sites in the US, including forums, dating sites, IM platforms and social media services. We’re finally seeing the smaller social media sites like FUBAR, Hi5 and Tagged move into this area – hopefully the rest will follow since it matches engagement and revenue.

Nice article, BUT… What you fail to realize is that these sites that monetize users in this way have a majority user base with MUCH different social customs and norms, ie. Asians. My korean gf was explaining to me recently how a Korean version of a social networking sites make truckloads of money through selling virtual gifts, many of which is bought by guys for girls. It is normal in Asia for girls to like status items no matter how silly or virtual. It is normal for their male counterparts to buy these things for them. It is normal for these girls to “virtual” beg for them. All concepts that probably won’t fly outside of Asia.

Hey, here’s an idea for facebook. Why don’t you stop selling ads from people just trying to scam your customers then maybe people will start paying attention to them.

I think the part is great way to monetize the social networks


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    …focusing on the evolution and economics of high technology business and strategy. By day, I am a venture capitalist at Benchmark Capital.

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