Corporate Information Systems

Social Networks and Business Models

Professor Fabrizio Amarilli Professor Maria Grazia Fugini

Andr Maria Alves Maia Filho 762918 Flvio Nogueira da Cruz 762939

Social Networks and Its Business Models

The aim of this project is to analyze the different business models proposed by the different active social networks. The topic is particularly interesting considering that these companies purpose, mostly, a cost-free experience for the users and are nonetheless well evaluated by financial markets. The relevance of the topic is clear; Social Networks are growing rapidly both in size and in revenues, on the same pace that the fear of a new internet financial bubble effect should be developing in front of everyones eyes.

Image 1 Social Network Ad Revenues Evolution and Trend

Whereas the first name that comes to ones mind when the topic is social networking cant be any other than Facebook, it is only one among many different examples of this kind of virtual environments where people and companies socialize, share information, experiences and satisfy their most different needs and desires. Boyd et al(2008) describe social networks as webbased services that allow individuals to (1) construct a public or semipublic profile within a bounded system, (2) articulate a list of other users with whom they share a connection, and (3) view and traverse their list of connections and those made by others within the system. The nature and nomenclature of these connections may vary from site to site. It is interesting to notice that different geographical regions have different predominant social networks

Image 2 World Map Of Social Networks

The choice of which social networks to analyze was based primarily in three factors: Popularity of the social networking Popularity of different services in different geographic areas New comers on the market Being that so, it has been decided to focus this paper into the following websites:

Network

Reason for choice

Size

Size

Size

Number of Active users

+800million

+100million

+135million

Network

Reason for choice

New Comer, Fastest growing +90million

Popular in Russia and Eastern Europe

+100million Registered

Number of Active users

Launched in February 2004, the world's current largest social network was created by Mark Zuckerberg, at the time a student at Harvard University. In a first moment, its access was restricted to members of said university, but it progressively expanded to a large number of American and Canadian universities, followed by high school students, employees of several companies and, finally, on September 2006, it opened to the general public, accepting as users any person of at least 13 years of age with a working email address.

Some data
Currently Facebook has more than 800 million active users, from over 200 different countries, of whom more than 50% access the website in any given day. One user have, in average, 130 friends and is connected to 80 community pages, groups and events and more than 7 million apps and websites are integrated with the social network , as stated by their official statistics page. Facebook accounts for 40% of daily web traffic of all internet users worldwide and for more than 50% of visits to any social media platform. Facebook, Inc., the private company that operates and owns Facebook, which reportedly became cash flow positive in 2009 (Source: The Guardian), is expected to go public in the early months of 2012. The company's IPO (Initial Public Offering) has been valued by specialists at $100 billion, and last year (2011) its revenue was over $4 billion, according to Bloomberg.

But why is this company so valuable? How did it make so much money without charging the users? The following lines of this report present and analyze Facebook's business model, how it changed from the original one and how it is expected to evolve in the near future. The presentation of the business model will tackle the company's strategy in selecting obtain users, how it creates utility for their customers and, most of all, how it obtains profit.

Facebook's Business Model How to obtain users

At the time Facebook was launched (originally by the name "The Facebook". The article "The" was dropped in 2005), the social network scenario was dominated by MySpace. The main features of Facebook were extremely similar to those of MySpace, so the company's strategy in obtaining users was the key factor of success for it becoming what the giant it is today. As mentioned before, the network started as a platform exclusive for students from Harvard University, and as it became popular between them, it expanded to the major universities and colleges in the USA, and then Canada. It was the world's first social network destined exclusively for university students and quickly took an important role their social scene. This aspect made a lot of users, even though also registered in MySpace, start to use Facebook, as it was the easiest way to connect with and get to know the interests of their university companions.

The following image is a snapshot of the original profile page on "The Facebook":

Image 3 Snapshot of Original Profile Page

As more people started to use Facebook (it had an estimated 80% penetration among the students of the covered universities), the network was making a name for itself, and expanding to other environments, such as high schools and companies. After some time, it achieved a "critical mass" of users that made it possible for an opening to the general public and a subsequent international expansion, already as an established and trendy platform, what made it interesting for more people to join. The more users the network had, more people would want to be a part of it. The greatest possible advertisement for a social network is its popularity, as people want to use the network that allows them to connect with the highest possible number of people. Facebook never had to do any major advertisement strategy. This shows that it is not unreasonable to assume that had Facebook started already as an open platform, it wouldn't be as successful. MySpace users would have no incentive to register and access Facebook, as it would basically be the same as their current network, only with fewer users. Nowadays, Facebook is present worldwide and therefore presents a different approach from its original one. The company was able to update its business model to grow successfully. It could have chosen to maintain the original exclusivity for the university environment, what would make it much less powerful and, consequently, profitable than it is right now. This brings the question that intrigues most of the people who are unclear about where the company gets its revenues from: How can a free social network be currently valued at $50 billion, and the double of that when it becomes public?

Sources of Revenue
There are currently two main sources of revenue for Facebook: Advertisements, and sales of virtual goods. Advertisements are their most important way of making money. Facebook possesses an outstanding capacity of enabling targeted marketing, due to its enormous user base and the fact that its platform allows the perception of aspects such as the user's interests, location and so forth. The offering of self-serve advertising makes possible the purchase of ads, to be presented specifically to the users that fit the profile determined by the marketer. As soon as a user likes a page related to a specific sport, for example, ads related to that sport will start to appear on his wall. The following picture shows an example of advertisement related to recent activity made by the user:

Image 4 Advertisement Related to Recent Activity Example

Facebook has been able to create a media reaching power that can't be ignored by advertisers and marketers. This possibility of focusing the ads on the targeted market segment is something extremely valuable, and almost impossible outside the web, and that's what makes it appealing for big brands and also small and medium local businesses. Local gyms and bakeries, for example, that wouldn't be able to afford advertisements elsewhere and, even if they would, on Facebook their message would go only to their real potential customers, and not be wasted on people from other countries or of different interests. Some top brands also made agreements with Facebook for offering special deals for users, from which the website receives a percentage on those sales. Almost anyone can buy space on the site if they have the money and want to do it (minimum cost by click at around $1,00. If you also consider the number of people who see the ad but don't click on it, you get a relative cost much lower than what is charged by big internet portals ). In this approach, Facebook's clients are the advertising companies, and what the website has to offer is the elaborate pool of information of the users. They became the unit of trade for the network in this process. The information, however, is always analyzed anonymously, so that there is no infringement on privacy questions, as Facebook states in its page regarding advertisements. The current advertisement situation, in fact, is the result of another adaptation of their original business model, in which the revenues from ads came from banners, sponsor groups and text announcements, directed to the university students group and not to one particular user. Their other source of revenue is the sales of virtual goods, such as game and application credits and items. It may seem something silly and unlikely, however it represents 30% of all of their income. The social gaming applications are developed by outside programmers or companies, like Zynga, and made available for users on the social network. According to their statistics, more than 500 million people use an app on Facebook or experience Facebook Platform on other websites every month. A lot of those users end up buying virtual credits for themselves or even to give as gifts, and for every purchase, Facebook receives a percentage of the money. There is the intention of adding on the platform features such as online movie rentals, a music platform, already being developed and tested, and virtual books sales (Facebook acquired an eBook company in August, 2011), similar of those from iTunes, Apple's successful media platform, currently the biggest selling music store in the world. This would increase the importance of the selling of virtual goods as a revenue stream and might mean an intention of taking an approach towards incorporating media platform characteristics, another evolution on their business model. The following image demonstrates what will be the sources of revenue in the near future, in case this evolution takes place:

Image 5 Sources of Revenue Schema

Final Remarks
Facebook's strategy has unquestionably been working so far. The company was able to develop an intelligent strategy for entering the market, successfully taking the place of that which was then the biggest social network of the world, MySpace. After that, the company has proved its capacity of exploiting its resources in order to generate profit, through selling advertisement space and virtual goods such as social game credits. If there really is an IPO, and all indicates that there will be, the company has the potential of growing even more. However, this is a tricky market, in which something new can come at anytime and change the scenery, very much like Facebook itself did in the near past, so it is essential that they keep their efforts on maintaining their users satisfied and interested in the website.

Despite the fact that even the CEO of the company, Dick Costolo, questions whether Twitter is or not a social network, it was decided to include it in the list of the studied services, once it somehow fulfills all the basic characteristics of this type of websites, previously listed. The main source of revenues for this platform is advertisement. In November 2011, Twitter had 2400 advertisers, 50% more than in last spring. While the revenues in 2010 were around $45million, the numbers for 2011 are expected (as in September 2011) to present a stunning 210% growth, reaching around $140million. In addition to that, eMarketer (www.emarketer.com) foresees the companys revenues from advertisements to soar to as high as $400million by the year 2013.

Image 6 Twitter Ad Revenues

It is hard to fully analyze the companys financial health, once it has no obligation of publishing reports in that sense. However, its been speculated that both Google Inc. and Facebook Inc. would be among the companies willing to pay something yielding from $8 to $10billion for the acquisition of this company. In this sense, and looking at the revenues evolution, Twitter appears to have a quite high power in what refers to targeted advertisement. To reach this remarkable trend in growth, Twitter has been developing a diversity of ways to satisfy the advertisers, translated into different tools:

Promoted Tweets
As described by twitter, the promoted tweets can be used to amplify your message with targeting options that allow you to reach the right person, in the right place, at the right time. They are nothing but paid tweets that appear with some kind of priority to some specific kind of user under some specific situation.

Image 7- Promoted Tweet Example

They can be further divided into: Promoted tweets in search: Aimed to reach users while they are looking for their interests using the search engine provided by Twitter. The promoted tweets will appear on the top of the results page.

Promoted tweets in timelines: These tweets are used to improve the visibility of a message directed to the followers of its publisher, or other users that are like your followers (users that are not followers of the publisher but should be receptive to the message). This kind of promoted tweet will appear at the top or close to it of the timelines of the targeted users. It is also possible to enable a geographic targeting functionality on these promoted tweets, in order to increase the impact into determined countries or even regions (inside the United States).

Promoted Trends
The idea of the promoted trends is to allow advertisers to enter the trend list in Twitter. This generates a high exposition for the insertion, once it will appear on the same list as the most debated or simply repeated topics. This service, however, is still in beta testing.

Image 8 Promoted Trends Example

Promoted Accounts
This tool allows accounts to increase their number of followers in a speed higher than the usual. When using the Who to Follow tool, that analyses the users profile and suggests other people from whom it could want to receive the tweets, the promoted accounts will appear on top of the others.

Image 9 Promoted Accounts Example

Enhanced profile pages

One more functionality still in beta testing, the idea is to provide to advertisers the possibility of having a differentiated, more appealing and functional profile page. As examples, the client would be able to add headers images, promote tweets with no extra cost (promoted tweets functionality) and have a more mobile-friendly profile page.

Image 10 - Enhanced Profile Example

Advertiser Analytics
The advertiser analytics tools provide the advertisers information (mostly statistical) valuable on the understanding of the impacts of their actions on the platform. It is possible to visualize the development over the time of the promoted tweets (number of impressions, replies, retweets and clicks) and of the activity on the profile (follows, unfollows, mentions), as well as the possibility of visualizing statistical data about the interests and intrinsic characteristics of the followers of that profile.

Image 11 Tweets Dashboard Example

Image 12 Timeline Activity Example

Image 13 - Who are my Followers? Example

Launched in May 2003, describes itself as the world's largest professional network on the Internet with more than 135 million members in over 200 countries and territories. Through our proprietary platform, members are able to create, manage and share their professional identity online, build and engage with their professional network, access shared knowledge and insights, and find business opportunities, enabling them to be more productive and successful. It is nowadays a publicly held company, with a market capitalization of 7.18 billion dollars, revenues of $139,5million for the third quarter of 2011 (representing a 126% growth referring to the same period of last year), presenting the 8th consecutive quarter of accelerated growth. Profits for the three first periods of 2011 sum $5million, in opposition to $10million for the same period of 2010. These are the basic figures of the third most popular social networking website on the internet. The main sources of revenue, for this company, are grouped into three categories, as shown on the investor relationship section of their page.
Premium Subscription s 20% Marketing Solutions 29%

Fraction of revenues
Hiring Solutions 51%

Image 14 Fraction of Revenues

Hiring Solutions
This charged service represented around 51% of the revenues of Linkedin. It consists of a section of services that help companies to recruit employees using a post and reply logic, as well as a profile matching logic. The three main functionalities are: Post a Job: Aimed at posting a job to be found by active searchers Find Top Talent: Aimed at helping the company to identify and contact passive potential new workers Build Your Talent Brand: Aimed at increasing the reputation of the careers into the company and to spread the will of working in there among the candidate workforce As an example, for a single job offer post in Milano, for a 30-days period, the cost for the company is of 69,95.

Image 15 Hiring Solutions Page

Marketing Solutions
Representing other 28,7% of the revenues, this set of services, also charged, is focused on helping companies to promote their brands and products, get market insights and all the usual marketing activities. It is divided into eight subgroups of products, being Company Pages, Groups, Social Ads, Display Ads, Sponsorships, Partner Messages, Insigts, Mobile and Plugins. However, it is not very clear how exactly the delivery of these products is translated into revenues, but it all indicates that they are sold for companies both individually and in bigger packages.

Company Pages
The company pages are a way on which the companies can get in touch with the other users of Linkedin, by displaying status updates, creating an overview tab to introduce the company to professionals and creating a virtual showcase of the offered products and services. There are also analytical tools provided to understand better who are the followers of the companys page

Image 16 Company Page Example

Groups
The idea behind this product is to allow the interaction of the user with different groups, by participating or advertising to them. There is a distinction between two different types of interactions: The called Custom Groups are focused in interacting with customers, with exclusive access for delivering custom media. On the other hand, the called Enhanced Groups are focused in increasing the awareness of the company among certain target communities, through having access to an exclusive ad placement among these users the company may want to communicate to.

Social Ads
The social ads are tools devoted to increase your power inside of the social network. The Follow Company Ads are intended to increase the number of users following the Company Page, the Join Group Ads aim on increasing the number of participants on the companys groups and the Recommendation Ads strive to show brand reputation through displaying other users who recommend a certain product or company.

Image 17 Social Ads Examples

Display Ads
These are the traditional kinds of advertisements observed nowadays. Companies publish banners on the webpages in diversified manners, namely the Homepage Takeover, on which the page is blocked by an advertisement banner until the user closes it, Standard Ad Units and Text Links and Content Ads, which allow companies to use dynamic content on their publicity shown on the site.

Sponsorships
The concept is to create brand awareness among the customers, through diversified channels: Employee Profiles: Makes use of the profile of the employees for displaying content about the company Groups: Same idea as previously explained, is also part of the sponsorships product Answers: Displays messages while professionals use the ask questions functionality Polls: Displays ads on the windows opened by users to answer polls Events: Displays ads on the pages of events Applications: Provides customers applications that can be useful, with the proper brand communication tool aside

Partner Messages
The basic idea is to communicate with members using Linkedins internal messaging system, InMail. It is also possible to use targeting options.

Insights
It consists on the provision of data useful for marketing. It can be through the Analytics and Reporting tool, that provides the company information about itself and its activities on Linkedin, as well as the Research tool that provides the company information about how to better perform marketing activities at the website or even elsewhere.

Image 18 Analytics and Reporting Example

Image 19 Research Example

Mobile
Linkedin offers to the companies the possibility of having their messages published as status updates in a favorable position when users use the network on their mobile tools.

Image 20 Example of Mobile Insertion]

Plugins
The last marketing solution product consists in plugins that companies can use, mostly on their websites. They can be the simple Share and Recommend buttons to be added to the companies websites in order to increase the exposition, as well as the sophisticated Custom Development tool, designed help marketers develop custom applications, micro-sites, marketing promotions, social monitoring tools or any other execution that utilizes LinkedIns APIs off of LinkedIn.com. as described by Linkedin itself.

Premium Subscriptions
The remaining 20,3% of the revenues for the last available account period came from this

source. As the name says, it is the option of having an account with privileges, in exchange of the payment of monthly or annual fees. There are three different levels of premium accounts for each of the four different profiles of users (Business, Recruiters, Job Seekers and Sales Professionals), with corresponding variable prices.

Image 21 Premium Subscription Selection Page

The youngest of the social networks here analyzed, Google+ (pronounced Google Plus), was launched in June 2011 by Google Inc. as the company's bet to take a major role in the social network scenario, after the increasing decline of its still existing previous bet, Orkut, that had a big presence in some countries like Brazil and India, but never managed to obtain a global success. After being initially available for selected guests only in a testing phase, through an invitation method similar to the used in the early times of Gmail, Google+ was opened to the general public in September 2011 for anyone who is over 18 years old and has a valid email address. It offers the interesting approach of social circles, through which it is possible to assign each friendship to a specific circle, such as family, work, friends, university colleagues, etc. and to choose which circle will be able to see what is being posted. The process of assigning each person to a specific circle is illustrated in the following picture:

Image 22 Process of Assigning Friends to Circles

Google recently announced that Google+ has currently 90 million users globally, an impressive number considering a seven-month existence, always with free access. The company also stated that is not planning on having advertisement in the platform. So the main question to be answered is: How will it make money?

Google+'s Business Model

The social network has the proposition of becoming an integrator of Google services, which would cause their clients to use more of the company's services and to discover features they weren't used to exploring. In Google's eyes, Google+ has the mission of making people spending more time in the company's platforms and less time in competitors, such as Facebook and Twitter. The strategy is to take the competitors down by impacting on the amount of traffic competing businesses have to capitalize on. It relies on the image Google has on the web universe as an certifier of quality and reliability, thus attempting to attract possible customers. The fact that an immense number of people already use gmail,

youtube and many other Google services, and that it possesses the go-to search engine on the web worldwide daily accessed by millions of people have strength enough to make people at least curious to see what this social network is all about. That may be the cause of such a fast growing number of users. The decision to leave out advertisements from Google+, especially when they are already present in other Google platforms, such as Gmail for example, may seem strange, but it has the purely esthetical objective of giving the social network a clean, classier aspect. This would go in contrast with Facebook's image, that Google describes as polluted by the advertisements, what could make users feel they are having a more pure and fair social network experience Google+ has the +1 function, that has the same functionality as Facebook's "Like". However, as the "Like" only makes sense inside the Facebook universe, the +1 can be used to refine the user's experience on other Google websites. One example is the refinement of a search according to the interests demonstrated by the user with use of the +1 function. Another possible use for the information obtained through Image 23 +1 Button the user's appliance of the +1 function is to improve the segmentation for the ads shown on the other Google pages, thus increasing the value of the ads, making it possible to earn more money, compensating the lack of advertisement on the social network with better directed advertisement on the platform where they are present. The conclusion is that Google+ doesn't have the objective of making money on its own, but of increasing the profit of the Google Group as a whole, by acting as an integrator, making users access more Google services, improving the segmentation for the advertisement present on other Google pages and, of course, by lowering the power of the competition. In the end, Google+'s business model, is just a part of a much bigger one.

Vkontakte.ru is the most popular website in a big part of the world, mostly composed by Russia. But what turns its business model interesting, apart from the initial curiosity related to the monetization of the social networks in general, is that it didnt create anything notoriously new; it inspired itself in the model presented by Facebook (there are, including, some rumors of copied codes). Inspired enough to have even started its spread on the same way: Initially registration of new users was limited to university circles and could only happen with invitation. Many would classify it as one among many other clones of the most known social network there are. However, if it started as a clone, it is now certainly creating some noise on this turbulent market.

Image 24 Vkontakte Profile Page, With New VK Inscription Already Present

Even though the monetization in this network, as in Facebook, comes mostly through advertisements, (with a monthly revenue of around $8 to 9million, 60% related to advertising, 30% to applications and 10% to other services) they have recently changed their approach by discontinuing banner ads. In this sense their revenues should come from targeted advertising and apps, only. This represents one initial source of differentiation from the American network, that displays banners. Nevertheless its design and functional similarities with Facebook, Vkontakte has also a remarkably different kind of public in what refers to their interests online. This fact changes the approach companies must follow in order to use this website as an advertisement platform. It can also be claimed that the majority of the users is composed by teenagers, looking more for comedy and funny content than in other networks. This has shaped the way the website has developed within its lifetime. As an example, it is the only social networking website with unlimited audio and video streaming available for the users (which can as well raise copyright issues in a global expansion), as well having integrated torrent filesharing technology which allows users to share larger files.

Image 25 User Watching Movie In Vkontakte

Vkontakte has a declared intention of growing worldwide, already put in practice with the acquisition of the domain vk.com, claimed to be easier to memorize than the full actual name, especially for people with mother languages that differ a lot from Russian. Whether there is or not space in the market for the growing of a Facebook alike competitor in the market is still unclear, especially considering the intrinsic cultural differences among the users that have given the tone of evolution for the two different platforms. While the translation of the website for many languages is already available, however, most of the content is still in Russian. Finally, there are some rumors about a IPO to be set in 2012, on which VK shares would sell at NASDAQ stock exchange. The last Vkontakte stake negotiation valued the company at $1,5billion. It is still far from the other big companies on this market, but it is certainly remarkable by a company which many claim to be a simple copy of the benchmarking leader.

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