The value of a social network

Since I’ve started a challenge for myself on writing at least 750 words in English each day I thought I could use some of the text I write for an article here. This will be a longer than normal article and the topics will be of something I have been thinking about or working with in the past week. 

This week’s topic will be on the possible profit of big social networks and how to find which ones are valuable.

Facebook was introduced on the stock exchange not to long ago and Twitter was the second large network to follow. They are both massive companies and their power is in that others need to keep using the services they provide.

They could both be compared to a production company and say that for a company who creates cars, the profit comes from that customers will continue to buy the company’s car over competitors. For Facebook and Twitter the car in this sense is the actual service they provide and as long as customers return to use that service their non-realised profit increase.

I call it a non-realised profit and the reason is that the profit a social network generate is not in dollars and cents primarily. It is in a meta currency I call influence and to transform this influence into dollars and cents there need to be a conversion service in place. For Facebook this has been one of their greatest challenge yet. They’ve been sitting on a great stock of influence but haven’t been able to tune the conversion service to start generating profit as needed.

Now if we should put Facebook and Twitter aside for a while and look at a generic social network instead just to keep our personal feelings about the two companies out of the discussion. For the sake of this article I will call it The Network. The Network is an online service where users return multiple times each day to update on what is going around in their local surroundings as well for the remote parts of their personal social network. The influence generated by The Network I estimate to one million. This is the amount of times a user is making an update on the service so for each such action The Network gain one influence. Service is ongoing and the amount of users is no longer gaining pace, instead they are steady at one million influence per day.

The Network have a maintenance fee to keep it running. There are bills to pay for hardware, the connection to internet, domain names, salaries for the ones making it work and so on. Let us say that the actual cost of running The Network is ten thousand dollar all things included each running month. We can now see that to make this going at a profit we need a conversion service that can make more then one dollar for each one hundred influence.

First and easiest thing that everyone and their dog is using for online services is ads, ad networks and affiliate links that one can attach to a site or service. These are services that will pay The Network for the amount of views they can create on the ads but most importantly the amount of clicks and actual deals that the ads from The Network will generate to the companies that have bought ad space.

The ads for a site like this would not be enough alone to convert the influence into a profit on a ten thousand dollar running company. So, how to make The Network profitable? New revenue channels can be invented to increase the conversation rate of influence to dollars. Second way is to just increase the amount of generated influence.

Payed themes or other graphical enhancements might put off some users and by that reduce the amount of generated influence. Every change is a delicate matter not to loose influence but also to increase conversion. The easiest way is often to just try to increase the influence generation by adding more users.

Going back at Facebook, they introduced the apps that users can use or stick to their profiles. There are games, apps to look for a new job, brag about what you’ve done or own etc. Apps that will make more people return to the site and by that driving the influence up. And by driving the influence up, the revenue channels they have will rise at the same time. But it was not enough so Facebook also added Facebook credits where they had a new conversion channel in fractional incomes on the transactions.

Both Twitter and Facebook was introduced on the stock exchange and investors thought they would all be the next Google, explode in profit and fame and everyone who bought would become a millionaire. The truth was that both stocks was valued too high at the time of introduction. They were both introduced at a time when they had not yet fully evolved their conversation services. As they start to get that part in place, the profit will be generated.

So what is the lecture we can bring with us after all this?

A social network do not generate money, it will generate influence. It is then up to the company behind the social network to build a conversion service that they can apply on top of their influence to generate profit.

Influence alone will never generate profit.

With this knowledge in our backpack we will know that to see if a social network is a valid investment or not – see how big their influence is and how far away their conversion service is. This will give a good indication when profit can be seen. At the time of writing it seem that Facebook has in fact started to get their conversion service running while Twitter still has a way to go to reach the same profit potential.

This page was edited on February 6th, mostly grammatical fixes.

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