The Future Of Social Media Monetization, Part 1

Editor's Note: This post was written by Ro Choy, Chief Revenue Officer of RockYou. In this series, Choy will address the future of social media monetization, focusing on the potential of platforms such as Facebook and the ability for third parties such as RockYou to create their own platforms and monetize a multi-faceted approach to social media marketing. The Future of Social Media Monetization Last year (even six months ago) most questioned whether social media could deliver meaningful business results. Whether it was the daily concern over Facebook's revenue or the questioned utility of social applications, the general consensus was the entire social media industry was hard to monetize. Today, the huge success of social games, the increasing number of brand marketers using social media and the myriad of business targets that social media leaders are pursuing (payments, e-commerce, search, etc.) are referenced daily. Add to that, Facebook recently announced turning the corner on cash flow. The truth is, there is A LOT of money being made in social media today, in fact, I estimate it's over $2 billion in 2009 alone (although one recent report projected this at closer to $1 billion). The only question is which model will be most successful and where to focus efforts within the space. To date there are three basic revenue models in social media (which I'm defining as sites and applications focused on social interaction, communication and engagement, including Facebook, MySpace, Bebo, hi5, Orkut, RockYou, Slide, Imeem, iLike, Flixster and countless others): Performance marketing Brand advertising Virtual currency For the sake of simplicity around market-sizing, I'm focusing on U.S. based social media companies. Let's start by looking at each business segment more closely. Performance Marketing Performance marketing is made up of CPA and CPC-based marketing offers from a huge swath of direct response advertisers including ringtone providers, eCommerce sites, online education sites and wherever lead generation exists (games, auto, finance, etc). Marketing spend is focused on the largest aggregators of impressions, which includes ad networks, exchanges and large publishers themselves. Consensus estimates of this market is currently north of $500M-$600M* for 2009 on social media sites/applications alone. The drivers of this industry are dead simple. If an impression generates a successful lead, the advertiser will pay a percentage of that transaction to drive volume of impressions. Many performance marketing campaigns in social media are actually paid out on a CPM basis, ranging between $.50 to $2, to capture top impressions and are increasingly global in nature (think places like Greece, Latin America and Southeast Asia), making these campaigns really attractive to U.S. based social media sites with large international traffic. Growth of performance revenue directly scales with number of impressions. As a result, thousands of developers are able to drive meaningful revenue with social sites and applications focused on delivering impressions alone. Since much of the performance marketing spend goes through the social networks themselves (e.g. Facebook's self-service system or the Fox Audience Network), through socially focused ad networks (RockYou, Cubics, AdParlor), or via network optimizers (Rubicon, Pubmatic) it's as simple as adding an ad tag to a page to build meaningful revenue. Given the simplicity of the business model (increase impressions = more revenues), performance marketing serves as the foundation for social media monetization, and it's the first opportunity most developers take on to generate sales. Now let's take a closer look at brand advertising in social media. Brand Advertising Brand advertising is driven by selling directly to media and creative agencies such as McCann Worldwide, Mindshare, OMD and MediaVest to name a few. The brand advertisers they represent for social media campaigns now include some of the best known across industries such as entertainment, consumer packaged goods, automotive, retail and food & beverage. At RockYou, I've been lucky enough to work with brands like Axe, Volkswagen, Ford, Gillette, Dawn, Sony Entertainment and dozens of others top brands in just this past year. Well designed brand campaigns in social media take the traditional advertising goals of building and defining a brand or product and combine it with the viral engagement of social media platforms. By delivering wide awareness of a user's interaction with brand campaigns across his/her entire network of friends (true "buzz"/ viral marketing), social media campaigns have raised the bar of brand-driven results beyond what print, television and content-site digital campaigns can do. Think of the difference between a fan on Facebook versus an email address. When a fan interacts with a brand message or campaign, his/her friends are notified of the fan's activity with the brand. When a user responds to an email campaign, only the receiver of the response is made aware of the activity. The tools available on social media for advertisers mirror what you'd find on any website, IAB standard banners, rich media, video, takeovers, etc. As a result, contrary to what most think, CPMs can actually be fairly high on social media pages, between $2-$10 CPM, depending on the targeting, rich media components and level of customization of the campaign. Click-through rates, which many assume are really poor within social media, average between 0.1% to 0.3% in our experience, which is equivalent to that of the average website. In addition, both Facebook's Fan pages and Twitter accounts are fast becoming standard marketing vehicles for brands, products and artists alike. Click-throughs on Facebook fan pages are much higher than the normal email marketing campaign, with some estimates at higher than 6%. Given the sustainable value of a fan or follower (an advertiser can broadcast to both on a continued basis just like email), and the viral/social awareness a fan or follower generates when responding to a campaign, it's no surprise that advertisers are actively investing in the space. We estimate the spend here between $400-$500M** for 2009 across social media sites, which makes brand advertising a material part, but the smallest segment of industry-wide revenue. Success with brand campaigns requires a publisher to have enough reach to deliver measurable results and a material upfront investment on direct sales, sales support, PR, marketing and operations. Brand advertising revenue scales with the number of direct sales reps, while the revenue per rep increases with the experience of the reps, the innovation of the ad products and the recognition of the publisher's own brand. This makes brand advertising an attractive revenue base, but harder to scale. In cases where a single social media publisher can't deliver enough volume to interest brands on their own, or don't have the resources to build up a direct sales force, there are a number of ad reps in the space who aggregate publishers and manage the sales efforts for them. These include companies like Federated Media, Appsavvy and Alloy Media Marketing. Working with ad reps gives social media publishers a real opportunity to understand what it takes to work with agencies and brands and build a brand advertising business. With this experience and broader reach, brand advertising can become a meaningful source of revenue for developers. In my next post, I'll touch on the most referenced and successful business model for social media, virtual currency and some of the complexities in succeeding in the space. Sources *Estimate based on Facebook $200M + MySpace $250M (assuming 50% performance vs brand--see here) + Other Networks & Social applications $50-$100M ** Estimate based on Facebook $125M + MySpace $250M + Other Networks & Social Applications ($50-$75M)

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The Future Of Social Media Monetization, Part 1

The Future of Social Media Monetization

Nick O'Neill

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