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Is the social media sector in crisis?

19th Apr 2010
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Bebo’s in danger of disappearing, Ning’s scrapping its free service, and Twitter’s risking the wrath of users with its ads. Is the social media sector in crisis? Or in the process of rationalisation?

When social network Ning announced that it would be cutting staff and its free service at the end of last week, it topped off a tumultuous 10 days for the social media sector.
The first drama came courtesy of beleaguered social networking business Bebo, revealing its precarious position in an email to its 40 remaining employees. "As we evaluate our portfolio of brands against our strategy, it is clear that social networking is a space with heavy competition, and where scale defines success," wrote Jon Brod, head of AOL's start-up acquisition and investment unit.
"Bebo, unfortunately, is a business that has been declining and, as a result, would require significant investment in order to compete in the competitive social networking space. AOL is not in a position at this time to further fund and support Bebo in pursuing a turnaround in social networking."
AOL, which had bought the site for a whopping $850 million in 2008, is now scoping out potential buyers – but there is the very real prospect that it will be scrapped altogether rather than sold.
Days later, micro-blogging site Twitter finally moved to monetise its business by adding sponsored tweets to search pages.
On the firm's blog, Twitter founder Biz Stone wrote: "Over the years, we've resisted introducing a traditional web advertising model because we wanted to optimize for value before profit. The open exchange of information creates opportunities for individuals, organisations, and businesses alike. We recognized value in this exchange and planned to amplify it in a meaningful and relevant manner.
"We hope you'll share in our enthusiasm as today we unveil a simple service we're calling Promoted Tweets."
Despite the insistence of the firm that the ads will be relevant and non-intrusive, the addition of paid ads to the beloved site was met with a decidedly mixed response by the Twitterati – although fears of a full-scale backlash seem unfounded.
Fears of a backlash weren't sufficient to stop Ning from announcing that it would be stopping its free service.
In a memo to staff, recently-appointed chief executive Jason Rosenthal explained: "We need to double down on our premium services business. Our Premium Ning Networks like Friends or Enemies, Linkin Park, Shred or Die, Pickens Plan, and tens of thousands of others both drive 75% of our monthly US traffic, and those Network Creators need and will pay for many more services and features from us. So, we are going to change our strategy to devote 100% of our resources to building the winning product to capture this big opportunity. We will phase out our free service. Existing free networks will have the opportunity to either convert to paying for premium services, or transition off of Ning."
Furthermore, Rosenthal announced that the firm would be reducing the size of its team from 167 people to 98 people.
Another bubble bursts?
So what's going on in the social media sector? As some commentators have been quick to point out, this flurry of stories is eerily similar to the bursting of the dotcom bubble some 10 years ago.
"The buzz and media attention given to the growth of social media has masked the fact that very few businesses have established or been able to prove the ROI they can get from the medium. The same thing happened around the dotcom boom and bust," says Tom Bailey, commercial director for social media engagement expert Comment Technologies. "Until businesses understand that a good idea is not enough and they need to have a solid business case then we will continue to see companies fail, unable to fully capitalise on a truly great opportunity to make money."
There is the suggestion that social media was always destined to have an awkward transitional period, as at some point they would have to monetise what have traditionally been free services.
"Facebook, YouTube and Twitter weren't created to be these enormously successfully adopted networks," says George Ioannou, head of creative and strategy at Maginus. "They were created by people who wanted to make things easier to share and involve others in their life. As these networks get so large there is an increasing urgency to monetise to cover the cost of development, hardware and storage facilities. So the circle goes right round to needing large budget backing to be able to run these services. The catch-22 is that they are only successful due to the free nature of the networks, so there are two popular ways to go about generating revenue for these sites – advertising and membership fees. People don't mind upgrading or paying for premium features, but the basis of the offering must be free.

"With social networks being created as a business opportunity they need to start off with a free service. Membership and subscription is far easier while it's free and it also helps with the viral aspect to the network. How many of us have received emails asking us to join a network or someone wanting to be our friend – with a commercial barrier this wouldn't happen. Therefore networks continue to offer free services as a way of luring themselves into our everyday life, in hope of monetising us one day in the future."

As the market is maturing, and as users familiarise themselves with the myriad of networks, so it is inevitable that there will also be some natural attrition. "Everyone jumped on the band-wagon of social media/social networking and created a profile on everything - scattergun style - and that's a lot to maintain! Now I believe people are rationalising, determining what works for them and why, reducing the amount they have to maintain and focusing on what has worked for them," says Clare Rayner, director of E-mphasis. "As a result a few, the cream of the crop, rose to the top - in our view that would include LinkedIn, Ecademy, Twitter & Facebook - perhaps also Naymz and Plaxo... although I’m not quite so convinced here! Why? Well, each of those has a really specific role to play - and this is what we advise clients embarking on a social media strategy to really think about why…"
Dan Thwaites, planning director at relationship marketing agency HS&P believes a specific type of social networking firm is particularly vulnerable at this time. "What's happening now is that those offerings that were little more than a network are struggling," he suggests. "It's slightly clichéd and marketing 101, but if you're not offering a benefit above and beyond connectivity, then you're not going to be around very long, in my opinion."
Nonetheless, while there may be some backlash to the latest moves by Twitter and Ning, most remain confident that the fallout is unlikely to damage the social networking sector as a whole. "Social media has, in my opinion reintroduced the concept of the local market, where people gather to exchange news, gossip and shop. If a social media site makes this easy and enjoyable you probably don't mind someone selling something to you - advertising – or interrupting your conversation with relevant stuff because they know what you like/dislike – sharing," suggests Mike Cavers, executive creative director at The Marketing Store. "If you don't like an ad break in your conversation you might move away from Twitter, if the conversation isn't interesting you are likely to not listen and leave till the conversation dwindles a la Bebo. So, social media will always be here and it will continually change to reflect the conversations/needs of its participants."
Meanwhile, Evan Adelman, technical lead at Likemind, believes that we shouldn't read too much into the recent rash of news from the sector. "It's definitely rationalisation – and not even a severe one at that, yet," he suggests. "Look at the amount of money Google is spending on subsidising YouTube's video traffic and I'm sure you'll agree that there's still plenty of money being spent with little thought of profit."
So, some logical rationalisation in a booming sector. There will always be natural attrition, and even the strongest has to adapt to survive. With social networking becoming so wildly successful, the consensus is that the matter of monetisation will be no more than a blip.
"One thing is certain, there is no crisis - more and more people are coming round to using social media and social networking - Web 2.0 has evolved... but just as Darwin points out in origin of the species, only the fittest and those perfectly suited to their environment will survive!" says Rayner.
And Thwaites is in agreement. "Are some in trouble? Definitely. Is social media as a whole in crisis? No way," he concludes. "Whilst the apparently ravenous hunger for social media remains – amongst real people and businesses – we're going to be seeing more focus on it – albeit perhaps from new or adapted offerings - rather than less. Crisis or continual metamorphosis? I guess that depends on your perspective."

Replies (2)

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By wecandobiz
23rd Apr 2010 08:19

Great article Neil.

First off, let me start by saying that the Social Web is the ONLY way forward.  We may not be talking about Facebook, Twitter or LinkedIn in five years time, but an internet of connected people rather than just computers will be the ONLY way we perceive the web.  Social media and social networks are NOT going away.

That said, the technology is going to evolve.  More and more sites will become "social", enabling us all to share comments, thoughts and web pages with friends no matter where we are.  Every website will look like an extension of a social network, with "fans" shown on site pages, comments and the like.  We are, remember, moving towards a truly Social Web.  Social networking will be omnipresent, rather than teh decreasing number of sites we know today.

This will mean two key things:

1) Existing social networks are likely to disappear or at least change significantly.  As the whole web will be social, we won't need to go to specific social networking sites to share and communicate with friends, colleagues or business contacts; that capability will exist everywhere.  I predict services like Facebook will become a "social identity" site with streaming, effectively acting as a portal to the Social Web, signing you in and then showing you who is doing what across the whole Social Web.  Your news feed will report what is happening regardless of where it's occuring, with pointers to take you along to join in;

2) The "social sites" that will win out are those that do something useful other than just provide social capabilities.  Facebook could become a social portal to ensure its survival -- helped by its sharing features, Facebook Connect and 400+ million users -- but all other social networks are going to have to work out what it is they offer once the whole web is a social network.  WeCanDo.BIZ offers an ability to easily locate potential customers with a need for what you do; LinkedIn offers schmoozing to help develop your career.  What about Twitter?  MySpace?  Plaxo?  All will need to have compelling benefits OTHER than just being a social network.

There are exciting times ahead, to be sure.  There will be consolidation.  But the net will be a Social Web where we'll wonder how we ever managed without social networking.

Crisis?  Not at all.  Social media is just growing up.

Ian Hendry


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By Neil Davey
29th Apr 2010 09:46

Thanks for your comments, Ian.

Interesting that shortly after your post, Facebook made a series of announcements that certainly signal another step towards your vision of "the whole web as a social network"....


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