Business models of social networks

When it comes to evaluating a new social network, such as the new Ello, one of the most important questions you can ask is how sustainable it is. The best perspective on the sustainability of any business is summarized by Jerry Maguire:

show me the money!

How does this new social network – or any social network – plan to stay in business? After all, a social network isn’t free. There are servers – even in the cloud – that cost money. Bandwidth costs money. Disk space, even with platforms like Amazon S3 and EC2, still costs money, and the more popular a network is, the more money it costs. That money has to come from somewhere.

From a business perspective, there are three fundamental models for how a social network can make money:

1. The network charges users. This is the most straightforward business model. The user pays a fee and the business uses those fees to stay in business.

2. The business sells something that subsidizes the network. Path did this with stickers. Spiceworks does this with its user community.

3. The network charges advertisers. This converts the user into the product, and the advertiser as the customer. Facebook and Twitter are the most prominent examples of this.

There are hybrids of these models. Path sold stickers and also sold premium memberships. LinkedIn is one of the few networks that manages to do all three: charges users (Premium profiles and features), selling ad space (LinkedIn Marketing Solutions), and selling a product (LinkedIn Talent Solutions). But if a social network doesn’t do one of these, then in the long term it’s not sustainable.

Ello has made the bold statement that it is an ad-free network, which means that to stay in business, it must do either #1 or #2.

The thing we must know for any new social network, whether it’s Ello or perhaps a new wave of entrants, is simple: show me the money. If it’s not there, don’t place more than a token bet on the network’s long-term future.

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