Facebook and Twitter seem to be the big winners of the current social media wave. Both services are growing like crazy, adding hundreds of thousands per users per week. But both companies are still struggling to find a profitable business model, currently prioritizing growth over revenue. Once you dominate the world you can always figure out how to make money from it, right?
Maybe. But the seemingly huge user numbers of these services could turn out to be far less impressive (and commercially relevant) in practice. Sure, both platforms have tons of registered users, but are these users really active? That’s probably something advertisers would like to know before they spend money on these channels.
There are a few heavy users that are extremely active, tweet a lot, have thousands of followers etc. But beyond this small group, usage drops rapidly. 50% of Twitter’s registered users are basically inactive. Since Facebook is far less transparent than Twitter, there are no similarly precise studies about usage of the leading social network. But a quick survey of the activity level of my 358 Facebook friends showed similar patterns. Only 71 (=19.8%) of my friends showed any activity in the past 72 hours, with only a handful clearly dominating. Admittedly, that’s anecdotal, but I’ve not seen any studies that show a different pattern.
Now, it’s not surprising that this kind of service has a long tail usage pattern. You can find very similar patterns in other types of communication networks like the phone system, e-mail, instant messaging, etc. The problem lies in how to best monetize these services. Both Facebook and Twitter don’t charge users. They want to monetize their services indirectly. Facebook mainly sells ads and virtual goods, Twitter still has not come up with a business model, but probably will go a similar route.
The problem is: these monetization approaches depend heavily on actual usage. Nobody pays much for ads that not many people see or click on. Virtual goods are profitable, but you can only reach a decent revenue size if many people buy them. So if it’s true that only 20% of users on both Facebook and Twitter are really active, that’s a big problem for both services, since their opportunity to sell ads and premium services is much smaller than their raw user numbers suggest. Granted, both platforms are very big even then, but maybe it’s not quite enough for total world domination…
So what would be a better way? Think about it: How does your phone company charge you? Your cable company? They charge flat fees because they want to extract a lot of money from low-volume users. Sure, they have different price levels for different user types, and they offer premium services, but the lowest levels are not cheap at all.
For instance, I’m a very low volume user of phone services. AT&T charges me for a 550 minutes per month package for my iPhone plan, of which I typically use 100 minutes or less. There’s no smaller package — tough luck for me. Do you want high-speed Internet at home, but use it only a couple of hours per week? You’ll still pay the full price. You need Microsoft Office for your business (because people send you fancy PPTX and DOCX files), but only use it every couple of weeks? That’ll be $399 for the “Standard Edition”…
These flat-price plans are simply a very profitable way to make money from services that have strong network effects plus a long-tail usage pattern. Charging based on usage (and online advertising is economically speaking an indirect way to do that) is fine as long as you sell to a heavy user, early adopter customer base, but as soon as you reach the mainstream, flat-fee models are way more profitable.
So the problem for Facebook (and, supposedly, Twitter at some point) is that the current business model will not really scale well with further growth in the mainstream, low-usage market. Online ads are measurable, and advertisers will only pay for audiences that are really active, i.e. generate page views or click on ads. I think Facebook and Twitter can only scale financially if they find a way to charge people even if they don’t use the service frequently.
By the way: Google recently killed strongly de-emphasized the free version of their “Google Apps” suite of messaging and productivity apps. Their model until recently was that small companies with less than 50 users could get the product for free, financed through advertising. Looks like that didn’t work out so well. The costs for accommodating a lot of mainstream users probably grew more quickly than the revenue from heavy users and ads.
And I’m convinced that Facebook and Twitter will face similar challenges in the near future.