

A way for social networks to actually monetize [better] (holding company theory) - zkinion
http://www.outrunpoker.com/blog/2008/03/a-way-for-social-networks-to-a.html

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notauser
Whoops, are a few basic errors here.

He has two assumptions:

\- You can make a profit in the industry of your advertisers. This is a huge
if, and is impacted by scale, expertise, management focus, time/maturity,
branding and many other factors.

\- The return on investment you can make in industry X is higher than the
return on investment you can make by expanding your operations in your current
industry. This could be true for social sites, where increased investment
(i.e. programmer time) might not get them many more users, but they still have
to compare the possible revenue to the increased profit from firing some
programmers and going into maintenance mode.

These to are the main reasons why you see companies outsourcing non-core
activities (like cleaning and even product development), the markup they now
have to pay on the service is lower than their internal cost of capital.

~~~
zkinion
-The SN network in this situation would be acting as a "holding" company. It does not expand into anything itself. The child companies do, and gain expertise (by possibly hiring from competitors), and also advantage by more traffic sent to them.

-That return on investment would be higher, in the long run. Yes, thats an if, but its a much better if than "social graphs completely turning around CPM for something like FB".

Those are also, by their opposite, reasons why companies consolidate and
acquire...

~~~
notauser
Your first point is essentially meaningless. It makes no difference if it is a
division, a child company, or part of the core business. Someone has to think
about it, manage it and execute it. All this costs money which you could use
elsewhere _and_ it creates potential conflicts of interests with your own
business. This means that you need a really good reason to go ahead.

For an example of conflicts of interest look at the Windows/Office vertical
integration and the constraints placed on Office in order to keep Windows
profits high.

Your second point boils down to the fact that social networks give an awful
return on investment. Could be true, but if so that's more of an argument to
get out of social networks altogether and find a more profitable business.

~~~
zkinion
Microsoft is still doing well off of office, and acquisitions/ventures such as
hotmail and msn/windows live search. When most "average" people use their
computers for the first time, and then on, they'll use internet explorer which
goes to the msn home page and searches on Microsoft's search solution. The
"average" user out there still uses IE, not firefox or opera. As a result they
get a ton of traffic they wouldn't otherwise get.

[http://www.alexa.com/site/ds/top_sites?cc=US&ts_mode=cou...](http://www.alexa.com/site/ds/top_sites?cc=US&ts_mode=country&lang=none)

As you can see, Windows Live is number 6 on there. It is terrible compared to
google, but that is still alot of traffic they get from synergy between their
companies. Would Microsoft make more money if they instead sold their search
traffic/IE users to google? Not at all.

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mattmaroon
This is very silly. It's a well-known concept in the business world that
companies should stick with their core competencies. Ones that try to do too
many disparate things at the same time generally fail. Facebook's core
competency is not selling mortgages or credit cards.

Also, if mortgage brokers are only willing to pay some portion of 14 cents CPM
there, that means Facebook is creating very little value for them. Which also
means that if Facebook got into the mortgage selling business, they could
probably capitalize off of it in much better ways than just advertising it on
their relatively worthless site.

So in essence, the only industries Facebook would benefit from entering are
ones that already pay them a high CPM. But if people were paying them a high
CPM, they wouldn't be in this predicament.

~~~
zkinion
"Facebook" wouldn't have to change their core competencies at all. It would
have a stake in a company who's core competency is whatever that industry
happens to be.

The site is indeed relatively worthless, and I doubt anybody at all is paying
them a high cpm in _anything_. Thats the whole point, to turn low cpm into
somewhat higher cpm, _in the long term_ by capturing more of the revenue
stream.

Is it fool proof? No way. Facebook or whatever, could risk losing their
investment in whatever company they bring up, and also lose the opportunity
cost on whatever ads they could be selling instead of sending to their own
child company instead... But does it stand a better chance at making more
money _in the long run_ compared to magical BS like social graphs and social
ads? Yes, I definately think so.

~~~
mattmaroon
The minute a startup starts making significant investments in mortgage
brokers, credit card providers, etc., you're leaving their core competency.

I don't think you're understanding why this provides no value to anyone.
You're turning Facebook into a Berkshire Hathaway of sorts, with the only
coherency being that every company they buy a stake in advertises on Facebook.
By that logic, why shouldn't Time Warner start buying stakes in whoever
advertises on CNN? Why shouldn't everyone who sells ads do this?

Facebook gains no higher CPM from doing this either. I mean, they may make
more money if these auxiliary businesses do well. But it's no more than if
they kept selling ads on Facebook for 14 cents cpm, set up these side
companies, and spent 14 cents cpm advertising them somewhere else. The fact
that they own Facebook provides no value whatsoever for the side companies.

Effectively you're saying that any company with a non-functioning business
model should just do something else too. That doesn't solve the problem.

~~~
zkinion
I understand what you're saying.

However, I'm trying to make this "whole is greater than the sum of its parts"
argument. But, with Berkshire, almost all of its investments thrive well on
their own. Buffett invests in each and every one because of fundamental
reasons within each individual company.

My argument is that some companies are making a lot more money off of each
traffic batch than the traffic batch is actually worth. By figuring out such
companies, the value of the traffic to facebook would then be higher. Would
this work with every company that advertises on FB? No. Could it might
possibly maybe work with at least one or two companies? Yes.

Saying any company with a non-functioning business model should just do
something else is really stretching it. I believe FB does have a functioning
business model that could use a great deal of improvement. This, to me, could
be such an improvement. What other alternatives are there? You have already
said yourself that things like "social graphs" are just BS meant to inflate
valuations to $15 billion.

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symbiotic
I agree that social networks need better business strategies in general, but
if the advertisers are making more money than the social networking sites, why
make the SN site in the first place? Why not just try to beak your way into
porno, gambling, credit repair (the list goes on) business and just sell adds
like everyone else?

I think the answer is that we believe SN sites _should_ be able to make more
money than these other businesses. The person who figures out how to make that
happen will be rich, but I don't think the answer is to just add another
business onto your SN.

~~~
zkinion
Sell ads on what? Those sites are buyers of ads. They do the _conversion_ of
traffic.

I should have made more clear that this is a longer term strategy, and yes,
indeed more expertise is needed in these industries. However, what these
industries do is not rocket science, and can be reproduced over time.

My point is that SN sites could eventually do the conversion of that sort of
traffic themselves, and gain higher CPM _In the Long Run_. This process would
take years, but is rewarding in the end.

~~~
mattmaroon
But it's not really a higher CPM at all. There's no benefit to Facebook
starting a mortgage brokerage and advertising that on Facebook (which
apparently isn't a very valuable seller of advertising, or they'd already have
decent CPMs) over just switching to a mortgage company entirely and
advertising on other social networks. Or better yet, switch to selling
mortgages and advertise on sites that are valuable to mortgage brokers.

~~~
zkinion
You're assuming perfectly priced traffic, in an arbitrage-free environment
where the buyers of traffic pay perfectly for the traffic, an exact amount
proportional to their revenue that they will get from that traffic.

It doesn't always work that way in the real world. Some random company buying
the ads at 10 cents CPM is not always getting traffic that is worth that much
100% of the time. By actually getting the entire revenue stream, the "child"
company, and thus its parent would capture the true value of the traffic over
a long period of time.

~~~
mattmaroon
No, I'm assuming that they could just buy ads with the same ROI in many
places. For instance, if Facebook ads cost 20 cents cpm, but they earn 40
cents, then their ROI is 2x. I would assume they would have no trouble finding
ads elsewhere with a 2x ROI. In fact, I'd be surprised if the market didn't
function to make their ads be a 2x ROI at MySpace, Bebo, Hi5, and maybe Digg,
Reddit, etc.

Spotting market inefficiencies like that should be really hard to do,
considering that all of the mortgage brokers, for instance, already know their
ROI on various sites, and the market will make it roughly equal everywhere
over time.

~~~
zkinion
Your putting too much faith in the buyers of ads reacting to the changes in
prices and knowing exactly how much the traffic they are buying is actually
worth. _All_ mortgage broker's/free i-pod scam/dating site/etc know the exact
ROI they get back from each and every little bit of traffic? No way. In some
industries, theres even a bunch of buyers, some less sophisticated than
others, but are yet still able to buy the traffic at a certain rate because
they are making a profit at that rate. That isn't optimization. In industries
with fewer buyers (high traffic dating sites), one site might have to purchase
traffic from a multitude of different sources, or indirectly purchasing it
from their own affiliates who might purchase it themselves, to keep up their
market share against other big competitors.

This isn't about spotting temporary market inefficiencies, its about spotting
long term ones that lurk beneath the surface.

------
davidmathers
Fail. Econ 101: wealth is created via division of labor, not consolidation of
labor.

~~~
yters
Interestingly, parallel programming theory comes into play here. There is a
sweet spot between completely distributing an algorithm and completely
consolidating an algorithm that allows it to scale effectively with more
processors.

------
agentbleu
I have recently had the same idea and tried to execute it with as an
astonishingly great failure. I have a real estate site with high traffic, I
sell adverts and have adsense too. I suspected I could see directly to these
visitors with another spin off that I controlled. So I built an e commerce
site selling organic wine (which I suspected would be of interest to the same
clientel) and advertised it prominently on the real estate site. Hardly any
traffic has resulted from the advert. The bottom line is, if the advert is not
on topic with the mode de operation of the user at that specific time it will
be ignored.

