Users Love Ello, But What’s the Business Model?
Social
network upstart Ello is generating terrific buzz among users, but
can its ad-free approach compete against Facebook? Professors John
Deighton and
Sunil
Gupta provide
insights into what drives social media success.
As yet, there is no foolproof
way to monetize social capital.
If
there were, Ello would
be well on its way to financial success. The upstart social
networking site set the internet abuzz recently by introducing an
ad-free platform, and the sheer amount of attention it has since
received suggests that social media users are increasingly
attracted to the idea of such a model. But funding it without
advertising's help won't be easy.
Two
digital marketing experts, Harvard Business School professors John
Deighton,
the Harold M. Brierley Professor of Business Administration,
and Sunil
Gupta,,
the Edward W. Carter Professor of Business Administration, provide
insights into the next generation of social networks, and what kind
of network they'd build with unlimited funding.
Q: How
native is advertising to the social media space? Is the recent
interest in Ello a response to an oversaturation of advertising on
other social platforms?
JD: For
me, the question is not "Would people like a less intrusive
social network than Facebook?" Of course they would. Do they
want it enough to pay for it? Probably not, as long as there is a
giant global community (Facebook), with a billion monthly active
members, including that high school exchange student who they lost
touch with when they went back to Bolivia. And that one's free.
SG: I
think it is a response to oversaturation, with Facebook being the
real culprit. While social networks claim to be enabling great
social causes, users are starting to understand they're being
milked indirectly for money. There's a sense of betrayal, a feeling
that "you didn't tell me what you were going to do with me and
now you're making billions of dollars off my data." It's hard
to go into the mind of Ello's founder [Paul Budnitz], but my guess
is that they genuinely believe there is a backlash and they're
filling a need in the marketplace. The challenge for them is: how
do they survive as a business after attracting a user base? Those
are two very different things.
Q: How
financially viable is a social network without advertising? How
realistic is that proposition?
SG: If
I'm a young person, I want scale. You're not running these networks
for them to make money, you're running them for an exit strategy.
Many VCs are thinking the same way. Historically in the internet
era, the notion for startups has been to build a large customer
base and monetize it through advertising. But it's hard to name
more than two companies that have done this successfully. If Google
and Facebook are taking up a big chunk of ad revenue, there's not
much left, even for the Twitters of the world. Increasingly, we're
seeing a shift in the business model from advertising to a
subscription model (think Hulu Plus, Pandora, Dropbox, etc.). Ello
is operating on more of a freemium model, where you pay for
upgraded features. But they face the same burden of proof for users
before they'll be willing to pay: are enough of my friends there to
make a switch worthwhile?
JD: Advertising
is not the only way to achieve a profitable exit, just the most
reliable way to date. Large social networks are very expensive to
run. Some say that servers don't scale very well, and it costs
nearly as much to serve the ten millionth member as the millionth.
Little networks like LiveJournal exist, but they don't grow into
Facebook any more than beetles grow to the size of
elephants—bigness requires a different metabolic principle. I
believe that principle for social networks involves selling access
to members based on their personal information. Subscription and
freemium models get talked about, but even Wikipedia can't make
such models work.
Q: So
what fate does Ello face? Any advice for them?
JD: Call
me cynical, but Ello is funded by investors, not altruists. The
first outside investor put in $435,000 and took a seat on the
board. That is a very small stake, and perhaps their idea of a
return is just the publicity. But the small stake will burn out by
December if growth is anything like the claimed rate, and at that
point a real investment will be needed and more seats on the board
will be demanded. The board will need to monetize the membership in
whatever fashion ensures a profitable return of capital for the
venture fund's investors. So my advice, if they believe Ello is
still viable by then, is to buy Budnitz out. A social network that
doesn't somehow commoditize users, like an elephant-sized beetle,
needs a metabolic principle not found on this planet to survive.
SG: If
you want to become big, you can't charge people up front because
they'll be reticent to join. You rely on funding from outside
sources and then at some point you need to turn back to the users,
like Wikipedia, and say "we need your help." You might be
somewhere between an NPR model, where the service you're providing
is good for the user and for society so people donate to keep it
going, and a subscription model.
Q: If
someone gave you an unlimited supply of VC money and told you to
start a viable social network, what would it look like? What would
it do differently?
SG: I
wouldn't build a social network for the masses because I think that
space is difficult to capture given Facebook's dominance and the
presence of network effects. Before you go to a party, you
generally want to know who is going to be there. But I do think
there are specialized networks that would generate huge value.
Rather than a gathering place, you create an exclusive club and the
exclusivity lowers the number of people you need and allows you to
charge them for it.
Let's
say you build an invitation-only social network for high net-worth
individuals. American Express could probably do it for their
platinum card members. If I'm a platinum card member, the kind of
hotels and travel experiences I look for are very different than
what's available on TripAdvisor for a 26-year-old backpacker. I
might be willing to pay quite a bit for a service that caters to my
needs and puts me in touch with other similarly-minded people. The
key is to identify what the value is to your customer and build
your business to serve that need.
JD: I'd
want to deliver something more addictive than self-expression.
There are some things but, for good reason, they are all illegal.
ABOUT THE AUTHOR
Christian
Camerota is Harvard Business School assistant director of
communications.
http://hbswk.hbs.edu/item/7492.html
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