Friday, March 7, 2008

On-line Advertising - No Competitive Advantage

As pointed out in my previous blog, online advertising is a BIG business, and social networking is becoming a significant part of that market.

The question is whether spending ad money with a social network is really the best way to take advantage of Social Networking. Is it better to spend at least some of that money on your own company’s web site to add social networking capabilities?

Let’s look at Search Advertising. It is based on a model that takes all of the profit from competitors. Company A and Company B will both bid up the price of the ad for an item that they both sell until the point that they do not make a profitable return. I know there are many e-commerce businesses who sprung up and took advantage of early leadership in search ads, building up spending to be 25%+ of their total revenue. They initially made money as they built up sophistication on using Adwords, finding profitable keywords ahead of their competition – but those advantages decrease over time. Then Company A and Company B are forced to continue spending at the high rate to continue to generate the non-profitable revenue that they now need to keep their volume up for their overall business. No wonder Google has grown so fast and profitable as it “Does No Evil” (except drain the profit from e-commerce companies by creating an efficient market).

Spending money on a banner ad on a social networking site will have similar consequences. Company A and Company B will both bid for the same targeted profile users or groups on Facebook up until that click-thru produces negative results. Of course banner ads have always had the same problem, and the benefit of a more targeted user or group in social networks offers only temporary competitive advantages until other competitors show up to advertise on that site. Good for the Social Network, but not a competitive advantage for the business.

Finally, advertising has always had the negative attribute of being a continuous expense. Businesses have always looked to retain customers as their low cost alternative and hope for the magical “word of mouth” that give very large competitive advantages.

In comparison, extending your company web site with social networking applications can truly build value in your own brand. As discussed in a previous post, social applications can bring large value to your web site with increased:
- Engagement of your users
- Loyalty by having your users be involved
- Virality within your own site and the larger social networks
- Moving from Personal to Social interactions

These basic values help you keep your existing customers and enable the most powerful method of marketing – “word of mouth”.

3 comments:

Juha Lindfors said...

I think a lot of what you argue for hinges on identity and profile ownership and interoperability between virtual spaces.

As long as my identity and profile (and perhaps also applications in the future?) are locked into a single vendor's system, Metcalfe's Law will rule, and a few large networks will dominate the space.

Once (or if) my profile is mine to own and moves around with my interests then the market truly opens for specialized networks. Until that occurs, creating a presence on multiple networks is too much of a hassle for the user (and so they propagate towards the larger ones).

Should the profiles be freed, it makes sense for the existing dominant players to become network aggregators (cf. Yahoo transforming from a directory of hyperlinks into a portal) which in itself may give them an opportunity for more targeted advertizing -- more data to mine on the user's profile.

At that point hosting your own network for your customers also becomes a no-brainer, and the market of narrowing ad margins will be reshuffled.

Bob Bickel said...

Hi Juha. Good to hear from you...

I doubt people want to keep a bunch of detailed profiles, but the reality is that people are keeping a lot of personal info on a lot of sites - how many sites have you bought stuff from or registered for to be on their forums or post a comment? OpenID is cool and might cut down on some of that, but there is really a need for distributed profiles. You can actually get some of that today with Facebook's terms of service. You can't store any of the information held by Facebook on your web site, but you can make use of it interactively as long as you have the UID for that user on your web site. This is what I mean by federated social graphs. There is also the idea of federated social applications and content that we think will become popular. We'll be talking more about that over the next couple of weeks.

Bob Bickel

Juha Lindfors said...

there is really a need for distributed profiles

Right, I think we agree. What you are saying is that I trust a host to keep my profile which then is reused across all my relevant networks.

Similar to how I trust an ISP, or Google, to host my email. I don't expect them to restrict me on who I can send and receive email from based on if they're a registered user with the host.

The same needs to happen with profiles -- that's what I mean with my profile becoming mine to own, not locked into a vendor's system which is the absurd case today (although I'm not at all familiar with Facebook et al).

It does require standardization in the form of how these profiles are stored. Projects like FOAF work towards that goal.

PS. noticed the new OpenID select box on Blogger comments, that's a tiny step towards improvement.