Per using the internal SocialCash daily news email, put together by our very own Thais, I ran across two blog posts that reiterate what is becoming a clear trend in the monetization of social networks and applications. First, there is Mashable’s post from Thursday regarding the nose dive of advertising revenue generated by social networks. That revenues are going to drop should not be a surprise for anyone, but the fact that drops are being reported in the hundreds of millions is certainly discouraging. It has been the story of the last six months as even the most popular of applications have been hit with dropping cpms amid a handful of offers for guarantees as low as 7 cents. With a growing focus on engagement spreading across social networks, impression based advertising is becoming less and less valuable, meaning CPA and CPC campaigns are becoming more and more popular. Even Facebook’s self serve ad generator, SocialAds, now gives advertisers the choice of CPM or CPC campaigns.
The second post I came across is TechCrunch’s coverage of hi5’s launch of a universal virtual currency. Right now this currency can only be used to buy and send virtual gifts on hi5, almost an exact copy of Facebook’s own virtual gifts. But, there is the suggestion that eventually users will be able to spend this currency on additional goods and services on hi5’s platform.
These two stories are like the two sides of one sheet of paper. As impression based online advertising revenue drops, the strategy of monetizing social networks and applications will have to shift to cash purchases from users. This is already wildly popular (and profitable) in established virtual worlds like Second Life, and applications on Facebook that accept direct payments. Many applications strike a balance between advertising and direct payment through CPA based virtual currency solutions that incentivize users with virtual currency to purchase a product or complete an offer for which the developer is in turn paid in cash.
The news of ad rates plummeting should only fuel the fires of developers to come up with sustainable business models selling digital goods/currencies or even services (which can garner recurring revenue). Now, this is much easier for a single application or even app development company to accomplish than it would be for Facebook or hi5. They are dealing with a monumental international user base (and developer base) making financial regulation a potential nightmare, not to mention the resources that will have to be spent on policing fraud. But it’s easy to see that the drop in advertising rates is making it necessary for social platforms to move in this direction, which is a good thing overall. Finding a balance between a free basic user experience and selling premium services/ goods will be key as networks search for new revenue streams.
How do you think Facebook or other social platforms should implement virtual currencies or payment platforms? Should it or can it be safely opened to developers? Will it disrupt the application ecosystem?