Social Website Dysphoria

RPXIt has been a terribly busy three weeks for me, with little time free for posting… between a round of Second Life® Evangelisation and attending to some clients who are physically away from my home city, I’ve been on the road (well, mostly on the train really…) across my tiny country, but still managed to do close to 5,000 km or so. Incredibly tiring!! And, of course, I couldn’t help but wondering: how many of those trips were really necessary and couldn’t have been done much more comfortably via Second Life? 🙂

As a matter of fact, most could have been avoided… but I would have missed the fun of hearing what other people have been saying about the “state of the art” of the Internet. And strangely enough, it felt like 1999 again.

Brave New World

On one of the sessions I was in, I was a bit tired of repeatedly listening to the same things over and over again (more on that later), so I decided to be provocative to wake up the audience. I don’t think I was very successful, but let me explain a little bit about what I had in mind.

These days, if you read around the media, it has been promoting “social websites” almost non-stop since, well, 2003 or so. In fact, the so-called “Web 2.0” is seen as the child of the dot-com bubble: the little that survived the catastrophic failure of some so many bright ideas that never caught on. On the post-bubble days, social websites are in, and they’re the only thing worth exploring. That and mobile phone applications, of course.

If you pick a random conference, it’s certain that someone will be either talking about their favourite social website and how they’re making a lot of money out of it (namely, by getting paid doing conferences about it — something which, of course, they will not tell!) or, well, how cool it is to develop applications for Android. If you paid attention in 2006 or so, they would be talking about hi5 or Friendster. In 2007, very likely they’d be talking about MySpace. Since 2008, of course, they’ll be talking about Twitter or Facebook. Or even both. Or, well, on how cool their newest application (or plugin, or mashup) integrates with either.

They will be eager to show you anecdotal evidence about how fantastic the reach of those tools are — about a 100 million for either Twitter or Facebook (although Twitter is growing faster), or 150 million for MySpace (although nobody ever goes there) — and how easy and cheap it is to push your message through those social networks: great for advertising. A speaker I recently heard was even bolder and claimed that he was able to change society by pushing his ideas to the many elected representatives, who, bored with endlesss hours in Parliament, spend their time chatting with friends on Twitter — and sometimes reply to complete strangers.

I’m not going to endlessly rant about the “cool factor” of all those social tools. You can just Google a bit for them, and you’ll see thousands, hundreds of thousands, tens of millions of blog posts and newspaper articles writing about the massive change of our society as people spend, well, all their time on social websites. Consumers exchange information about products; politicians keep in touch with “concerned citizens”; businesses look for new employees or new markets to explore. Every day someone has a new idea on how to use one social networking tool to push their idea/product ahead, and reaching “millions”. Take your pick. There are millions of examples.

It’s a Brave New World out there, and if you haven’t yet signed up to any of those Web 2.0 sites, you’re square. Or, well, worth of compassion and pity for being “left out”.

In the last 5 years, I believe that I have subscribed to about 250 different social websites, and I continue to subscribe to them, as new ones pop up every day. Obviously, it’s completely and absolutely impossible to keep track of all. In fact, after Twitter dropped their GTalk gateway, honestly, I don’t keep in touch with any, which will, undoubtedly, raise a few eyebrows from my vast audience of millions of readers — uh, I meant, handful readers. Yes, I cheat, using Ping.fm to post updates with around 20 or so microblogging sites (and I’m including Facebook on that…), but I do not log in to each of those separately to see if I got any answers. Which is a pity, really. I wish I had time for that. (The Twitter-to-GTalk gateway had the huge advantage of doing that very easily without any need to add Yet Another Application to my poor overcrowded desktop) Sorry to disappoint you all!

/me watches as her karma on Plurk drops and her status as part of the Twitter Grader Second Life Elite disappears after all those followers just remove me from their lists and disappear, shaking their heads

I’m not going to say that there is no worth on all those social thingies. I love Twitter because I see it as a “RSS reader with human intelligence”. I don’t use any RSS readers at all (surprise, surprise!) for a very simple reason: I can’t deal with a thousand emails a day, much less a thousand articles to read every day from those millions of so very interesting blogs. On the other hand, by following my friends on Twitter, and knowing that they share my interests, I’m quite sure they will be posting awesome articles about what they like. So you can view my list of friends as a very complex cloud computing grid with infinite amounts of raw pattern-matching power, searching every day through millions of articles, and spewing out a handful that I really will like to read. So that’s how I keep myself informed 🙂

Granted, you could use Facebook for that as well. Or Plurk. Or identi.ca. Or, well, the Yet-Unnamed-Microblogging-Tool-Of-Next-Week. The principle would be the same. It’s just a question of what design and interface you’d like best to use 🙂

And there is some use for LinkedIn, too. People ask often for my CV (resumee for you Americans), and although I have a more formal document somewhere lying around my MacBook, sometimes it’s easier just to point them to my account on LinkedIn. And since computers tend to break and require reformatting — yes, even Macs will break apart and melt down after a decade or two — and I’m never sure if the backups will work, I’m happy to post my pictures somewhere on Flickr and a few videos on YouTube. At least, if my Macs break down, I won’t lose everything.

So does that mean that I’d be happy with just a handful of social websites? Very likely not; after all, anyone might read the above paragraph and say: “oh, well, you can do all the above on a single site: Facebook”. Or MySpace. Or Friendster. Or Multiply. Or Netlog. Or… or… or… any of thousand different services. And, guess what, they would be right!

So the point here is… you cannot avoid to join any of those social websites. Even the most anti-social-website person I know — my roomie Moon Adamant — joined Twitter a while ago. And I’m sure she has a Picasa account somewhere. With so many different services floaing over there, it’s impossible that you don’t find at least one which, well, suits a very specific need you have. And once you register for one… you’ll soon start linking it to another… and discuss about it on a forum somewhere… and probably find a tool that will help you out with something… which requires a registration for, say, Facebook…. and since you’ve had to register for it, you might as well flesh out your profile… and then it starts spamming all your friends, who all of a sudden will find that you’re on that service… and, well, the snowball starts to roll. It’s unavoidable. You cannot avoid having a virtual identity on the social Web — sooner or later, it will catch up with you and beg your attention, no matter how anti-social-website you are. And it’s pointless to resist: you will be assimilated.

Stage Two: Talk About Your Love

Recent converts to any religion will be the most enthusiastic ones, and this phenomenon is well-known. If the word “religion” bothers you, you can replace it with “fanatism”. I’m an SL fanatic, and I’m still enthusiastic about it 🙂 But people get enthusiastic about pretty much everything that makes them bond with a group of people that share the same interest.

I guess that the success of social web tools comes mostly from a very psychological need we have. Once we join one of those, it totally absorbs our attention — specially when we start following our friends there, people with whom we share a common interest. And now we find out we have a new interest to share: the social website itself.

So, what do we do? We talk about it. A lot. We blog about it, we pester friends on messengers to join, we email them, we talk about it over dinner or in the breaks at school, work, or when watching a movie. By spreading the word, all those social webtools grow and grow and grow and quickly reach a hundred million users.

And then, of course, analysts, journalists, and bloggers start writing about the “phenomenon” — which brings even more people to those sites, and, in turn, more people will talk about them.

All of a sudden, all that talk suddenly becomes the very medium where social websites thrive: they’re good to push information to your contacts. So, instead of Googling for information, you just follow your friends: they will point to more articles about social websites, which you will connect to, finding new friends there, that will talk even more about what this or that journalist wrote about site X or Y, which you will log to, and find even more friends… and so on, and so on…

This a tremendous success for all those sites. Word-of-mouth, when it reaches hundreds of millions, is incredibly powerful. And, of course, this means that at least two types will capitalise on that “power”: businesses for their advertising; and the ones that love to push “opinions” (including, of course, yours truly; as well as many journalists, critics, and even politicians). These two types are the ones that use mass media more effectively, and all they need to do is to adapt to these tools to pursue their agendas. And, obviously, they’re the ones trained to do so. The only difference between a TV station that broadcasts to a hundred million users and a Facebook profile is that Facebook reached “hundred million of users” in just 4 or 5 years, while TV took 30 or 40 years (the numbers depend on whom you ask). And while every week a “new Facebook” comes out, TV stations are quite more conservative. But the techniques are similar enough — or, well, at least the numbers are similar, even if the techniques of putting ads might be quite different and have, of course, totally different production costs — but also different metrics.

So, what I have been seeing is an incredible shift from journalists, but mostly about bloggers, towards a self-centred view on social websites. Let me try to explain a little bit more. If you’re interested in technology, you might have picked an author on a magazine that you found out interesting, as they wrote well about a specific theme. You look them up on the ‘net, and you’ll see they’ve got their own blog, and possibly even write for some e-zine or two. After a few years, you’ll see a shift in what they write: from covering a specific technology/product, they’ll suddenly hit on a social website that fascinates them (often, because a lot of people on that social website have something in common — e.g. they might be their readers, share interests, and so on). The author will now start talking about how social websites allowed them to get in touch with that “community” which they weren’t aware of. So the next series of articles will be about that website and how it allows to easily keep in touch with “interesting people”. Then, of course, the author will cover some more social websites. They will talk about the technology behind it, and the tools that integrate with that specific site. When writing about it, they will suddenly find out that site A or B actually integrates, in some miraculous way, with their favourite social website as well — and thus they will talk about A or B instead. And so on. Soon, all they will write about is centred around social websites.

I have (sadly) seen this happening with some major bloggers in Second Life. They started producing some of the best articles about SL (which is not a social website — but more about later), but after a couple of years or so, got derailed by one or two lovely applications that integrated SL with some social website they were curious about. Soon they found out how cool that social website was, and started to write a lot about it — and completely forget about SL. After all, everybody is writing about social websites, so they better catch up fast. What they didn’t notice is that their audience has shrunk — but, again, to explain that, I’ll need a bit more time 🙂

This kind of trend is actually becoming mainstream. Journalists that started writing about how computers would change the way they worked (in 1980), and covered all the possible technologies in the past three decades, now are eagerly tweeting around the clock about the conferences they attend — which are about how journalists should tweet more in conferences! You might think I’m bringing out extreme examples just to make a point, but the irony is that you and I are still reading blogs — at least spending a few minutes of our time doing so — while all our friends are happily tweeting, updating their status on Facebook and adding another cool application there, listening to music on MySpace or blip.fm, or, well, worrying about their sudden drop of karma on Plurk…

And this is pervasive. A site about, say, stamp collections, will feature articles on how cool Facebook is to share pictures of rare stamps. A fashion magazine will tell you to join Polyvore or StyleFeeder or any of those trendy social websites for the fashion-conscious (ack, yes, I’m subscribed to both…). A TV show about motorbikes will feature their MySpace page, and these days, there aren’t any musicians around without a MySpace account either. So people will read and discuss and meet and talk about the social website instead of, well, the topic that really brought them to it. I’m exaggerating, of course, but talking about social websites is, however, one of the major uses of the social websites themselves.

So why do I think this is not such a good thing?

Follow The Money Trail

On my presentations I usually ask if people remember what was the first social website ever. Some die-hard veterans on the audience will probably point to IRC, or even to the pre-Internet BBSes; but when I point out that I was talking about social websites, the usual suspects are hi5 and Friendster, both from 2003, just after the dot-com bubble burst.

As a matter of fact, ironically, the oldest social website is FriendFinder — born in 1996. At this point, usually the audience laughs. FriendFinder, a subscription-based service, is mostly known for their sister website, AdultFriendFiender, which is, well, a dating service. A hard-core dating service, to be more precise. And, like always, sex sells — and quite well. Still boasting 32 million users, the point is that a huge number of those are paying users, and this illustrates my point.

Let’s step back to 1996. The Web was not a “novelty” any more, but, well, it was still in its early stages. It was clear that a lot of things would change due to the Web. I’d say that this was the wishful thinking about e-commerce stage. Everybody wanted to prove that you could do business through the Web, but nobody had a clue of what would work. Surprisingly, FriendFinder found a rather clever way of making money — a lot of money — out of it. As a matter of fact, all vaguely-sex-related websites did make money, and the media was full of articles about how terrible the Internet was for the younger generation since it exposed them to naked human bodies. Corporations were skeptic: nobody really would be buying things from the Web, would they? Not if only the perverts were around. Unless, of course, if you were going to sell items and content for perverts. And, indeed, back in 1996, selling information (e.g. articles) was thought to be a nice business model. After all, Medline managed to get a subscription-based service running for doctors to get access to up-to-date research articles, and weren’t losing any money.

Ads were also seen to be a good investment, and tons of competing products and services were rounding up popular websites — say, forums for football clubs! — to push ads to them. And, of course, on the pre-Google days, having a “portal” where you could place a lot of information and attract a lot of people looking for an “entry site” to the Internet, was also a huge business. Yahoo is definitely the mind-child of this latter model.

When we reached the end of the millennium, however, things started to change dramatically: all bets were off on what was going to be the “best” model for “making money on the Internet”. Spam was invented. VoIP started to become commonplace, after people like our own Philip “Linden” Rosedale invented audio streaming. What was awkwardly named “push media” was born back then — we just call it RSS these days, or Blackberry if it’s on your mobile phone. But there was a plethora of ideas around, and all were striving to become “the killer application of the Internet” — by investing millions.

Where did all that money come from?

Venture capital.

Around Europe, raising funds through venture capital is not as widespread as in the US, and this shows quite well the huge difference in innovation between the Old World and the New World. While the US have just 12% or so of the Internet population, they have created over 90% of the most popular websites — or probably more (again, these numbers vary a lot and depend on the sources you look up). In fact, the concept that anyone without any contacts, but with just an idea, and the ability to sell that idea on an “elevator pitch” to a business angel will get them millions on their account, usually even without needing a business plan or any kind of collateral — that’s an American concept, and one that is quite successful. At least in the sense that out of all those bad ideas, a few good ones will emerge: so long as you can generate many. And gosh, by the late 1990s, there were quite enough ideas around. Too many ideas, as we found out after the bubble burst — but, of course, it’s so easy to judge history from our end. Back then, people simply had no idea what would work out and what wouldn’t.

But that didn’t mean that they wouldn’t get funding — rather the contrary. America financed dreams. Most of the projects were, in fact, as insubstantial as dreams. But a lot got financed. And, although we can be very critical today, the truth is that this model usually works.

The bubble didn’t burst because too much money was invested — rather the contrary. Even if investing in a silly idea that would utterly fail after 3 years, the money would circulate. It would allow the failing company to buy servers and bandwidth, thus, well, providing more revenue for ISPs and making them push for higher bandwidth from the carriers, and demanding better chips from Intel and less expensive routers from Cisco. All this happened incredibly fast: since a lot of money was spread around, a whole industry started from virtually nothing, and not everybody lost.

There are a lot of ironies after the bubble, of course. Web-based ads, which was deemed one of the worst ideas during the last days of the bubble, survived. The giant Google only gets revenue from ads — they lose money on everything else (specially on YouTube). They’re excellent survivors of the dot-com days — they seemed to be one of the many stupid ideas around (how do you finance the huge running costs of a free search engine?) but in fact they had a totally different business model. Giants like Amazon.com and eBay/PayPal also survived well, and we’ll shortly see why.

But a lot of companies failed. Hundreds of thousands of them. Why?

The answer, surprisingly, is very easy: They did not have a solid business model.

And this is the hardest thing to understand. During the wild days of the dot-com bubble, most companies were looking for valid business models, a way to generate revenue based on their ideas, and prove to their investors that the model worked. They looked good on paper. Almost everything was either subscription-based (like, well, web-based email…) or traffic (VoIP…) or something like that. The idea was to tie the costs of running the service to the growth of the paying user base: if you attracted enough paying users, you’d be out of the red.

What accelerated the process, in my not-so-humble opinion, was the sudden inspiration that a lot of companies had. They weren’t generating enough users to pay for the costs of running the service; so, well, before all venture capital was burned, they opened up the service for free, expecting a huge influx of new users, and hoping against hope that some of those would stay and pay.

These were the very first days of the “free Internet”, when suddenly even Internet Service Providers started providing service for free — burying the small companies, of course, and almost collapsing themselves in the process.

But on the Web side of things, “free basic accounts” started to pop up everywhere. And this has a dramatic effect. Every good sales manager learns the Rule #1: Once you drop the price for a customer, you’ll never be able to charge more again. So, dropping the price to zero meant that they would never be able to charge for the service. Ever.

To make things worse… more users, and an explosive growth of users, naturally means more costs. Here is where the very few companies with realistic business plans were placing their bets: twice the infrastructure does not mean twice the cost, but usually an increase of, say, 50%. There was your margin. So, all you needed to do is to reach that point where suddenly your costs would be growing at a much smaller rate than your user population. Once you reached that point, you’d be safe — even losing here and there a few million users on free accounts wouldn’t make a difference at all.

Unfortunately, for hundreds of thousands of companies, the bubble bursted too soon: way before they reached that point. And, of course, this meant that Plan B wouldn’t work, either.

Plan B was also simple enough. If you never reached that wonderful point of diminishing costs, but had a large subscription base, you’d become a valuable asset for any huge megacorp interested in investing on the exponentially-growing Internet business. Back in the late 1990s, this meant becoming attractive to, say, AOL or Microsoft (but there were more). As you might imagine, the number of those companies that actually managed to reach that ultimate goal was quite small — hundreds or thousands, but definitely not hundreds of thousands!

The bubble simply burst when it was clear that the vast majority would never reach the point where they would actually become interesting — either as a self-sufficient company or as a valuable asset for a megacorp. And so, bye-bye Web 1.0.

The legacy of those wild years was simple: people don’t want to pay for Internet-based services. So the only things that interested a majority of users was for free. And if you don’t have a revenue model, you’re out of business after you burn out all your venture capital. It’s a simple and harsh fact of reality, and completely unavoidable. It should have been easily foreseen. I’d be too arrogant to claim otherwise, but even in my naive days, as soon as I understood that everybody was going to go for free accounts in despair of attracting new users, my partners and myself immediately dumped out company and sold out — because we were financially unable to survive in a world where everything was for free. It seemed obvious to us in 1999, but I’m not happy to say today “told you so” and waggle fingers at the ones who lost millions thinking otherwise. We never thought the collapse would come so quickly.

Not surprisingly, the new generation of companies that appeared after the bubble burst were quite different: they assumed that their services would mostly have to be for free, and started announcing free subscription models, right from the very start. Web 2.0 is the free web of free profiles, free uploads, free contacts, free email, free messaging. Everything we use has a free subscription model.

So how do these companies make any money?

The Lesson Of The Giants

Let’s take a typical example. At the end of the bubble days, all web-based advertising was collapsing. As company after company failed and traffic dropped on the “major sites” dramatically, the advertisers were not interested to place ads any more. Ad networks were shrinking and finding it even more difficult to get new clients. The huge advertisers were all dropping out of the Web, disappointed: many were definitely thinking that you couldn’t make any money out of it. Web ads were once classified as “one of the most stupid ideas of the Internet Era”.

And yet, a giant survived: Google.

As a matter of fact, Google did not only survive, they thrived. As more and more web-ad networks collapsed, Google bought them cheap, and sold more and more, and grew more and more. How was that possible at all!? What “magic secret” did Google have up their sleeves that nobody else did?

The answer is usually “oh, they had the search engine”, and while that’s definitely one aspect of it, the real reason is not so obvious. Sure, Google can profile users and serve better ads, and they used that argument of “superior technology” (which is undeniable!) to catch more customers. But that wasn’t the secret to their success.

A web-based ad campaign was expensive, even in 2000. What Google thought instead was a different business model. Instead of buying “ad space” and getting a huge salesforce world-wide to get new clients, they thought that it would be way easier and far cheaper to let website owners share the revenues with them.

This model is not so innovative. After all, even FriendFinder used the concept of “affiliation”, which was, for them, a major success: announce our service to your friends, and you can make money out of it — maybe, with luck, and a lot of friends, you might even be able to cover the costs of your own subscription. Of course, the majority of the users would never make enough to cover their costs.

Google used a similar model, but was way more generous. You didn’t have to be a customer of Google to be an affiliate. Also, you didn’t need to have a “high-traffic” site at all. This is where Google was more clever than the competition: all of them were in search of the highest-traffic sites and fighting vicious battles to be allowed to place ads there; and, on the other end, everybody was trying really hard to become a high-traffic site, in order to be able to sell ads to the big web ad networks.

Google targeted the small fry. Instead of focusing on the huge sites — which were taken by the big web ad corps anyway — they had millions of small sites: common blogs, forums for niche markets, small communities. And they had a wonderful technology that indexed pages and could profile ads targeted exactly for those small communities. So they were happy to pay a few cents for some banner space — and charge a few cents more to companies willing to target exactly those communities. They kept the difference.

And what a difference it was! Soon, everybody was happy to “offer” banner space to Google. Why not? What would you lose? A few pixels on your site? At least you’d get a few cents here and there, and these would add up. Google didn’t care if you just had 200 visitors and paid you to the proportion of your traffic. But it didn’t exclude you. They shared their revenues with all customers, big or small — and, of course, there are millions of small ones (these days, probably billions).

This business model of sharing your revenue with your customers, or, put in another way, give your clients the opportunity of making money too, was probably the biggest lesson from the Web 1.0 era, and it’s completely astonishing to me how so few companies have learned it. Web ads, once deemed to be a complete and utter conceptual failure as a business model, empowers the coolest and trendiest megacorp of the world. Just because they did it right — and it took some time.

They weren’t the only ones, of course. You can pick the next two best examples, also long-term survivors of the Web 1.0 era. eBay is the most obvious one: they don’t “push” services to anybody. Instead they just put sellers and buyers in touch. They just get a slice of the proceedings. That’s it. PayPal, an eBay company, works the same way. But you can think of Amazon.com nowadays as the same example: once they were restricted to deal with the huge book publishers, but Amazon.com saw what eBay was doing with the small merchants and basically replicated the model. Don’t minimise the small, individual merchant that just spends US$10 a month: instead, get millions of those.

And the beauty of this model is that you can give away subscriptions for free. It’s only when people buy and sell that you get a slice of their transactions. But a “free user” that suddenly completes a lot of profitable transactions is happy enough to pay a little bit — if it’s really, really little — to be able to use the service. If you look at all three models — Google, eBay/PayPal, Amazon — you’ll see that all offer products to sell that people want to buy so long as they’re cheap; and all offer the opportunity for people to sell products too, and just take a tiny commission out of sales.

Looking backwards in time, this might seem obvious now: if you can make your users earn some money by being subscribed to your service, your users will not only be eager supporters of your service, but they will look at you as a business enabler. They will be grateful. And, of course, they will fight hard for you to succeed — since they’ll make more and more money if you grow and grow.

All this sounds like a very obvious lesson from the Web 1.0…

Web 2.0 Or Dot-Com Bubble 2.0?

… so why are none of the Web 2.0 companies doing it?

Pick a random social website of your choice and ask yourself (or, well, Google for it!): how much money do they make?

You’ll quickly see the answer: they’re not telling.

Ok, that’s probably not so terrible, specially because many of those will tell you how much they grow and how often they’re mentioned on the media.

Or will they? Every time I prepare myself for another presentation, I go through Google in search of hard numbers. I’m naturally spoiled by Linden Lab, who keep pushing all kind of data about Second Life, so much that we get easily lost, and we always complain that we haven’t got the really interesting numbers

But let’s take Facebook as an example. They’re one of the nicest ones, since at least they publish their statistics. Well, of course, there is no way you can know if they’re right or not (who audits them?), but, again, this is just me being spoilt, because so many people publish statistics about Second Life and engage the Lindens in serious discussion about their own numbers. I mean, we have Meta Linden coming in-world on his Office Hours to get attacked by the residents because the “numbers are not right”, and people show them “proof” that “Linden Lab is lying with numbers” all the time. Surprise, surprise, Linden Lab actually shows pretty accurate numbers over time — they might just choose to interpret them differently, and that is always cause for discussion, of course.

For the sake of the argument, however, let’s assume that Facebook is not lying about their numbers, neither are their lying about their timeline. However, you might notice on that webpage a typical trend of popular social website companies: they will always tell you how much money they’ve raised in funding capital, but never how much money they make.

So, is Facebook a profitable company? How do you know?

Let’s look at some hints. From 2004-2006, you have no clue what Facebook was doing to get revenue. On 2006, you get a hint: “Facebook and Microsoft form strategic relationship for banner ad syndication”. Aha! So that’s where the money comes from! Googling for that didn’t return anything really interesting — just oh so many articles on how Facebook grew and grew, on how many active users change their status every day and add a lot of apps and new friends, and so on. Lots and lots of “coolness” factors, but — nothing about business.

The “banner ad syndication”, an add-on after two whole years not selling anything, seemed to have been fruitful, though: on October 2007, “Facebook and Microsoft expand advertising deal to cover international markets; Microsoft takes a $240 million equity stake in Facebook”

Double-Aha!

Soooooooo, to recap. For two years, Facebook was basically just burning capital. Then they approached Microsoft and told them how cool they were and how many millions of active users they had. Microsoft — suddenly amnesiac about the dot-com bubble — nods and says, “hey, cool, we can sell ads then!” and builds a “strategic partnership”. And after another two years, they are willing to pay US$240m for a share of Facebook — cleanly paying off all investments by the venture capitalists, for a huge profit (total investment was $40 million, and a bit was sold for US$240m — not bad!).

What happened since then? Has Facebook, under the Microsoft umbrella, thrived and prospered, and is now an increasingly profitable company, making the shareholders of Microsoft happily rich?

All right, wait. This is a “Plan B”-type of company. One thing that I should explain about Plan B is that… things have changed since the bubble burst.

Companies don’t always get bought by megacorps because they’re profitable. In fact, when you’re a megacorp, your biggest problem is — paying as little taxes as possible, because your profits are way too huge.

The best way to do so is to invest in more companies — so you’ll cut out the investment costs out of the taxable revenues. However, when you’re a megacorp with a huge exposure to the media, you have to be extra careful, or the stockmarket will go haywire. Investing in a company means less money to be spread among the shareholders on that year — although good investments will mean more money on subsequent years — so usually the shares drop after a big investment is announced. On the other hand, a big investment on a cool company might actually make the shares go up — after all, you might lose a bit this year, but you’ll cover up the losses on subsequent years.

What the megacorps have found is something new. I’m not sure about what happened during the Web 1.0 days, but the Web 2.0 days are quite more interesting. When Google bought YouTube for US$1.63b., people couldn’t understand why they spent so much money on it (after all, Google had their own video site, Google Videos, although, granted, it was not so big…). After a lot of Googling, I found out that around June 2007, someone posted a spreadsheet with a lot of data about YouTube. Apparently, the estimated revenues from Google AdSense — the only sort of revenue YouTube had; “pro” accounts came later — were less than half a million US$ monthly. YouTube’s infrastructure costed up to five times that amount! So they were one of the least lucrative companies on the Internet. So why did Google buy it!?

Well, of course, Google has its own infrastructure, which mostly means that they could reduce the costs to a more tolerable amount by placing YouTube on their own data centres. However, this still doesn’t make YouTube a lucrative venue. It has grown and grown in terms of users and bandwidth needs, far beyond what Google can ear from the few ads they manage to sell there…

Actually, and to take Google’s example… none of their venues generate any profit at all!

The only lucrative business that Google has (besides the share market!) is Google AdSense. But it’s so lucrative that it pays for everything else, and Google is still lucrative even when figuring out the losses on all their other venues!

Not surprisingly, Microsoft is not much different. Allegedly, from all their product lines, only two products are lucrative: Windows and Office. All the rest are things “they have to have” to be able to, well, keep the status quo of the world’s largest and most profitable software house. But… they only lose money on all other products and services.

“Losing” US$240m. on Facebook is a bargain. They can afford it. It was way cheaper than YouTube! And I’m sure that Facebook is running under Microsoft’s new Azure cloud computing technology, which is one of the best ways to test it anyway. They need those kinds of things to test 🙂

As said… Facebook is actually one of the most informative companies. If you try to find equivalent information on Twitter — who don’t even sell ads! — let me know. All the rumours I’ve found just point to Twitter selling profiling data to some huge megacorps. That’s a bad idea, as we saw during the Web 1.0 dot-com bubble days: if Twitter starts losing too many users to competing technologies, the megacorps will look for better profiling data. And what happens if Twitter can’t sell itself before that? (Yes, of course, they’ve avoided Google’s offer, but… was that wise?)

You can start now going through all those hundreds of thousands of social websites, and ask yourself the same question every time: how do they make money?

And if you can’t answer it, you’ll know they’re just hanging in there, burning venture capital, until it runs out, and patiently waiting for plan B — that Microsoft, Google, Yahoo, or AOL buys them. If none of these will, they will disappear.

Llewelyn’s Law

Any company having a brilliant idea that will attract millions of users in (relatively) little time, but that won’t publish their business model nor their revenues, relying mostly on funding (from business angels or venture capital) to remain afloat until it gets bought by a megacorp, will disappear in 2-5 years and will be forgotten before that.

These are, unfortunately, the harsh facts. And as we have seen during the Web 1.0 days, only very, very few actually managed to get bought before they utterly disappeared. And even less than that managed to grow and become as big as, say, Google.

Why are we repeating the same mistakes again and again? Well, I would actually blame the media, but that’s unfair — the media looks at technology and publishes numbers of users, because in their minds, more users means more profit. What they constantly forget is that more free users means more costs, and unless the company has a model to cover those costs, well, more users is not necessarily a good thing.

So aren’t there any companies that actually do things the right way? Oh, sure there are, but — they’re not in the Web 2.0 bandwagon, which was for me quite surprising!

A typical example is lulu.com. In spite of the silly name, they’re not a social website, but a small press — a company that prints out books from self-published authors, e.g. “vanity press”. Again, their model is based on getting customers in touch with sellers, and get a share of the revenue of the books being sold. They’re good, easy to use, you set up an account for free, and if you promote your own books well, you’ll sell a lot — and lulu.com will love you for that, since they get a commission and the cost of the books. It’s a pure e-commerce site for the post-Web 1.0 generation, and it was founded in 2002 — yes, during the dot-com bubble euphoria — and they’re still around. You can take a look at how much they sell by looking at this page — and if you don’t believe their numbers, at least, with a lot of patience, you can count all the books they have for sale. Oh, and a suprise: lulu.com was founded by the same person who created Red Hat Linux, in itself a very successful venue, although it makes money out of — open source software.

I could obviously go on for another 2 pages of examples, but the big question is: well, sure, there might be a few good examples, but is there a “New Google”, in the sense of a start-up that suddenly became stupidly rich and powerful by launching a new service that nobody ever thought before?

Sure there is. It’s not a start-up, though. I’m obviously talking about Apple with iTunes first, and the AppStore for the iPhone later — who sold a billion applications in just a year. A billion! Even if on average they only cost just US$1 — even though many are free, a lot are quite expensive! — you cannot fail to think what Facebook would make in a year if they just had the same idea and charged US$1 for every application added on Facebook…

Isn’t it exactly the same model? To be an iPhone developer, you have to “invest” first US$100 — but if you sell just 100 copies of your US$1 application, you get an immediate return, and you’ll be happy you’ve invested those US$100. Everything above that is pure profit. Consumers get ultra-cheap applications delivered to their iPhones with free updates. And Apple just gets a share of all that money. Simple. Effective. Lucrative 🙂

Now imagine if Apple starts to build a social website on top of AppStore. Uh-oh…

The Age of Confusion

… well, they might not do that, after all, unlike Microsoft, Apple doesn’t seem to be interested in entering the “pure” social website market. The reason might be a simple one: they know how to sell music (on an age where everybody complains about reduced sales due to piracy) and even how to sell applications on behalf of their developers, but they don’t know how to make money out of social websites 🙂 Allegedly, when an Apple representative was asked why they weren’t in Second Life, the answer was: “we don’t know how to make money out of it”. It might not be a true story, but at least it does ring true. 🙂 Believe me, if some Apple representative figures out that they could sell audio streams from iTunes straight into SL and turn a nice profit out of it, they wouldn’t hesitate…

The point is, creating social websites is now very easy.

Three years ago, I had a small project that required a Facebook/MySpace clone, and, being short of funding, I was looking for something that was open source and could be installed easily on the client’s server (Ning was ruled out because it cannot be downloaded and installed…). There weren’t many choices. Most people recommended to do it on my own, using Joomla or any other popular content management tools. But, of course, the costs of development would have been staggering. And worse than that woud be the costs of maintenance. So the project was dumped; there wasn’t a friendly business angel around the corner willing to invest a few million dollars in developing Yet Another Facebook/MySpace Clone 🙂

The truth is, these days, a lot of tools abound. I usually recommend Boonex’s Dolphin, which is by far the best solution to get one fully-featured social website up and running with all the bells and whistles. But even easier solutions are around the corner, like the newly launched WordPress-based BuddyPress. Granted, it has way less features than Dolphin (or any other tool), but it will capitalise on the huge developer base of WordPress to do what WordPress does best: add gazillions of plugins to do whatever Facebook does, and do it better. In far less time that Facebook took. And if you wish to replicate Twitter, you can always try laconi.ca, even though some friends of mine hate that open-source clone because they say the code is awful. It might be the case, but the point is: once the province of very highly specialised and talented developers, platforms for building social networking tools easily are becoming commonplace.

And with that, we’ll start looking at Web 2.1 — an explosion of clones of all kinds of social tools, not unlike what happened with “content management software” during the dot-com era. What this means is that “originality” will not be such an unique feature: after all, what distinguished Facebook from MySpace was mostly the ability to add new applications. Once all current social websites start allowing those applications (either through OpenSocial or, well, WordPress plugins…), they will become more and more alike, and you will have a much wider variety of choices. And lots and lots of more different logins to remember. Oh yes! I will probably look back and be happy about being registered “only” to 250 sites today.

(As a side note, you might have noticed that I’ve added RPX support on my blog, since I got so many criticisms about the difficulties of getting registered with OpenID when posting a comment on my blog. Now you can choose from 12 different identity providers 🙂 However, I guess that in 2012 I’ll need to add a few thousands…)

As designing social websites becomes commonplace… things will probably become much closer to what the blogging landscape is today: thousands of solutions, with a handful of “major” ones struggling to compete with the independent ones. And that will mean fragmentation. I might, for example, dislike Facebook’s fascist ToS, and instead use exclusively a BuddyPress-based Facebook clone that has a more reasonable one. Or, well, I might simply join a SL-specific Facebook clone, since I don’t bother about anything else on Facebook anyway — and thanks to RPX, I will even be able to log in to that with my Facebook account! And invite my friends over easily.

With thousands of social website solutions around, it will be even harder to get a solid business plan for the existing ones. If ads for paying for the running costs become popular, and people tire from seeing those, they’ll jump to the ones hosted by their friends at home and instead just push status updates to Facebook — but they will never log in there. That’s what I already do: I’m part of the statistics that counts status updates, but I do not need to log in to Facebook at all. So I’m not part of Facebook’s revenue stream. Twitter, of course, is even worse, since the number of people that use the service but never actually log in to the site is huge. So even if Twitter, at some point, started pushing ads on their site, a large number of users (perhaps 40% or more!) would never see them. Unless, say, Twitter started charging for external applications to post to their system… which, of course, would only lead to people to move faster to Facebook instead (and use the very same external tools to post status updates on Facebook, too!).

In fact, as more and more APIs are released, and all of them are free… the less likely people will, in the near future, log in to those sites. But the backend servers will still feel the traffic! They will just not be pushing ads. And once that happens, companies will not see any point in placing ads there. It’s the dot-com bubble bursting again.

Or perhaps social networking fatigue will settle even earlier and people just tire of microblogging. 🙂 They will still post pictures and videos of themselves, of course, because that’s something quite tied to our ego and vanity, and thus will remain (and consume bandwidth!). And, of course, a lot will still be on those sites for dating 😉

Where Does Second Life Fit In?

So, ironically, I complained about many bloggers and journalists, who wrote fascinating articles about SL or some other niche technology and moved over to talk about social networking sites, and I’m doing exactly the same? 🙂

Alas! The difference, I hope, is that there is a point to be made here.

My techie and geekish friends tell me that geeks will jump from technology to technology, as soon as “something new and shiny” comes out, because that’s in their nature. This explains, for instance, why the games industry knows that a game loses interest after half a year at most, and keeps launching new ones.

This is naturally quite disputable. SMTP-based email is around since 1972, and although people claim now that “one day we’ll just use Facebook to send messages”, I think not.

And the reason is simple: there is — and won’t be — no unifying protocol to tie all those social networking sites together. The current trend is further fragmentation — as the technology becomes way more easier to replicate — and not consolidation. Granted, APIs bridge the problem of fragmentation, but you still can’t send an email between MySpace and Facebook (or an IM!) and very likely will never do so: they’re ferociously competing and see no interest to “join forces”.

By contrast, open-source-based social websites will communicate among themselves, but they will be borderline — there will only be a lot of them. In the mean time, however, we’ll stick to email messages 🙂

So… on one side, innovation is important, in the sense that it pushes us ahead, it drives our creativity, and it also drives business. The whole concept of social websites filled a need for communication, vanity, and dating, and it was one that was quickly filled. Right now, however, the problem is that there doesn’t seem to be anything new on that area. It’s tough to say that “there cannot be any more innovation” on social websites, since that would be placing little faith on the human nature of discovering new things. Still, you can take a look at how a blog works to see an example of a relatively mature technology: although every day a new feature or design issue is introduced, blogging, as a concept, stays pretty much the same. We’ll probably continue to blog in a decade, and the tools will be easier to use and more feature-rich, but a blog will continue to look like a blog, and fill the niche that blog fills.

Similarly, vBulletin or phpBB are very sophisticated software tools that allow forums, and they have thousands of cute features. But they’re not that different from the BBSes in the 1980s. A time-traveller from the 1980s jumping into a forum today would find it familiar. Similarly, someone only knowing IRC would look at a mix of Twitter and MSN conferences and flag it as just “IRC with bells and whistles”.

I believe that social websites are very close to the maturity stage. It’s very likely that a few new players will come up with something dramatically radical in the next couple of years — there are still enough unexplored territories — but, ultimately, social websites are starting to become commodities, just like CMS, blogging software, or forum software are commodities: all do the same thing, all work similarly, all produce the same results. There is no space left for dramatic changes. To be honest, at least on the text-based side of social networking, Twitter and Facebook were the last two radical ideas: microblogging and adding applications on social websites. MySpace, Netlog, Yahoo360, MS Live.com profiles, hi5, Friendster, Multiply and so on are just glorified versions of FriendFinder.com with some extra features, but they’re not new ideas.

So we need something else 🙂

We need something that combines blogs, forums, Twitter, Facebook, instant messaging, emails, videos, voice chat… and who knows all else… into an ultimate tool.

The company selling the Ultimate Tool™ will naturally have to be profitable: they will need to have a solid business model.

Users of the Ultimate Tool™ will also have to be able to earn money from it. Although registering for it will be free, it will have to put producers in consumers easily in touch with each other. They will have to feel that if they pay anything for using the Ultimate Tool™, they’ll get something in return — more than what they invest, in fact. They should be able to make good business using the tool. That also means making payments easy.

It will need to be something very hard to replicate in order to be successful and unique. There is just on Amazon.com, one eBay, and one Google, although there are certainly a lot of competitors. None have managed to replicate every single feature of those, and this means that those giants have managed to be, after a decade, at the top of the food chain.

On the other hand, it will have to address interoperability issues — an easy, and more important, a standard way of communicating between similar Ultimate Tools™, so that you can use your login and your data across Ultimate Tools™ easily. But the user will be able to choose which Ultimate Tool™ he belongs to (imagine a collection of Facebook clones, all inter-operating, all posting to each other’s status, all sending messages to each other — it would be your choice to pick one and use it, and it would look the same way, no matter where you’d log in from).

It will definitely need to be highly interactive. “Comment-based” social networking is asynchronous by nature, and it has its place — on blogs, on forums, on early Web 2.0 tools — but right now, as Facebook and Twitter are showing, real-time (or close-to-real-time) interaction is important!

And, well, it couldn’t be an Ultimate Tool™ if it looked just like any of the hundreds of thousands web-based social networking tools — after all, in that case, it would just be one of many 🙂 and not an ultimate tool.

I propose that the look will have to be… dramatically different.

Instead of being cool widgets and jQuery’ed, flashy webpages… I might humbly suggest that it could be… 3D?

In that case…

… we already have it 😉 It’s called Second Life® and it’s available today.

So, if you’re still blogging about who will win the social networking race, Twitter or Facebook, my answer is: in 5 years, nobody will remember either of them, but we’ll be discussing the old days of the bursting of the Web 2.0 bubble happily logged in to Second Life (or an OpenSim-based grid connected to LL’s own). And sure, I’m quite prepared to be laughed at my bold claims, but then again, I’m used to be laughed at anyway. 🙂

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