What Would Happen If Social Networking Sites Charged
from the a-thought-experiment dept
JohnForDummies alerts us to a suggestion from Dan Lyons over at Newsweek, saying that sites like Facebook, Twitter and YouTube should just start charging for their basic service. He brushes off those who think it's a bad idea as "the prevailing wisdom in Silicon Valley today is that everything on the Internet must be free." Except, that's not true. No one (NO ONE) is saying "everything on the internet must be free." This is just a silly strawman put forth by folks with little understanding of the business models people are actually discussing. Lyons also fails in recognizing that his "example" isn't even a very good one. He talks about PalTalk, who has built a business by offering premium features at a fee. That's the typical "freemium" model, but that's not what he then suggests for Facebook and Twitter, who he says should just start charging. Amazingly, he suggests that Facebook would only lose 50% of its users if it started charging (in fact, he seems to suggest that this is a conservative estimate: "Even if half of Facebook's members were to leave rather than pay...")Well, there's a problem with both Lyons' math and his crystal ball. In cases where companies have gone from free to charging, the numbers I've seen (and, yes, it does range slightly, depending on the service) the rate of uptake is usually somewhere between 0 and 1% at best. Even if we grant Facebook some credit as being a "necessity" for students, I'd be shocked if they could get 5% of people to pay up to use the service -- and they'd find that number dwindle really fast. With only 5% of people using the service, it certainly becomes a lot less useful. Rather than communicating with all your friends, you can now only communicate with the 5% who ponied up. Or, you jump ship to someone else that doesn't charge.
And that's the real issue. The second that Facebook even hinted at charging users for basic service is the second users would start moving en masse to another (very, very happy competitors would be quick to offer themselves as an alternative). I recognize that it was still back in the days when Dan Lyons hated social media and thought social networking and blogs were evil, but he might want to familiarize himself with the history of Friendster. For a while, there were all sorts of rumors that Friendster was about to start charging, and MySpace kicked off a very well coordinated "grassroots" rumor campaign about how Friendster was about to charge, and everyone should switch to MySpace before Friendster put up a paywall.
In other words, not only will a lot less than 50% of people sign up for a pure fee-based Facebook, but everyone will move elsewhere, making that the place to be (for free). That's not to say that Facebook couldn't come up with some additional offerings of value that it could charge for, but the idea of charging for the basic service is really short-sighted and easily debunked if you think through it.
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Filed Under: charging, daniel lyons, social networks
Companies: facebook, twitter
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Money changes everything, for the moment everyone gets a free ride because people were more concerned with eyeballs and valuations rather than functional businesses. But like the wild west, things are settling down in internet-town, and the businesses that will be left will be the ones that have a business model that pays them to be there. Eyeballs are losing their value (especially when the are blind to ads and wise to spammy blog / social postings).
So where do things go from here to actually pay for all this incredible free?
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Charging for Social Networks
BTW: It's kind of funny how I was able to read that Newsweek article on the web without having to pay Newsweek.
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Where do things go from here? Perhaps server costs decrease significantly. Maybe advertising strategy advances to convince users to pay attention, or maybe premium additions are offered to take advantage of the audience drawn in by free services. In any case, it will be up to entrepreneurs to find a way to make profit while providing basic service for free, because free is not going away.
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Regarding eyeballs losing their value, I disagree. Newspapers have been subsidized by advertisement for 200 years. Sure, to some degree, people tune-out the ads, but not completely. The onus is on the advertisers to ensure that eyeballs do not lose their value. I'm confident they're up to the task.
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"Rather than communicating with all your friends, you can now only communicate with the 5% who ponied up"
I feel the urge, as a telecommunications expert, to add that Metcalfe's Law applies to the value of communication media such as social networking sites. Thus the value of the whole is proportional to the SQUARE of the number of nodes (users) on the medium.
If Lyons' foolish prediction were true, then a 50% reduction in Facebook users would result in roughly a 75% reduction in utility. If utility were reduced by that large a factor, the remaining people would be reluctant to pay for this service that is far worse than it was for free, and they, too, would seek out a better alternative. The competitors would be scrambling, happy to be that free alternative.
If Mike's more realistic 5% retention estimate were true, then Facebook would lose 99.75% of its utility. Who would pay for that?
Thus, by charging, you reduce the value of the product substantially. With music, by charging you only lose the business from the people who won't pay, but at least the product stays the same. With Social Nets, the product gets worse as you raise the price.
These are network economies: the biggest Social Networks offer value only because everyone else is there too. As soon as they're not there, there goes the value. Lyons is oblivious to some very important game theory.
But what would us idiot hippies in Silicon Valley know, what with the "prevailing wisdom" here? Ha.
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See...
I suspect I'm not alone in this. If those places started charging, I just wouldn't use them anymore and go back to maintaining my own website more often, and email to keep in touch with friends and family.
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Perhaps decisions would be made differently when determining whether to pay with money versus paying with time and attention, and who's to say what the financial value of Facebook is to users now, or with 50%, in the absence of competition? However, I think the real deterrent to charging and potential loss of users is less an issue because of the loss in utility to users that might pay, and instead the fact that free competition can arise so swiftly as to eliminate any remaining value that the original may have had.
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bye bye
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In short, my aged aunt Hilda doesn't need to pay to keep in touch with her grandchildren but at the age of 15, they are more than happy to splash the cash to suck up more of that facebooky goodness.
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A site that did charge
Then something happened.
The site started charging. Suddenly, myself and everyone else I knew was no longer using 'Together We Served.' Apparently, according to the web owner in a message to the users, he said that he couldn't generate enough ad revenue to support the site for free. Well, I don't know exact numbers, but no one I know uses the site anymore and as far as I'm concerned it's dead. So much for charging for a social networking site.
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Another virtual two cents dropped.
Okay, I'm "no one" in terms of recognition, but I am someone who does say "everything on the internet must be free".
Yes, that's right. If it's digital, and it's distributed on the internet, there should be no charge for it whatsoever. I don't care if it's a service, song, show, movie, book, etc.
Otherwise, don't put it on the internet.
Then again, that's why we're seeing so much copyright bullshit today. Right, Techdirt?
That's from those who don't want to share. I wonder if those in charge teach their kids to charge their friends to share their toys?
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Re: Another virtual two cents dropped.
Same with musicians and iTunes.
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Classmates
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You mean to replace any value that the original may have had.
"I'm not sure that you can really tie desire for a social networking service with the number of users. Even granting that general utility can be measured accordingly, internet users may choose a network on the sole basis of its being a better alternative than any others, or because their specific subset of friends are on there(which changes the utility of a service specific to them), or because it is the hot thing to do."
A: If they choose it for these reasons than these reason provide utility.
B: If there are shortcomings between what users want and what's being produced then a free market, without government restrictions, is best qualified for correcting this. A government sanctioned monopoly (ie: cable companies) provide less competition and are less qualified.
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LinkedIn
Of course, I have no idea if LinkedIn is making money.
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B: If there are shortcomings between what users want and what's being produced then a free market, without government restrictions, is best qualified for correcting this. A government sanctioned monopoly (ie: cable companies) provide less competition and are less qualified.
A. I agree, this is what I was saying; there are other sources of utility other than the number of users as espoused by Metcalfe's law.
B. Again, I agree. And the internet is an incredibly free market right now, hence the consumer empowerment.
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Email is ubiquitous, everyone has one, it's a standard part of social and commercial transactions. Many companies have their very own in-house email server, but there are global ones as well (Hotmail, Gmail, others). How do you make money off of these? Advertising is one way, which I think Gmail does a particularly good job at. Adwords aren't intrusive, are based at least partially on what you're interested in, and are well-placed in the front end itself. I'm not sure how much a money maker/loser Gmail is for Google, but it hasn't disappeared yet, and likely won't any time soon.
Social networking sites could follow the same path: there will be in-house versions, and global versions like Facebook or MySpace. They may be partially supported by advertising (and yes, good advertising works, and will make money for those involved). They may be loss-leaders, in the sense that offshoots from the focal service will bring in the cash (Facebook "branded" stuff for sale? Twitter services for money?). But I strongly doubt people will pay for something that's been free for a while now. I seem to recall Hotmail once selling larger inbox space for $20/month or something years ago. The idea of that is laughable now.
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Re: Charging for Social Networks
You're doing it wrong. Facebook's customers aren't they're users. Their customers are advertisers. The users are their product. Facebook harvests time and screen-space from it's users and sells that to advertisers. If it started charging people for the "privledge," it would run out of things to sell.
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(1) What makes a social network a better alternative? A cleaner interfece, more apps, more people to interact with? If it's not "better" by something intrinsic to itself, what draws these better things?
(2) When talking about "a specific subset of friends," you're now talking about a cross between that subset and "people willing to pay" for the site. But you're defining "people willing to pay" as people who have friends there. As soon as you start discouraging people from using your site (by charging), you'll find fewer and fewer people fall into this category; the more people leave, the fewer friends who are there, and so even more people leave.
(3) Why is something "the hot thing"? Because it's popular. because people are doing it. But when you're discouraging people from using your site, it's unlikely to really become popular.
Yes, these things may keep some peple there for some time, and it may convince them to pay for your service for a little bit, but I can't imagine that it's very sustainable.
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Perhaps because it provides utility to people, otherwise why would people use it. If people don't use it it won't be "hot" (and by hot I don't mean stolen).
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It should REMAIN a free market, we should ensure that the government does not screw it up like they did with cable television thanks to the lobbying efforts of stupid special interest groups.
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Friendster's "death"
Everyone admits to some FB-stalking and it's part of the site's success that it allows this to a point. Friendster's mistake was not considering charging its users but instead it was exposing their users.
Also, interesting to note that Friendster remains extremely successful in Asia, though competition is heating up in that market.
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I am firmly in agreement that charging for Facebook would devastate the user base and probably be a terrible decision. I am merely contending with Derek Kerton and Metcalfe that the utility scales that directly with the number of users; I think Facebook would retain value in a vacuum despite charging, but loses this against free competition.
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You do make a valid point. This is a know limitation of Metcalfe's law, and nothing new. It's the reasons I threw the weasel word "roughly" into "would result in roughly a 75% reduction in utility".
You see, I believe firmly in the overall theory of the Law, but the exception is that not all of those nodes on the network are of value to any single individual. The example used at Wikipedia when explaining Metcalfe's Law is that by adding a billion Chinese citizens to our telephone networks, we don't really increase the value that much, since most of us don't speak Chinese (and they only speak Chinglish, a weird idiom that you have seen in so many owner's manuals.) Similarly, adding people you don't care about to Facebook does you no good.
Or does it? Ever want to be found by an old friend? Want to connect to musicians? There are lots of opportunities in a massive Social Network that aren't there if it's just you and your buddies. And are you sure that you didn't use Facebook to re-kindle lost connections like primary school or high-school contacts? If the weren't on the network, you wouldn't be able to do that.You would take the six-degrees-of-separation advantages, and choose just one degree?
And even in the possibly real case that you only care about your close friends, you're wrong that Metcalfe doesn't apply to the loss of value when pricing is introduced. What makes you so sure that if payment is required, a portion of YOUR group of friends doesn't drop off then network?
Metcalfe's law cannot be canonically applied to an individual user's perceived utility in any precise way, but on the whole, it does a pretty good job. The important take-away is that the drop in value is geometric (exponential, logarithmic) and not arithmetic (linear).
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You are an advocate of repeating, in the discussion, the points that were clear and well stated in the article?
OK, then. I just want to point out that this article was by Mike Masnick on Tuesday, Jul 28th 2009. Discuss...
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Re: Friendster's "death"
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It's evil but...
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Re: Another virtual two cents dropped.
Then you're someone who is wrong.
Yes, that's right. If it's digital, and it's distributed on the internet, there should be no charge for it whatsoever. I don't care if it's a service, song, show, movie, book, etc.
Do you see the difference between the first item in that list and all the others? One is work being done for a customer. Work is a scarce good. The others are all digital copies of goods, which are non-scarce. Thus it makes perfect sense to charge money for rendering services*, even if that is not true for goods.
* not all services obviously. For example, internet search is a service that must be free. However my company provides services over the internet, and our clients - shockingly - pay us to do so. Where does that leave your "must be free" argument?
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Re: Charging for Social Networks
Another point, let's not confuse Newsweek with an actual new source. They have slipped into Enquirer territory some time ago.
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Re: Classmates
My rebuttal to Lyons:
Classmates.com
QED
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Xing do
Xing already charge for their membership, so ...
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Re: A site that did charge
couldn't generate enough ad revenue to support the site for free
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Re: Re: A site that did charge
Where TWS differs from Facebook:
* TWS websites are quite different from the mainstream social networking websites like MySpace and Facebook which are a) open to the general public, b) have no clearly defined common ground and c) are mainly 'fun' sites focusing primarily on making new friends.
* The TWS websites were from the outset designed as military heritage websites to preserve the service history of Members of the US Armed services for the benefit of Family, other Service Members and future generations. With so many of the "Greatest Generation" leaving us this was considered an important Task. The Membership of Marines.Togetherweserved included Charles Lindberg and Ray Jacobs, the two remaining Marines who planted the first flag on Mt Surabachi, Iwo Jima, until their passing 3 years ago. In addition there are several Medal of Honor, Distinguished Flying Cross and Navy Cross recipients who are currently active on the sites, in addition to numerous recipients of the Silver Star. One of our newest members is Col Leo Thorsness (USAF/Ret) Medal of Honor recipient from Vietnam.
* TWS created a unique medium, separated by Service, whereby the posting of comprehensive service information creates a powerful means for Members to be able to locate and reconnect with others with whom they served throughout their career. TWS's units and patch databases are among the most comprehensive and accurate in existence. Almost no other networking site provides this level of search capability and our Marines, Navy. Air Force and Army websites contain many thousands of success stories of buddies found.
* TWS websites are exclusively for active duty and former serving members of the US military. There is no provision for public access as is commonplace for true social networking sites which benefit from maximum membership levels.
* TWS Members span several service eras from WW2, Korea, Vietnam through to OIF/OEF. The interactions between the various generations of Marines, Soldiers, Sailors and Airmen on their respective TWS forums displays a unique and very close sense of community which is not found on true social networking websites.
* TWS websites have very effective privacy protection mechanisms. Members have total control over what information is publicly displayed down to single data entry level. This degree of control of presentation is not available on general social networking websites.
* TWS also provides a venue for Members to network professionally and is a great place to share information on matters that affect careers, etc. for example, our Navy site contains a popular Forum designated "Ask the Chief" - a mentoring forum for junior ranks.
* Member's e-mail addresses are not available for spam purposes as they are privacy protected by default. Members can privacy protect selected information and photographs, a facility not available on MySpace and Facebook websites.
* TWS does not provide any direct functionality to support dating.
* TWS encourages professional behavior and requests a service photo to be displayed on profile. No pseudonym's, alias's, caricatures or any other types of unrepresentative information are permitted.
* TWS provides a Job Board which advertises opportunities for military personnel transitioning out of the service or have already left the service. Jobs are posted by TWS Members themselves in order to assist their military brethren. This Member help Member feature does not exist on general social networking websites.
* In keeping with the sanctity of a Military website, TWS sites are entirely free of third party advertising. (The TWS Store and Cafe are in-house facilities which reinvests its proceeds into the site and a portion goes to support the Wounded Warrior Fund). It does not release its Membership lists for marketing purposes which is a standard revenue source of true social networking websites. TWS websites are supported entirely by its Membership who, through the option of paying nominal annual dues, have a vested interest in the website's success.
* TWS sites honor the memory of those who have served and who are no longer with us. TWS Remembrance profiles, created by the Members themselves, portrays the spirit of TWS as a place where no Soldier, Sailor, Marine or Airman or Coast Guardsman may ever be forgotten.
* Contrary to the way most social networking sites are run which, by necessity are highly automated, TWS sites are administered entirely by a team of former service personnel to professional military standards. Send a question or request to Admin and you are responded to by a real service person within a few hours.
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