Saturday, August 28, 2010

The Online Social Networking Revolution

With the advent of Internet 2.0, Social Networking Sites (SNS) have become the poster child of an entirely new portfolio of web based services. In a short span of about a decade after being conceptualized, the SNS have shown colossal growth and the boom is here to stay. Recent developments like Facebook’s awaited IPO and a recent valuation of Facebook at $33 Billion have generated a lot of talk among investors and promoters. All of this is an efficient measure of the market interest and future growth potential that this industry possesses.

The SNS industry today is vastly diversified in terms of the target user community and the product offering. While a majority of user volume intensive SNS cater to the casual networking needs, a substantial chunk of the industry offers opportunities for business networking. LinkedIn and Plaxo are big players in the business networking category. The differentiation of the product offering is what hugely affects the growth and popularity of any SNS. The range varies from clich├ęd Facebook like websites to the hugely popular micro-blog-place Twitter.

The number of SNS users has increased exponentially over the past years. The official Facebook blog boasts of more than 500 million active Facebook users. The sustainability of the SNS industry’s current bull-run depends on a lot of factors. The business model dynamics are very interesting. A high degree of product evolution is essential, the utility being offered needs to be maintained and more efficient and effective marketing strategies need to be developed. The SNS industry employs the following three vastly different revenue earning models:

The Advertising Model

The advertising model churns the largest amount of money for the SNS. A primary reason for this is the fact that there is a strong preference for free services from the SNS. For companies relying heavily on this mode of revenue generation, it is highly important to gather a very large or a differentiated user community. Number of users and frequency of use are the key revenue drivers and focus areas. Marketing and advertising aimed at acquiring more users is the major cost component. The process of acquiring users is where Orkut’s Google connection has been most effective, but it has lost the battle to Facebook owing to product evolution and differentiation.

The Subscription Model

The subscription model is mostly prevalent among business networking sites. The main revenue contributor in this model is derived from the users’ willingness to pay. Thus, the main objective is to increase the willingness to pay by offering specialized products and unique services. Although the focus is not entirely on number of users but a critical user mass is required to ensure profitability.

The Transaction Model

The transaction model is unconventional and charges the user per transaction for certain specialized services offered. The most common example of a transaction model is intangible gifts being offered for sale on Facebook. A couple of options viz. Endogenous and Exogenous transaction models exist within this model. They are classified on the basis of whether the SNS or third party produces the product or service being sold in the transaction. In this particular model, SNS focus on both the willingness to pay and a strong user base to support it.

The lucrative advertising opportunity for companies and utility for users being offered by these SNS continues to fuel this progress. However, experts in the industry predict that this growth is going to plateau out sometime in the near future.

The Revolution in India

In India the birth of the SNS revolution is directly linked to the introduction of Orkut in the Indian cyberspace in 2004. An early entry coupled with an aggressive marketing through parent company Google’s mammoth online presence quickly translated into staggering growth in Orkut’s user community. The fact that the number of unique Orkut users in India grew to a staggering 15 million figure by mid 2009 is a clear indicator of the exponential growth that it has experienced. All through this five year period from 2004 to 2009 that saw Orkut become the ruler amongst online social networks in India and Brazil, North America and Europe sang the MySpace and Facebook song.

In the past one year though, Facebook (20.9 million unique visitors in India in July) has performed on steroids and has finally beaten Orkut (19.9 million) in terms of user base in India. Facebook registered a strong 179 percent growth in its Indian user base since July 2009 against Orkut’s mere 16.6 percent. The numbers speak the truth. Facebook’s ever improving presence is more than evident for the Indian youth. This stunning performance by Facebook in India and other places around the globe has forced Google to go under a panic attack and Google’s proposal of focusing on an entirely new bunch of networking utilities such as the Google Buzz, Google Me etc just makes it clearer. For the time being Orkut seems to have lost the race in India, but it still remains to be seen how far Facebook’s growth story continues. We wonder if there is another “Ace of Spades” that Google has up its sleeve.



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