Social Media Gnomes!

By Erik Hekman on 19 October 2009

One reason for the interest in social media is that people expect to make money on it. Some investors paid serious money for popular social media sites. However sites like Twitter or MySpace are now having difficulty finding funding respectively have been down valued from their original buying prices. After watching a rerun episode of South Park, I concluded that most social media business strategies could be compared to the Underpants Gnomes business strategies.

The business plan of the Underpants Gnomes is as follows:

Phase 1: Collect Underpants
Phase 2: ?
Phase 3: Profit

The joke is that they don’t really have any clue about what phase 2 should be, but they’re certain that a big pile of underpants will someday lead to profits. The same currently applies to social media:

Phase 1: Create social media service
Phase 2: ?
Phase 3: Profit

While some strategists fill in the question mark with ‘advertisement revenues’ or ‘Google buy me out’ they have no clue how to make profit on it. I’m not the only one who made a connection with the Underpants Gnomes. Selena Maranjian from The Motley Fool also concluded the same in 2001, around the first Internet bubble burst (implying there will be a second one):

“In the past, when I’ve thought about Yahoo! (Nasdaq: YHOO), I’ve probably come up with something like this business model for it in my head: 
Phase 1: Build a huge website, attract the highest traffic volume possible, hook lots of people, sell lots of advertising.
Phase 2: ?
Phase 3: Profit.”

“Take another example: WebMD (Nasdaq: HLTH). It’s been losing money for the past few years—more and more money. Could it be that my review of the company yielded the following exciting strategy?
Phase 1: Provide, in its own words, “connectivity and a full suite of services to the healthcare industry that improve administrative efficiencies and clinical effectiveness enabling high-quality patient care.”
Phase 2: ?
Phase 3: Profit.”

“The same phenomenon is evident in The Motley Fool itself, as well as other companies with major websites full of content: Salon.com (Salon Media Group (Nasdaq: SALNC)), TheStreet.com (Nasdaq: TSCM), etc.
Perhaps the plan below applies:
Phase 1: Build rich websites, full of compelling content, and attract many readers. 
Phase 2: ?
Phase 3: Profit.”

One problem of valuing social media sites is at least, in part, due to failing to recognize the difference between a several million people audience social media service and a mass medium. Treating social media as a mass medium with a similar audience gives social media a large value equal to the number of participants times the amount of online advertising per online person. In particular selling advertisement opportunities to this mass audience is more difficult than for a mass medium because advertisements may drive away the people who produce content, and therefore diminish the attraction of the (free) service. Thus owners of the social media services have been seeking other sources of revenue, for example, ways to bank on the knowledge about their user for targeted more unobtrusive marketing.

Personally I’m not a big fan of quoting televisions shows but for this post I will make an exception. To quote the fictional character Kyle Broflovski:

“We thought we could make money on the Internet. But, while the Internet is new and exciting for creative people, it hasn’t matured as a distribution mechanism to the extent that one should trade real and immediate opportunities for income for the promise of future online revenue. It will be a few years before digital distribution of media on the Internet can be monetized to the extent that necessitates content producers to forego their fair value in more traditional media.”

tagged with: south park, business models, user-generated content, social media

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