Monday, February 11, 2008

Still no light in the social networking sites business model

The news that Google has announced that its results were quite below expectations in the Google-MySpace advertisement’s deal has lead many to think that the almighty Mountain View’s company is loosing its Midas’ touch. However, I think that the news actually confirms what many have said, that that social networking is a very good idea and quite good for the users, while nobody has found how to make money out of it.
Last week, while explaining to a group of students during the first law class in the first week of the degrees the importance of the law in designing a business model, I used the example of Facebook to show that things that make sense on paper may not make sense in reality and those that make sense in reality may not make sense according to the letter and spirit of the law, which renders them not viable (remember Napster?). The students’ answer was that there was not such a big issue in Facebook because they were going to start making money out of advertisement as Google and, therefore, the model and its legality had been properly tested. My answer was two pronged: I first asked how many of them had ever clicked on a Facebook advertisement (the answer was none) and then warned them about the academic validity of anecdotal evidence like that. But Google’s news goes beyond the anecdotal…
So, how to make money if you own Facebook, MySpace or any of the others? The idea that Murdoch should be happy because it got U$S900 million from Google from advertisement space that made quite less than that, is simple wrong and based on the current culture of very short term gains. Even in the mid-term the news should be bad for Murdoch too because next time that he sits to negotiate with Google, or anyone, they will show him the numbers and if Google couldn’t, he will have to be very persuasive to convince others that they will be able to make money out of adds on social networking sites, which brings us back to the question of how to make money…
The almost obvious answer is to use the wealth of information that these sites collect about the users, either directly or through the applications. Just as comparison, if you put together the information you give about you with the one that can be inferred from your choices in applications, what you have given would make the Total Information Awareness program (stopped by the US Congress due to its privacy invasion features and its very dubious legality) look like a kindergarden’s science project. The combination of information that users give to the sites and the rights the users give to the owners of the sites would constitute the ultimate weapon for marketers and there are some arguments to say that there is no way to collect such an almost perfect consumer profile even if you are asked to write pages and pages of your preferences (some applications, when combined, would give a very precise picture of your interests and preferences that goes beyond what you consciously know about yourself, without even mentioning that it is almost impossible to get out of some of these sites). But, would that be legal?
While, oversimplifying, in the US there seems to be agreement about the ownership of the data being on the companies hands, the European view is quite more complex. It could be argued that when users accept the terms of service they are giving the agreement required under EU law for the processing of personal data, the fact that sensitive personal data is bundled with the non-sensitive information seems to change completely the game (and, again, EU law gives you the right to "leave" with your data, which seems to not be possible in Facebook). In the case of sensitive personal information, like political views, religious believes and sexual orientation (this later being deducted by combining interests), the law would require express consent and in each case, which becomes further complicated when the plan is to sell or share the information with non-European companies (even if the are part of the safe harbour agreement). It could be argued that this previous analysis does not preclude the use of the data for marketing purposes, but it seems that, if the business model is based on its use, the expectations would have to be lowered and the dance of billions that people think these networking services will provide are simple fantasy. Any proposed business model should get a balance between what can be lawfully used without requiring users agreement and how far the users want to go in order to enjoy the sites, and, while such a balance is reachable, the result would probably give a still healthy but lower rate of return on the investments.

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