Social Machinery

Youtube, Twitter and Wikipedia are three emblematic services that attract hundreds of Millions Visitors every month. Their current company value is skyrocketing, but ¿Are these companies making big money for their owners?

Today’s missing piece of Web 2.0 can be summarized in one sentence: “Show me the money “.

No one has figured out how anyone could be willing to pay for the kind of services we are enjoying today and how to create a sustainable business model that could bridge the gap between value generation ( the relevance of these applications for users) and value creation (monetization).

In this article we explore the cases of these three companies 

How to monetize a web 2.0 site? This question has been around for years on the internet. Five years back it wasn’t something to keep you awake at night, simply because if your idea was innovative enough and you where a little bit lucky, venture capitals could fund your start-up and then cash in when they sell your concept to a Big buyer like Google, Microsoft or traditional media companies. But suddenly VCs start realizing that the enormous audience generated by these innovative starlets and monetization doesn’t go hand in hand. Even, with the promise that online advertising will fund every single service on earth.

1. Youtube

One of the best cases reflecting the Paradigm of value creation and monetization on the web is Youtube. On October 2006, Steven Hurley and Steven Chen, Youtube founders, sold their company to Google for the astronomical figure of 1.65 Billion US. Well, if you are willing to spend that amount of money in such company make sure you know how to monetize it.

According to Nielsen report only during July 2009, You Tube generated more than 7 billion streams and 104 million unique viewers in the US.

Even with this enormous amount of traffic Youtube have a big problem for monetizing their site. Almost all of Youtube’s content is trivial home-made videos, and these are essentially not “monetizable”. Also, identifying the content of these videos for inserting targeted ads is difficult and the advertiser’s willingness to pay high CPM rate for these trivial videos is low.

On the cost side, the very nature of Youtube as an online video repository means that the cost of maintaining those videos grows exponentially. There’s no ceiling in sight for YouTube’s traffic support costs, as people are watching hundreds of millions of videos and uploading hundreds of thousands of videos daily. In fact, every minute, ten hours of video is uploaded to YouTube.

Credit Suisse analysts project that YouTube bandwidth costs, content licensing agreements, hardware needs and other expenses will reach more than $700 million by the end of 2009. Only bandwidth and content licensing agreements will account for 87% of total costs.

The issue for YouTube going forward is to increase the percentage of its videos that can be monetized by closing more deals with content owners and driving more targeted and relevant advertising through standardization of ad formats and enhanced ad effectiveness. Nevertheless, this could mean to re-focus their “broadcast yourself ” strategy towards a more traditional content aggregator model, where Hulu is already strong player.

For the past year, Google has been pressed by analysts to come up with ways to make money on Youtube. They have come out with a series of new ad formats leveraging on their adwords + adsense vast experience, but it seems that is not enough for finding sustainability.

Other out-of-the-box ideas are related to movie rental business in partnership with Hollywood studios, click to buy content, and sharing their ad revenues with top video producers.

2. Twitter

Twitter is a more strange case in the quest for monetizing the web 2.0. Their traffic is reportedly up 16 times compared to last year and is reaching around 45 million users around the world. At that level most web 2.0 sell ads to pay for their services to be free for users. Currently Twitter is not using any advertisement in their site, but with a site growing as fast as twitter more revenues is always in demand from investors and partners.

During this month, Twitter gave a hint on what is coming for their monetization strategy, when they expanded their terms of service to allow for advertising. The terms of service were modified for Twitter users to specify that the social network may run ads. Twitter founder Biz Stone explained that “We leave the door open for advertising. We’d like to keep our options open, as we’ve said before.”

The cruel irony about Twitter is that there are several other companies making real money at expense of their platform.

One example is CoTweet , a business platform for Twitter that allows multiple individuals at one company send tweets on up to six corporate Twitter accounts and keeps the messages in sync across all of the accounts. The company already have customer like @Ford, @Pepsi, and @MSWindows, and they are planning to implement software as a service model, where subscribers pay per month to use the service. Pricing levels and are not defined yet, but they could implement it by the end of this year.

I believe that Twitter is missing the point when it comes to monetization. Twitter has been able to build an amazing ecosystem of applications that developers love. Focusing on this flourishing ecosystem could changes the game. 

If Twitter focus on investing in their developer community to do more with its API it can create a remarkable business that can even challenge giants like Google or Microsoft. As some analyst have predicted, we are in the midst of a operating system evolution, where Twitter could be the first Social OS, adding premium services for developers and creating innovation around their platform.

3.Wikipedia

Wikipedia has rapidly become one of the most used reference sources in the world. Besides being one of the world’s most popular website, its holds more than 3 million articles, written in over 260 languages and it’s absolutely free to use. 

But during the last years, several people from Wikimedia Foundation has stated that they need more funding to keep the soaring success resulted in a need for more server capacity and bandwidth. Funding is an open issue for Wikipedia, as they face constantly uncertainty due to a business model that only relies on donations.

So how could Wikipedia monetize their site to keep it unbiased, healthy and efficient? One way could be by offering advertising which currently is not part of any of their 3 million articles. This topic is more or less a taboo within Wikimedia as they see advertising having a negative effect particularly on thousands of wikipedians that could lose their loyalty to Wikipedia as they see it as a more commercial platform.

There have been some advertising experiments in the past, but none of them has being considered successful or aligned with Wikipedia’s company motto. According to Wikipedia co-founder Jimmy Wales  it’s not his decision to make though he personally dislikes the idea of advertising on Wikipedia and any decision to utilize ads would have to come from the community.

Again, the cruel irony in Wikipedia business model is that other parties in the web 2.0 ecosystem are already monetizing it. The encyclopedia already relies on Google for much of its traffic as Google’s algorithms are tweaked in Wikipedia’s favour. Latest studies show that the website’s explosive growth is flattening. The number of articles added drops from 60,000 in 2006 to only one third currently. Also, the number of edits made every month and the number of active editors both stopped growing the following year, flattening out at around 5.5 million and 750,000 respectively.

These latest trends could imply that Wikipedia is not facing an exponential cost increase as Youtube every month, but is also interesting to highlight that the reduction on numbers of contributors could compromises the quality of the encyclopedia in the long-run.

Will Wikipedia donation model be sustainable enough to keep all their pieces together or will they need to find new revenue streams ? If they do so, How they will keep their unbiased perspective of things?

Who will be the next trendsetter?

This article is not about criticizing all the incredible things we have gathered from these innovative start-ups, but just to highlight that one of the most important aspects missing today on web 2.0 way forward  is how to achieve a sustainable business model.

Just think about how Google changed everything nine years ago, when they launched their keyword-based advertising with 300 customers known as Adwords. At that time, several analysts’ criticized Google’s monetization approach and questioned their ability to make money around their search engine. Google found success with Adwords and later AdSense; that success turned keyword advertising into a business model that is widespread and robust today.

Now, we need companies to come with the same level of innovation for monetizing the social media space. Is advertising really the answer? Google was a trendsetter that created advertising revolution and showed the way for other to bring innovation. Will there be other trendsetters like Google?