So how DO you make money with a social networking service on mobile?

Ok. Its four years since our book Communities Dominate Brands came out as the first business book on social networking. In the book we discuss the opportunity and some of the early business models and pioneering companies. That was a time before Facebook, YouTube and Twitter. How can you monetize this opportunity? We have seen the rapid growth of mobile social networking, and just like we predicted in the book, those "digital communities" or "user-generated content", or "citizen journalism" or "web 2.0" or indeed, "social networking" is now bigger on mobile than on the internet, by service revenues.

SETTING THE STAGE

Lets compare first. The social networking services on the internet are older, have more users, and have many global brands. So they are better known: Facebook, MySpace, Bebo, YouTube, Flickr, Second Life, World of Warcraft, eBay, Skype, Wikipedia, etc. The giants of that group when measured by users which have hundreds of milliions of users worldwide - Facebook, YouTube, Wikipedia etc make their money by advertising, and at quite modest levels when measured per person per month. The smaller groups which still have millions and even dozens of millions of users like World of Warcraft, Second Life etc will make most of their money from subscription revenues.

And the problems of both models are well publicized. eBay for example was quoted by CNN this week to be in the process of trying to sell off Skype which is still not profitable even thought it has 405 million subscribers. The Financial Times reported that Skype earned 550 milion dollars last year. While that does seem like a big number - it is half a billion dollars, in reality, that means an average income of 11 US cents per subscriber per month. With that they offer free unlimited calls globally. And inspite of their enormous cost-savings of their technology, they do have massive costs in handling the billions of minutes of telecoms traffic. And note that Skype are competing against the fixed telecoms landline business which also offers local, long distance and international calls - and increasingly offers those also as internet protocol calls (VOIP Voice Over Internet Protocol) like Skype. But consider - the fixed landline telcoms industry earns over 25 dollars per month per subscriber. Over 200 times more income per subscriber. And the fixed landline industry has 3 times as many customers as Skype.

I do not mean to be dismissive of Skype, they are a telecoms and internet phenomenon. And they are the world's second largest telecoms operator behind only China Mobile on the bigger mobile side of telecoms. But Skype do illustrate very distinctly how difficult it is to make money with online internet based social networking services.

SUBSCRIPTIONS AND ADVERTISING

So lets look at mobile. Mobile is the magical money-making machine. For any industry, for any service, for any need. Kids in the developing world now use their mobile phones on very basic social networking services such as GrameenPhone does in Bangladesh where teenagers use the simple SMS and WAP based social networking, e-business and digital money platform to make money for themselves. For example a high school age kid could offer tutoring services for younger school kids to teach Math or English etc, and advertise their little business, find customers, and collect payments - all via the service. Similarly if you are a young aspiring musician and already have years of piano lessons, you can now offer piano basic lessons and again make it all work via mobile social networking services. In Bangladesh the PC penetration rate and broadband internet availability is so low that an internet based eBay type of service is not commercially viable. But every economically viable person on the planet has a mobile phone.

So how about them social networking services? How do we monetize them? The obvious answer seems to be to copy the internet, and use advertising andn subscriptions. And while yes, advertising and subscriptions do exist as money-making elements also on the mobile side of social networking, this is not the big opportunity. There are FAR bigger money-making opportunities on the mobile side, that do not require subscriptions and do not require advertising. But before we go to those, lets take a few quick comments on subscriptions and on advertising.

Subscriptions are the first and most obvious element to try to monetize any online service. Almost all internet and mobile services have attempted the subscription model, to varying degrees of success or lack thereof. The idea is simple. If they like your service, and you charge a reasonable fee, then why would they not pay? So for example in the past 15 years just about every online variant of a newspaper or magazine has attempted a subscription model and most have failed miserably. Yes, in some cases there is a strong loyalty - Financial Times, the Economist; or perhaps a value in the archive part of the content like with the NY Times; or the content is so desirable (mostly adult-oriented content in this case) like Playboy, but most newspapers and magazines have tried and tried again, and have not been able to turn a subscriptions based model to success on either internet or mobile sites enough to turn a profit on the venture.

On specific social networking services, there are some that can insist on this model, mostly gaming worlds for massively multiplayer virtual environments like World of Warcraft and Second Life. But in most cases, even if there is a subscription level like on Linked In, the majority of users access the basic services for free. On mobile, we find that the trend is away from subscription services. Not because they do not work on mobile, but rather, because better ways exist to make money. I believe Flirtomatic was the first to do this twist, that they had a subscription fee for mobile and they announced that they had abandoned it, like their CEO Mark Curtis says, "as unnecessary". We hear that story all the time. The new Netsize Gide 2009 quotes BuzzCity CEO Dr KF Lai from Singapore also echoing the same theme, they started with the subscription model on mombile but have abandoned it.

And this is not mere pennies they are throwing away, consider the scale. Meetic Mobile runs in 9 countries across Europe and has 19% of its 700,000 customers of the converged internet and mobile dating service using the mobile service. The mobile users pay between 2-5 Euros (3-8 dollars) per month as the subscription fee. If we assume the average Meetic subscriber pays the average of that, at 3.5 Euros per month, the 130,000 mobile suscribers deliver 10 million dollars of subscription revenues annually to the total fixed-mobile dating service. We are not talking peanuts here, this is serious money. And its not the only income stream for Meetic Mobile, which also charges 15 Euro cents per chat message within the service, and is rolling out targeted advertising systems to the service. But think of it, Flirtomatic in 2007 when it had about 250,000 users and about 100,000 of fhose were on mobile - said they abandoned the subscription as unnecessary, abandoning a legitimate revenue stream counted in the millions of dollars. What is going on?

So lets look at advertising. Advertising exists on most social networking services, both online and mobile. YouTube earns most of its revenuees form advertising. So does Facebook and MySpace. And advertising on social netwrking can range from the very primitive and intrusive (typical banner ads for example) to the very creative such as branded content and even the sale of branded islands inside Second Life etc.

The fixed-and-mobile converged services like Habbo Hotel and Cyworld (and Flirtomatic) also offer advertising, but the scale is radically different. Habbo said in 2006 that their revenue included only about 10% from advertising. Regular readers of our blog know that Habbo Hotel by Sulake of Finland was the world's first company to crack the fixed-and-mobile internet business model in 2003, where they offer free unlimited access online, and charge premium content to users that is paid for by mobile phones. To understand their size, consider Habbo Hotel earned 35 million dollars by its radical business concept back in 2006 when they only had 7 million users in only a dozen countries. But yes, of that zero dollars came in subscription revenue and only 10% came in advertising revenue.  And they are not alone. In 2007 Cyworld in South Korea had reduced the contribution of Advertising to under 10% (with subscription fees another less than ten percent). Flirtomatic didn't give exact numbers but it was estimated that in 2008 advertising formed only one quarter of their income with yes, no subscription income. All earn millions of dollars but not like their better-known online internet siblings. What is going on?

PERSONALIZATION, GIFTS AND EGO-SERVICES

So here are the first three true innovations in the business model when we insert mobile into the phrase "social networking" or indeed for most internet based services. Personalization, gifting and ego-services. All work beautifully inside social networking services that include mobile. And obviously any service should try to evolve their concept to allow as much of these as possible.

Personalization was invented by Sulake with Habbo Hotel (or actually they had been developing this earlier with their predecessors such as Hotelli Kultakala which was a modest commercial success in Finland). You get a free avatar and free room inside Habbo Hotel. You can wander around the hotel to meet with your friends and you can engage in any activities with this basic setup. And you can customize your avatar and your room also for free. But if you want to be cool, you don't want to use the standard free options, you want something special. So Habbo introduced paid customization options. Special haircuts, special clothes for your avatar; special furniture and decorations to your room etc. 

Not all users will use these. Most will use the service for free. But about one in ten members of these big social networking services are willing and very able to pay for the services. When we enable the payments by mobile phones, we get past the micropayment obstacle, so anyone can pay, using premium SMS to buy the virtual currency to then buy various premium content on the service.

Think of the scale. Skype is used by 405 million people around the world. Most of these are adults. Most are quite wealthy (can afford a PC and broadband connection). Yet after almost a decade of payments innovations on Skype, they earn only a little over a dollar per year per user. Habbo Hotel is used by teenagers with almost no money. Yet already in 2006 only 3 yeras from launch they earned 5 dollars per user per year. Five bucks from a teenager's budget, that is very much, on average.

Personalization is a major income stream for just about all of the famous mobile social networking services from Cyworld to Mobage Town to Gala to Club Penguin to Flirtomatic to Mixi. Cyworld then added a major twist to this in South Korea when they introduced branded customization. Not just that you can have the cool new style blue jeans on your avatar, now you can have Levis's jeans. And your room, same story. Not just that you can buy a poster or painting onto your wall, you can buy the Mona Lisa and hang it onto your virtual room wall in South Korea with a full license from the Louvre Museum in Paris France. A massive new revenue stream - and now Cyworld's parent SK Communication earns money also from the revenue-sharing when the branded content is sold - they take 40%. By 2005 there were 500,000 items of branded content for sale inside Cyworld. Wow.... In 2007 SK Communication said they had 700,000 active users of Cyworld Mobile (most users on the broadband internet based Cyworld variant) and Cyworld Mobile earned 8.3 million dollars just from the customization income. Thats a dollar every month per active mobile user, just out of this one form of income. Think where Facebook would be if they could monetize their 15 million mobile Facebook users out of the total 140 million use base, in the same way?

Gifting is the second big idea. This came from South Korea and the innovator was Cyworld. They started it with music. South Korea was the first country where full-track MP3 file format music downloaded directly to mobile phones was introduced as a rival to the iPod model of installing music to a separate portable musicplayer. So it is no big surprise that many other music related innovations on mobile came also from South Korea, such as Ringback Tones (ie Waiting Tones), mobile karaoke, and yes, the music gift. The first concept of the music gift was the "welcoming song" inside Cyworld.

Welcoming songs worked a bit like a ringing tone, so whenever someone visited my room, the person would be greeted with a song of my choice. As I like James Bond, it would probably be a tune from one of my fave 007 movies. You could customize the songs so that different songs played to different people or at different times etc. The sound was very high quality, not the simple ploink-ploink music of basic ringing tones. And the business model? Jukebox! Pay per play. Pay per gift. Pay every time someone enters your room. 40 cents every time. Wow. Cyworld stumbled upon something enormous. Because obviously its not limited to music. You can give any conceivable virtual content as a gift. Bring a bottle of virtual wine to enjoy when you visit your friend. Or a sixpack of beer. Or if you're not of drinking age, bring a couple of cans of Pepsi or Red Bull etc. Give your firend a gift of the poster of the rock star or actor or movie - a Quantum of Solace. Etc. Or give your darling sweetheart a virtual red rose..

A virtual red rose. Such a simple idea. Takes a teeny bit of programming, you generate a virtual gift rose. Beautiful, red, yellow, pink, etc. And then sell them. No branding needed. But now the Romeo can show his true love to his Juliet by sending a rose to his true love. And that is how Flirtomatic adapted the gift idea from Cyworld. They launched the red rose in 2007 and to a total of about 400,000 total users of Flirtomatic on both internet and mobile in the UK at the time, they sold 3.5 million red roses in 2007. At 23 UK pence (40 US cents) per rose, Flirtomatic earned 1.4 million dollars just selling virtual flowers. The average Flirtomatic user spent 3.5 dollars in 2007 buying roses or almost 30 cents per month. This is just one of dozens if not hundreds of gifts that Flirtomatic now offers to its members ranging form the marriage proposal (an image of two wedding band rings) to the "virtual boob job" - don't laugh, Flirtomatic sold 10,000 of these virtual enhancements - on a service which is strictly non-pornographic, so the boob job is only seen on say the bikini top being bigger. The boob jobs cost 1 UK pound (1.60 dollars) each. And yes, they also offered the tummy tuck for the men.. Virtual gifts are now also becoming a standard offering on many other social networking services from Mobage Town to Buzz City.

The latest innovation is what Flirtomatic CEO Mark Curtis calls "ego services". (And yes, the line is a blur here, one could argue a boob job is an ego service, or a personalization, or indeed, can also be a gift). But lets see what Flirtomatic now offers in ego services to see and understand the potential. They offer ratings just like Amazon lets us rate books and eBay lets us rate the sellers, on Flirtomatic you can rate how good (or bad) a flirt the other person is. Five stars or two stars etc. And these are computed to an average rating. And yes, we humans are competitive and we want good ratings. So the need emerges to somehow make a change to the ratings. Perhaps someone is unfair in rating you, because you broke up in the real world, what was previously a 5 star rating is now changed to a 1 star rating. So Flirtomatic introduced the ability to "delete your freak". To remove the worst rating you have. And yes.. mobile is the magical money-making machine - we can charge you for that !

It seems that men prefer to deal with their problem flirts this way. But women seem to think differently. They don't want to pay to remove the bad flirt rating, they prefer to solve it by communication. So the flirt ratings are anonymous, but Flirtomatic offers the chance to find out who gave you that specific rating. Who gave you the 2 stars (or perhaps, who gave you five stars?). This also is a premium cost service. Men don't use it much, but women love it. These are some of the early ego services on Flirtomatic. I don't have specific metrics on their use (yet), but Flirtomatic has seen three consistent patterns. The total usage of their service has consistently been far greater on mobile than the internet version. The mobile side has grown much faster and is today more than half of all users. And the proportion of advertising (and obviously the abandoned subscription) revenues has been in steady decline. In 2007 half of the total revenues of Flirtomatic was from advertising. By 2008 it was down to one quarter of the total revenues even as Flirtomatic has been very innovative in advertising and sponsorship options also on the service.

REVENUE-SHARE TO THE MEMBER

One last but very important concept. Reward your members. If you can enable user-generated content on your service such as Cyworld does for example, or the SeeMeTV mobile variant to YouTube style of user-generated video sharing, then give a revenue-sharing part to your members. SeeMeTV pays a penny back to the original creator every time that video is viewed by someone. If 100 people view your video, you earned 1 UK Pound (100 pennies), if 1,000 people viewed it, you earned 10 Pounds etc. The average video on SeeMeTV in the UK earns about 27 dollars to its creator and the top viewed videos can earn thousands. This is yet another indication of the power of mobile: it is the magical money-making machine, also for user-geneated content. SeeMeTV on the various Three services (Drei, Tre etc) is actually a copy of he concept from MobileOne (M1) in Singapore who launched their servce first as MeTV and is copied by many including LookAtMe on O2 and even an adult-content only video sharing service for mobile called PixMeTV. Meanwhile the revenue-sharing concept has been offered as far as the USA with MyNyMo and New Zealand with Vodafone's Self Central.

So how do you make money using social networking? First, you need to have a mobile variant to your service if it is not mobile from the start. Then you launch personalization, gifting and ego-services. If possible include revenue-sharing with content creators within your membership and obviously also with branded content. Then watch the money roll in. Soon you too can abandon the subscription fee as unnecessary and watch as your advertising income continues to grow, yet forms an ever tinier proportion of the total income to your company. Like Mobage Town in Japan. They have 10 million users and they generate 200 million dollars in annual revenues. Compare that Skype, Facebook or YouTube which need 10 times the number of users more to reach such levels using mostly just advertising.

WE HAVE MORE INFO

So, if you want more info for free, I have my new Thought Piece on mobile social networking. I'm happy to email that to you if you send me a request to tomi (at) tomiahonen (dot) com. It summarizes the mobile social networking status of today into just two pages.

If you would like to read 50 case studies into the most innovative and successful mobile social networking services (including obviously all the examples here form Habbo to Cyworld to Flirtomatic to Mobage Town to SeeMeTV etc) with far more details, stats, revenues, and quotes from the execs, then pick up a copy of my brand new eBook Tomi Ahonen Pearls Vol 2: Mobile Social Networking. It costs only 9.99 Euros and there are free sample pages at the book ordering website (Tomi Ahonen Pearls Vol 2)

Then if you want to read a "real book" then the near future of social media and digital communities are in Alan Moore's new book with Ajit Jaokar, Jouko Ahvenainen and Brian Jacobs, called Social Media Marketing. A really brilliant book I can wholeheartedly recommend.

And obviously for all who want to know how to make money with mobile, to understand the services opportunity, the customers, and how to create successful mobiile content and applications, the book to read is my latest hardcover book Mobile as 7th of the Mass Media. The book has a chapter just on mobile social networking (plus obviously other mobile content chapters like gaming, video, music, etc). It has 16 case studies including Cyworld, Flirtomatic and SeeMeTV. 

UPDATE Aprl 29 - just blogged about Habbo Hotel annual numbers for 2008. Not only phenomenal growth, and solid revenues - but PROFITS too. Read Habbo Making Profits.

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