Are Social Networks Tapped Out?

A recent eMarketer report revealed that social networking has reached a “saturation point”. Currently, 63.7% of US web users use social networks. This number is only expected to grow to 67% by 2013.

With the usage numbers slowing, what does this mean for social networks, particularly Facebook, recently valued at $85 billion, and which some analysts predict could be worth $234 billion by 2015?

That is, how will these social networks continue to thrive if the measure of success stops being user count? How will they get value from their existing user base and continue to scale profits (if not network size)?

Clear benefits for the users, but what about the networks?

Debra Aho Williamson, eMarketer’s principal analyst, said, “with fewer new users signing up, social network users will be more sophisticated and discerning about the people and brands they want to engage with”:

“Social networks will need to cement their relationships with their users, particularly people ages 35 and older, in order to keep them engaged. Marketers and media companies can contribute to this effort by creating compelling user experiences that make people want to stay connected to social networks so they can gain access to experiences, deals or content they may not be able to find anywhere else.”

This is great news for consumers as the brand experience on social networks should only get better. But it’s still not clear how the social networks will make money.

How will Facebook Make Money?

Facebook’s value is no longer in its user count, but rather, in the sheer volume of information that its users provide. From simple statistical data about age, sex and location to complicated insights into human language and consumer opinion, Facebook is sitting on a goldmine of consumer insights. And Facebook isn’t sharing.

One obvious revenue stream for Facebook are ads. It’s a compelling sell: their data allows brands to create ultra-targeted ads, sure to reach people in their market.

But the jury is still out on whether Facebook ads match up to Google AdWords in terms of ROI. Many reports suggest “no”. For example, a recent Goldman Sachs survey showed that search engines and recommendation engines have more greater influence over online shopping decisions than social sites.

Another experiment by PuddleDucks, a children’s swimwear company, found a less than 1% sales conversion via Facebook, compared to over 5% from Adwords. Another study by Smart Insights for Saxo Bank also showed that Facebook campaigns result in a lower response rate, but argued that “you can target effectively in Facebook while limiting your exposure through a CPC investment” (Dave Chaffey). According to Saxo’s head of marketing, Stuart Rice:

“Facebook ads have a tremendous advantage over Google (which we also use) because we can target people who perhaps use words like ’Rolex’, ’yachting’ or ’shooting’ in their profiles. It enables me to target to a better degree than Google…I just know with CPC what it has cost me when someone clicks there. If I bought 100,000 impressions I’d have to spend a lot of time going through the data to see what I got for my money.”

Other reports offer added weight to Facebook ads’ effectiveness. This morning, eConsultancy published the results of comparison tests suggesting that Facebook is, for the first time, starting to perform favourably as a real challenger to Google:

• For brand advertisers spending around the £1,000 mark, the CPA for Facebook campaigns is marginally lower than it is for search.
• For higher-spending brands (those spending more than around £2,000), Facebook starts to give a lower CPA rate, and so becomes the more effective channel to meet the CPA goals.

These are early tests, but it does suggest that there’s something happening under the hood at Facebook that justifies its ballooning valuation. And its something that brands are itching to get their hands on.

However, since the F8 update last year, most of Facebook’s data has been unavailable to brands. With Facebook in control of the goods, it remains to be seen how Facebook will get value from this data without compromising user privacy.

Digital Marketer Carlton Jefferis suggests in his aptly put comment on eConsultancy:

“I would bet the ranch that FB are busy beavering away on killer analytics tools that will help them tap the real value. But they’ll still keep the really juicy stuff for themselves. I reckon that’s what Goldman Sachs and their merry little bunch have invested in.”

Like Carlton, we can’t wait to find out. …