The following is a blog re-post from Raj Kapoor’s , Managing Director at Sillicon Valley’s Mayfield Fund. Raj is an energetic type A personality that likes to explore, learn, question, and enjoy. The original can be found here. Contact Mayfield Fund here. Thanks Raj!

PREDICTION: Social Networks Will Make More Money Off Site vs On
by Raj Kapoor.

Social networks are here to stay…100s of millions of consumers now use them as an indispensible tool to stay current with friends and interests. There has been a lot of debate on how they can make money. Let’s keep in mind that they ARE making money today (facebook over $300M annual revenue and LinkedIn well over $100M) – more than most internet sites – but just not a lot on a per-user basis.

I believe this is because the traditional ad model doesn’t work well here – social networks are a communications platform at the core.

People log on daily to check messages, photos, and videos that were added by interesting people for them to view. They are not coming to view content as much as people would have hoped, nor are they using it as a main portal or launching point for all web activities (Google won that so far…)

Communications sites have never monetized well because the consumer is focused on communication and is not going to be diverted by ads.

I experienced this firsthand running Snapfish and trying ad sales for 6 years against online personal photo pages. We got advertising up to 10% of revenue but that was about it.

Why? Lack of performance and attention from users… they were too busy viewing photos vs clicking on ads. Many social networks suffer the same issues as shown by their dismal click thru rates.

THE DATA ECONOMY:

That said, I do believe there’s a big opportunity – it’s in the Data that is captured explicitly (entering info on yourself in your profile) and implicitly (the groups you join, the content of the messages you send each other). In some social nets like Facebook and LinkedIn, the data is very deep and for the most part true. The profile page itself is a treasure trove of information on age, gender, location, interests, work experience, favorite movies, tv, etc – all the attributes a great brand marketer wants to target when reaching an audience.

The advertiser may not have measurable success reaching the user in the social network, but if they had access to the data when the user is on other sites – more conducive to engagement with ads – the advertiser would be in nirvana.

The data economy is developing fast where data is decoupled from ad inventory and used to target audiences where ever they are (Mayfield companies Audience Science, Adchemy, and Rubicon Project are leading the charge here). I think the big social networks are aware of this but are treading carefully given the privacy concerns. I do believe when they find the right mix of user privacy and sharing of this data, they can provide it to advertisers, networks, and publishers and profit handsomely from it. They can make more money on a user by charging a tax for the data each time its used vs the pageviews from that user on their site.

Let’s do the math and make some assumptions to illustrate:

I used the following estimates on ad impressions/user/mo on top social networks:
- Facebook: 356
- Tagged: 387
- Myspace: 452
….Avg: 403

…And I assume $.50 as the assumption for eCPM (which I believe maybe high). Thus, on average a social network makes $.20 per user per month on ads on their site.

USING SOCIAL NETWORK DATA TO MAKE MONEY OUTSIDE THE SOCIAL NETWORK

Now, let’s look at how many ad impressions the typical internet user encounters in a month – I’ve found it to be about 1,650 per month. Let’s also assume the following:

- 50% of these impressions could be targeted using the vast amounts of profile and friend data from SNS
- $2 eCPM for such a data targeted ad
- the social network keeps 15% of this revenue for its data (which seems like the going rate talking to data players).

That’s about $.25 per user per month. So, if my assumptions hold true, then a social network can monetize their users $.25 offsite vs $.20 onsite….

Social networks will make money on their site – thru ads, virtual goods, etc – but the real big opportunity is freeing all the user data and enabling it to target them wherever they are on the web.