November 2009: Will Users Pay for Content on Social Networks?

On September 15, 2009, Facebook CEO Mark Zuckerberg announced that the social network had surpassed the 300-million-member mark and reached cash-flow-positive status for the first time. Those milestones validated Facebook’s core concept of monetizing its service through advertising, and revived a lingering question that has swirled around social networking since its inception: Will users pay for content?

Most of the media attention around social networking has focused on ad models—and for good reason. Advertising constitutes the bulk of the revenues that social networks have earned so far, and its outlook is positive.

However, emerging data points to paid services as a key growth area for social networks. A July 2009 Piper Jaffray report, “Pay to Play: Paid Internet Services,” forecast that US paid social networking site revenues will surpass $1.4 billion in 2013, more than doubling the 2009 figure of $627 million. Piper Jaffray expects the lion’s share of this growth to come from a combination of new, paid services from new and existing networks, and also from increased usage of premium services from established players such as LinkedIn and Classmates.com.

For the years 2008 through 2011, Piper Jaffray expects 100% growth in paid social network services—from $502 million to $1 billion.

By comparison, eMarketer’s estimates of social network ad spending during the same period call for an 18.7% increase—from $1.18 billion to $1.40 billion.

This means that even though advertising represents a larger revenue stream than paid services, the gap should start to narrow as social networks experiment further with fee-based approaches.

According to Piper Jaffray, one of the key ways a social network can increase revenues is through the use of “freemium” models, which allow users to access basic features for free but require them to pay for premium services.

This model is emerging as a preferred monetization tool for social media companies. In a February 2009 Abrams Research survey of more than 200 social media leaders in North America, 46% said freemiums were the best way to monetize social media. This top response was followed by targeted and contextual ads, with 20%. The survey defined social media leaders as “early adopters and those who understand the medium and are able to conceive of it going forward.”

The fact that only 3% of respondents chose banner ads and traditional online advertising as their top monetization vehicle indicates that social media leaders are gravitating away from traditional approaches. Instead, they are embracing freemiums and subscriptions on the direct-to-consumer side, and the sale of research data, API access, corporate sponsorships and user metadata on the business-to-business side.

Beyond mainstream sites such as Facebook and MySpace, paid content is alive and well. Networks that cater to market niches have particularly thrived on hybrids of paid models and ad-based systems. Some of these players, such as LinkedIn, Classmates.com and MyLife.com, are earning at least as much revenue from fee-based content and services as from advertising.

As the online ad market continues to struggle, paid services including membership fees, premium features and virtual goods will take on increasing urgency for social networks, either as primary revenue generators or ancillary income sources.

Find out more about eMarketer’s digital marketing and the new report “Social Network Content: Are Users Willing to Pay?

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