The Rise of the Paid Social Network Business Model

“The Internet should be free.” Remember that? Reality suggests that the Internet is anything but free. Value is being created, it’s being paid for, and it’s getting a lot of attention. Rather than “free,” the Internet – and social networking in particular – is largely built on ad revenue or the prospect thereof.

For businesses seeking a venue with a large, engaged audience – and from an advertiser’s perspective that’s exactly what the social Web is – that’s useful: most of the social networking sites offer well-built advertising tools that connect businesses with potential customers. Compared with TV, Internet ad revenue is still relatively small, but it’s growing and will continue to grow. Clearly the ad model works on the Internet just as it does on TV, radio, and print.

But there’s an alternative: Instead of ad-driven there is another model – pay as you go. While most media channels have evolved more or less by following (indeed, by creating) the ad-driven revenue model, physical goods – cars, food, homes, games – have generally been pay as you go. Want a new TV? $249. Want to go to France? $2,499 Want a Chevrolet? $24,999. Want a house? You get the idea.

The Internet is becoming more about “things” as it simultaneously continues to be about media. Commercial media remains an important part of the Web, but it’s no longer the whole story: the paid applications market is growing up around it. There is an increasing revenue opportunity in the form of a fee charged rather than an ad shown, and there is a clear willingness on the part of consumers to pay for things they value instead of, or in addition to, enjoying access to media or other things that is paid for in part by advertising. HBO’s announcement of its stand-alone streaming service last week is just the latest example of this shift.

As is Ello and its freemium social networking model: Beyond basic (free) social networking, members (will – it’s still in the future) pay for the specific applications and capabilities that they want. On its face it’s a fairly obvious business model: you like it…you buy it. So, it’s surprising to see articles describing Ello’s business model as “consumer hostile.” Rather, Ello seems perfectly timed to capitalize on consumers’ increasing concern for how their data is used, for consumers’ hesitancy at sharing data with marketers, and for consumers’ willingness to pay for selected software applications. Far from consumer hostile, the apparent promise of Ello is to give members a platform on which to build the personalized social networking experiences they really want. And it’s not like there isn’t a proven model already.

The proven model is, as you read this, either in your hand or in your pocket. It’s your smartphone. By itself, it can make calls (arguably the least important function of a smartphone), send a text (much more useful), and perhaps browse the Web and get email. Beyond that…it’s the app store that unlocks the real power of your smartphone. And while the majority of apps are either built by a specific company to encourage interaction with that company (example: United Airlines’ mobile app) or are themselves ad-supported (example, Spotify), there are also killer apps that people pay for (example again, Spotify) to avoid the ads and/or unlock more advanced features. That’s the Ello model, applied to social networking.

Does the “paid functionality” model work on the social Web? To the extent that you see the social Web as media, HBO’s new streaming service, along with Netflix, Hulu, Google Play, and iTunes, suggests that it does. If you see your favorite social network more like your phone – the network as a backbone of a set of social experiences and capabilities that you build to your specifications – then the mobile/smartphone market offers a great look ahead. On a total addressable market of 1.75 billion smartphone owners, a total of $8 billion was spent on paid applications last year. Facebook has 1.3 billion active members and generated about the same ($7.87 billion) in revenue in 2013. That’s roughly the equivalent (order of magnitude) in terms of revenue per user as the smartphone market per owner for paid apps.

How does this relate to your business, and to marketing on the social Web? Imagine that consumers continue to shift to paid apps – sans ads – in significant numbers. Ten percent of the market. Twenty-five percent of the market. More. Imagine that the paid really does catch on in media applications. Imagine that all of the content houses follow HBO. Then what?

First, there is a potentially significant shift in advertising demographics: consumers willing to pay in exchange for being left alone (not reachable through conventional/digital advertising) versus consumers accepting ad supported content are likely a very desirable segment. How will you reach them? And if the mass market shifts?

You need to be thinking about how to reach customers when an interruption isn’t an option. Alternatives include a focus on customer care, where an outsized share of touch points are experienced. These experiences turn into stories, and stories power recommendations. Recommendations from trusted sources are a powerful marketplace force. Who do people trust? Lithium just published a study: people trust people like themselves. And more to the point, they trust people like themselves more than they trust advertising. Full disclosure: I am employed by Lithium.

In addition to advertising and generating positive recommendations, overt participation in social networks – abiding by established terms and conditions – is an increasingly important best business practice. Generally connecting with more of your customer base, connecting more customers with more employees, is a great way to pull customers closer to your brand, to learn, innovate, and enhance loyalty. Simply, it’s a great way to encourage beneficial recommendations.

Looking ahead, it’s worth paying attention to the growing acceptance of pay-for-play as digital experiences move from media-like content to device-like functionality. Consumers, tired of seeing information they provide used in ways they didn’t consider, will continue to evolve as they take control of their media. As they do, your ability to interrupt may suffer: in that case, what will you do? Now would be a great time to start answering that question.