Slide 1

Professor Michael Mainelli, Executive Chairman, The Z/Yen Group
Leon Benjamin, Ecademy

 

[An edited version of this article appeared as "The Trends And Impact Of Monetising Networks" CIMTech,The Chartered Institute of Marketing (April 2005).]

Monetising Online Networks

The massive take-up of a wide variety of electronic devices coupled with rapid broadband penetration is undisputed.  Along with the internet, devices and broadband are transforming our social environments into a sea of communication spaces which are becoming increasingly difficult to search in an efficient, meaningful way.  A recent study by a team of researchers at AT&T Labs in the U.S. found that people still rely heavily on their personal social networks to do their work 1 and concludes that ‘expensive’ search and sorting tasks consume large proportions of an individual’s time.   At the most intrinsic level Ecademy has monetised its network by creating an environment in which small businesses and entrepreneurs can find each other and the content they generate using a rich set of search criteria.

The most financially successful online communities all have search as their centre of gravity.  In the UK, Friends Reunited reports 7m registered users and despite its churn continues to be profitable.  In the US, Classmates.com is reported to have a current revenue rate of $30 million annually.  Dating community Match.com and Udate.com also measure annual revenue in the tens of millions of dollars.  Jobs community site Monster.com measures annual revenue in the hundreds of millions of dollars. What do these communities have in common?  They are all search communities; people visit not simply to chat, but to find something (customers, soul mate, employer, employee).  People are willing to pay for search.  Some search communities also enjoy powerful network effects and the larger they are, the more valuable they become.   At Ecademy, after private messaging, the most frequently invoked online functions are tasks relating to search and the most frequently requested enhancements from members are related to search.  Business networks like Ecademy, LinkedIn, Ryze, Spoke, OpenBC are all in the people search business. 

The opportunities for marketing to online communities are significant.  For example, in 2004, Pepsi launched its Mountain Dew soft drink in Sweden by creating advocacy inside a kids’ online community called HabboHotel and became the number one soft drink in Sweden within six months, at a fraction of the cost of traditional advertising.  

However, there’s more to it than search.  Value exchange beyond just finding each other must exist to keep these communities alive.

The Economics of Online Community Value

Stan Liebowitz 2 points out that basic economics still applies online.  In order to understand online economics, it helps to draw analogies with traditional economic situations, but the problem is often making sure that the online model is contrasted with an appropriate off-line or ‘bricks and mortar’ model.  For instance, drawing on the ten categorisations used by Sarkar, Butler and Steinfield in their paper on Cybermediaries, 3 online social network functions can be linked to numerous traditional models, as follows: 

Online Social Network Function and Example

Traditional Economy Analogy

1.   search & evaluation: finding people

telephone directory or dating agency

2.   needs assessment & product matching: recommending people to meet

traditional hardware store

3.   customer risk management: escalating ‘safe’ meeting arrangements

shop that offers warranties

4.   product distribution: local meeting services within global network

network of gas stations or postal service

5.   product information dissemination: structure of content, e.g. accountants here, media there

catalog or mail order store

6.   purchase influence: most interesting person, new book by members

shelf or product placement in supermarkets

7.   provision of customer information:

market research firm

8.   producer risk management: ratings of usefulness

credit agencies

9.   transaction economies of scale: global meeting services

international consumer credit

10.        integration of consumer and producer needs: summary resumés (sic) or size of photos

balancing needs of consumers and producers, e.g. publisher who prevents too much advertising in publication 

As Sarkar, Butler and Steinfield note, intermediaries coordinate “…a multifaceted set of functions…” and these authors expect more, rather than fewer, intermediaries as services move online.  They go on to enumerate some cybermediary categories – gateways, directories, search services, malls, publishers, virtual resellers, web site evaluators, auditors, financial intermediaries and forums, fan clubs & user groups.

We submit that the most appropriate traditional model for the economic valuation of online communities is a traditional financial exchange; the London or New York stock exchanges would be good examples.  Looking at online financial networks 4 we can see not only that many communities result in the formation of exchanges, but also that it is the ‘community’ that creates value.  The key value for members of online exchanges is appropriate risk and reward summed up in ‘trust’.  Online services need to encompass almost all of the functions above but, moreover, learn a couple of additional concepts that apply to ‘exhanges’ as well as cybermediaries.  Obviously, concepts from the world of financial exchanges can be applied to online communities:

Financial Exchange

Online Community Functions

1.   liquidity

likelihood of finding connections of value without disturbing the market

2.   membership: basic membership rules for traders and what they trade, how they get listed and certifying the validity of core information

information provision requirements, validation or referrals or references

3.   price formation

helping members find the appropriate degree of interaction

4.   transparency: information services about the markets, pre-trade and post-trade rules for publication

giving members control of information appropriate to the role they currently occupy, e.g. finding people or wanting to be found

5.   facilitating transactions: order-matching, clearing, settlement

facilities to help members connect and meet, facilitating anonymity where needed

6.   enhancing trust: preventing fraud and aiding dispute resolution

helping members get along, rating members and expelling abusive members 

People often focus on the scale of exchanges as the most crucial point.  Liquidity is presumed to increase as things get larger, but things are more complicated than that.  Where exchanges are inefficient at serving a sub-community, e.g. small cap stocks, then other exchanges arise, e.g. NASDAQ in the USA or the Alternative Investment Market in the UK.  In the USA in the 1850’s there were some 250 exchanges, now there are a handful.  One leading online exchange, e-Bay, seems to dominate person-to-person goods transactions.  In Europe, one leading betting exchange seems to dominate, Betfair[5].  But before we get too carried away with assuming that online communities will follow the Highlander strategy (from the film of the same name), i.e. “there can be only one”, we have to return to the key value for members, ‘trust’.

Almost all long-term exchanges have been mutuals or had strong elements of mutuality.  The value of an exchange derives from its members and it is only fair to recognise this.  You may provide a fantastic online software package for an online community, but without the contribution of each of the community members it is worthless.  Mutuality is not clear-cut.  Recently, a number of exchanges have de-mutualised.  e-Bay is a for-profit organisation.  On the other hand, most exchanges remain mutuals and many de-mutualised exchanges are controlled by the larger members holding shares, i.e. quasi-mutuals.  A commercial competitor of Betfair recently declared that it was moving to becoming a “co-operative exchange”.  It might be interesting to speculate on the future of e-Bay, particularly when compared with Craigslist.  Our point is that members give both networks value, and will not permit all of the value to be captured by a commercial entity.

When valuing an exchange as a commercial entity, for instance the London Stock Exchange has recently had several offers, it is tempting that to say that the value is nearly infinite, because people have nowhere else to go, in this case for large UK equities.  But that’s wrong.  The members do have alternatives, in UK equities several, and will place their business elsewhere just to prevent being dominated.  In foreign exchange, leading banks teamed up to create EBS just to ensure that Reuters did not dominate the forex markets.  So members will ensure that a non-mutual exchange, in the long run, has either strong competition or they will move to a mutual model.

Implications for Online Communities

Members welcome competition among a number of online communities.  If, perhaps due to liquidity advantages, a single online community ‘exchange’ arises, it will have to be benign.  Members will not tolerate being taken advantage of – at that point you’ve lost trust.  We believe that commercial online community providers might consider ‘selling’ their community to the members, perhaps over a period of time.  If providers try to make the largest possible returns for shareholders, then they may well lose the membership, and therefore almost all of the community value.  If the loss of members is quick, the vendor loses the value; if slow, then the purchaser loses the value.  If a provider moves to a mutual model, it may well encourage liquidity formation.  Whatever, we believe that the combination of membership providing value and the threat of competition limit the value of online communities to that which the members will tolerate.

About the Authors

Leon Benjamin

Léon Benjamin has spent 20 years designing and delivering real-time solutions in financial services, telecoms and travel, for blue chip companies, counting Union Bank of Switzerland, Digital, Dresdner Kleinwort Benson, Barclays Capital, Andersen Consulting, Airtours, Opodo and British Telecom (BT).

Leon has led Ecademy's community consulting practice since 2001 and has managed a number of successful online community implementations with clients including the UK government (Department of Trade & Industry), Microsoft & BT which has contributed to the growth of Ecademy's membership from 8,000 to 50,000 members and the introduction of a successful, social software subscription based revenue model. 

His first book is due for publication in April 2005, called Winning by Sharing is about the dramatic changes in the nature of work, the emergence of the network economy and its implications for corporations, employees and portfolio workers.  It describes the emergence of extensive, global networks of people who want to work and conduct business in completely different ways, which are at odds with the traditional nature of the firm and its command and control organisational structures.   This email address is being protected from spambots. You need JavaScript enabled to view it.

Ecademy Ltd, 12 St James Sq, Mayfair, London, SW1Y 4RB

Michael Mainelli, PhD FCCA FCMC MBCS CITP MSI, originally did aerospace and computing research followed by seven years as a partner in a large international accountancy practice before a spell as Corporate Development Director of Europe’s largest R&D organisation, the UK’s Defence Evaluation and Research Agency, and becoming a director of Z/Yen (This email address is being protected from spambots. You need JavaScript enabled to view it.).   Z/Yen was awarded a DTI Smart Award 2003 for its risk/reward prediction engine, PropheZy, while Michael was awarded IT Director of the Year 2004/2005 by the British Computer Society for Z/Yen’s work on PropheZy and VizZy.

Michael’s humorous risk/reward management novel, “Clean Business Cuisine: Now and Z/Yen”, written with Ian Harris, was published in 2000; it was a Sunday Times Book of the Week; Accountancy Age described it as “surprisingly funny considering it is written by a couple of accountants”.

Z/Yen Limited is a risk/reward management firm helping organisations make better choices.   Z/Yen undertakes strategy, finance, systems, marketing and intelligence projects in a wide variety of fields (www.zyen.com), such as developing an award-winning risk/reward prediction engine, building a global financial game, helping an environmental charity win a good governance award or benchmarking transaction costs across global investment banks. 

Z/Yen Limited, 5-7 St Helen’s Place, London EC3A 6AU, United Kingdom; tel: +44 (0) 207-562-9562.



[1]  B.A. Nardi, S Whittaker, E Isaacs, M Creech, J. Johnson, Jhainswort.  Integrating Communication and Information through ContactMap”,Communications of the ACM,  Volume 45,  Number 4, pages 89-95, ACM (April 2002).

[2] Liebowitz, Stan, “Re-thinking the Network Economy: The True Forces that Drive the Digital Marketplace”, AMACOM, 2002.

[3] Sarkar, Mitra Barun, Butler, Brian and Steinfield, Charles, “Intermediaries and Cybermediaries: A Continuing Role for Mediating Players in the Electronic Marketplace”, Journal of Computer Mediated Communication, Volume 1, Number 3 (1995).

[4] Mainelli, Michael, “Risk/Reward in Virtual Financial Communities", Information Services & Use, Volume 23, Number 1, pages 9-17, IOS Press (2003).

[5] Mainelli, Michael and Dibb, Sam, "Betting on the Future: Online Gambling Goes Mainstream Financial", Centre for the Study of Financial Innovation, Number 68 (December 2004), ISBN: 0-9545208-5-8, 34 pages.