Web 2.0 - it may be social, but is it profitable?

Executives from Digg, Foundry Group, Me.dium and other companies shared their thoughts on online advertising, while a Microsoft exec explained how many impressions it takes per month to make US$25 million. Why Digg’s founder hopes people are not using his site for work

Web 2.0 and social networking is drawing a lot of eyeballs and visitors, but is it likewise generating dollars?

That was a question asked during a panel discussion on the topic, Is Web 2.0 Sustainable, during Microsoft's MIX08 event in Las Vegas on March 6. Microsoft director of business development Don Dodge and a panel of social networking business experts considered where and how money can be made from online social communities.

Kevin Rose, founder of online content sharing community Digg, said success for him began modestly and grew rapidly as other online bloggers began to take notice of the modest community he began building. Rose started with a few hundred people who read his blog. He spent approximately US$10,000 to run his Digg community site during the first six months.

"Good articles were getting promoted in Digg and users were taking notice," he said. Webmasters on other sites would see traffic directed to and from Digg, blog about it, post Digg articles and tell other communities about it. "People see the traffic coming to blogs and sites and take notice of (where it came from) and tell people about it."

In general, social network communities don't generate a great deal of money, the panel noted. Most revenue generated by online social communities comes from advertising, but it can take a whole lot of page views by visitors to generate significant advertising dollars. Dodge presented a model that showed, at a CPM (cost per thousand impressions) rate of 50 cents, it takes 42 million impressions a month to generate US$250,000 or 4.17 billion impressions to generate US$25 million dollars. A CPM rate of US$10 takes two million impressions each month to generate US$250,000 or 208 million to generate US$25 million.

Ryan McIntyre, a venture capitalist for Foundry Group said audience targeting is key. "The more targeted you are the higher the CPM (rate) you can achieve," he said.

Dave McClure, a blogger and self-described Silicon Valley geek who hosts online community 500 Hats, warned that it's dangerous to rely too heavily on sponsorship and advertising to sustain your online community, particularly with the spectre of a significant downturn in the US economy. Such advertising dries up quickly.

Subscriptions and lead generation are other more creative and sustainable approaches, McClure said, although he admitted there are currently few successful paid subscription models that work.

"They have to be unique," he said. And subscription fees should be somewhere less than US$20 dollars a month, which most subscribers would consider "effectively free."

You should look to incorporate some element of subscriptions for under US$20 dollars," McClure advised.

However, Kimbal Musk, CEO of Me.dium, a company that is pioneering a new "social browser" tool warned of competitors seeded and funded by venture capitalists that often undermine subscription-based content models by offering low-cost or free high-quality content.

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