Ello, a new social network, emerged from nowhere. Riding the waves of recent anti-Facebook sentiment, the key tenet in its manifesto is that it does not, and indeed never will, allow advertising on the platform. What it offers is both radical and mundane in equal measure. But more crucially, Ello has questioned the validity of three assumptions of today’s social networks: a sprawling ever-expanding user base, an ad-centric business model and a lax attitude towards privacy. Existing social network giants will need to do some soul searching.
The success of social networks is intimately tied to their ability to rapidly acquire and keep users. Twitter’s stock price recently rose by over 30 per cent after the company reported accelerated user growth and increase ad revenues in the second quarter. But sustained long-term user growth is optimistic. What happens when the messaging platform reaches saturation and global user growth starts to slow down?
Ello has reported that it has peaked at 40- to 50,000 new users an hour in the past week. While these users probably did not leave existing social networks to join, the company’s user boom shows that people are constantly searching for new ways to connect. New entrants are also not the only threats posed to today’s social giants. Saturation point may arrive sooner than many think as the likes of Facebook and Twitter come into contact with equally popular rivals in emerging markets such as China, Brazil and India.
By leveraging unthinkable amounts of social data, social networks such as Facebook are almost entirely dependent on advertising revenues. Market research company eMarketer calculates that Facebook constituted over 5% of total worldwide online advertising revenues in 2013.
If the market for online advertising were growing infinitely, the reliance on an online advertising business model would not be problematic. The reality is that aggregated ad revenue projections from social media companies outstrip the realistic market potential for the online advertising industry. It is therefore little surprise that pundits are calling ‘social’ tech companies overvalued.
Ello has alluded to operating on a freemium model in the future, which has its own set of problems. Though a more consumer-friendly model than advertising, charging for premium features may end up putting breaks on user growth. And growth is exactly what Ello would need to make enough money converting a small percentage of its user base into paying users.
But a key lesson is that social networks need to move beyond traditional business models and find both innovative and transparent ways to monetize their user base. Twitter, for example, is already doing this by venturing into the lucrative online shopping space. Currently trialling a “buy” button “for a small percentage of US users”, people can now directly buy goods from promoted tweets.
Mark Zuckerberg’s argument that privacy was ‘no longer a social norm’ seems almost unthinkable now. Apps such as Secret and Whisper are making privacy the key value proposition. More recently, Ello has captured people’s growing disdain towards being bombarded with adverts and the opaque way that many companies use our data.
The network effects of having a large free network mean that networks such as Facebook are hard to topple. After all, who wants to be on a social network unless all of your friends are on it? But that’s not the only thing that users now want. In future, companies will need to be more careful by informing users what data they are extracting and who they are passing it to.