"A World Of Connections" - Special Report on Social Networking (The Economist)

A world of connectionsA special report on social networking

January 30th 2010

Networking.indd 1 18/1/10 11:17:45

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The Economist January 30th 2010 A special report on social networking 1

Online social networks are changing the way people communicate,work and play, and mostly for the better, says Martin Giles

is outside the United States.Although Facebook is the world’s big

gest social network, there are a number ofother globetrotting sites, such as MySpace,which concentrates on music and entertainment; LinkedIn, which targets careerminded professionals; and Twitter, a networking service that lets members sendout short, 140character messages called�tweets�. All of these appear in a rankingof the world’s most popular networks bytotal monthly web visits (see chart 1, nextpage), which also includes Orkut, a Googleowned service that is heavily used inIndia and Brazil, and QQ, which is big inChina. On top of these there are other bignational community sites such as Skyrockin France, VKontakte in Russia, and Cyworld in South Korea, as well as numeroussmaller social networks that appeal to speci�c interests such as Muxlim, aimed at theworld’s Muslims, and ResearchGATE,which connects scientists and researchers.

Going publicAll this shows just how far online communities have come. Until the mid1990s theywere largely ghettos for geeks who hid behind online aliases. Thanks to easytouseinterfaces and �negrained privacy controls, social networks have been transformed into vast public spaces where mil

A world of connections

THE annual meeting of the World Economic Forum in Davos, currently in

progress, is famous for making connections among the global great and good. Butwhen the delegates go home again, gettingeven a few of them together in a room becomes di�cult. To allow the leaders tokeep talking, the forum’s organisers lastyear launched a pilot version of a secureonline service where members can postminibiographies and other information,and create links with other users to formcollaborative working groups. Dubbed theWorld Electronic Community, or WEL

COM, the forum’s exclusive online network has only about 5,000 members.

But if any service deserves such a grandtitle it is surely Facebook, which celebratesits sixth birthday next month and is nowthe second most popular site on the internet after Google. The globe’s largest onlinesocial network boasts over 350m users�which, were it a nation, would make Facebook the world’s third most populous afterChina and India. That is not the only striking statistic associated with the business.Its users now post over 55m updates a dayon the site and share more than 3.5 billionpieces of content with one another everyweek. As it has grown like Topsy, the sitehas also expanded way beyond its American roots: today some 70% of its audience

An audio interview with the author is at

Economist.com/audiovideo

A list of sources is at

Economist.com/specialreports

Global swap shopsWhy social networks have grown so fast�and how Facebook has become so dominant.

Twitter’s transmittersThe magic of 140 characters. Page 5

Pro�ting from friendshipSocial networks have a better chance ofmaking money than their critics think. Page 6

A peach of an opportunitySmall businesses are using networks tobecome bigger. Page 8

Yammering away at the o�ceA distraction or a bonus? Page 9

Social contractsThe smart way to hire workers. Page 10

Privacy 2.0Give a little, take a little. Page 12

Towards a socialised stateThe joy of unlimited communication. Page 13

Also in this section

AcknowledgmentsThe author would like to express particular thanks fortheir help in preparing this special report to PeteBlackshaw of Nielsen; Ron Burt of the University ofChicago’s Booth School of Business; Bill Gurley ofBenchmark Capital; Keith Hampton of the University ofPennsylvania; Bradley Horowitz of Google; JasonKaufman of the Berkman Institute; Cameron Marlowe andEthan Beard of Facebook; D.J. Patil of LinkedIn; and ClaraShih of Hearsay Labs.

1

2 A special report on social networking The Economist January 30th 2010

2 lions of people now feel comfortable usingtheir real identities online. ComScore, amarketresearch �rm, reckons that last October big socialnetworking sites receivedover 800m visitors. �The social networks’greatest achievement has been to bring humanity into a place that was once cold andtechnological,� says Charlene Li of the Altimeter Group, a consulting �rm.

Their other great achievement has beento turn themselves into superb tools formass communication. Simply by updatinga personal page on Facebook or sendingout a tweet, users can let their network offriends�and sometimes the world�knowwhat is happening in their lives. Moreover,they can send out videos, pictures and lotsof other content with just a few clicks of amouse. �This represents a dramatic andpermanent upgrade in people’s ability tocommunicate with one another,� saysMarc Andreessen, a Silicon Valley veteranwho has invested in Facebook, Twitter andNing, an American �rm that hosts almost2m social networks for clients.

And people are making copious use ofthat ability. Nielsen, a marketresearch�rm, reckons that since February 2009they have been spending more time on socialnetworking sites than on email, andthe lead is getting bigger. Measured byhours spent on them per socialnetworkuser, the most avid online networkers arein Australia, followed by those in Britainand Italy (see chart 2). Last October Americans spent just under six hours sur�ng social networks, almost three times as muchas in the same month in 2007. And it isn’tjust youngsters who are friending and poking one another�Facebookspeak for making connections and saying hi to your pals.People of all ages are joining the networks

in ever greater numbers.Socialnetworking sites’ impressive

growth has attracted much attention because the sites have made people’s personal relationships more visible and quanti�able than ever before. They have alsobecome important vehicles for news andchannels of in�uence. Twitter regularlyscores headlines with its realtime updateson events like the Mumbai terrorist attacksand on the activities of its highpro�le users, who include rap stars, writers and royalty. And both Twitter and Facebookplayed a starring role in the online campaign strategy that helped sweep BarackObama to victory in the presidential race.

Delivery timeBut like Mr Obama, social networks havealso generated great expectations alongthe way on which they must now deliver.They need to prove to the world that theyare here to stay. They must demonstratethat they are capable of generating the returns that justify the lofty valuations investors have given them. And they need to doall this while also reassuring users thattheir privacy will not be violated in thepursuit of pro�t.

In the business world there has alsobeen much hype around something called�Enterprise 2.0�, a term coined to describee�orts to bring technologies such as socialnetworks and blogs into the workplace.Fans claim that new socialnetworking offerings now being developed for the corporate world will create huge bene�ts forbusinesses. Among those being touted areservices such as Yammer, which producesa corporate version of Twitter, and Chatter,a socialnetworking service that has beendeveloped by Salesforce.com.

To sceptics all this talk of twittering,

yammering and chattering smacks of another internet bubble in the making. Theyargue that even a huge social network suchas Facebook will struggle to make moneybecause �ckle networkers will not stay inone place for long, pointing to the exampleof MySpace, which was once all the ragebut has now become a shadow of its former self. Last year the site, which is ownedby News Corp, installed a new boss and�red 45% of its sta� as part of a plan to revive its fortunes. Critics also say that thenetworks’ advertisingdriven businessmodel is �awed.

Within companies there is plenty ofdoubt about the bene�ts of online socialnetworking in the o�ce. A survey of 1,400chief information o�cers conducted lastyear by Robert Half Technology, a recruitment �rm, found that only onetenth ofthem gave employees full access to suchnetworks during the day, and that manywere blocking Facebook and Twitter altogether. The executives’ biggest concernwas that social networking would lead tosocial notworking, with employees usingthe sites to chat with friends instead of doing their jobs. Some bosses also fretted thatthe sites would be used to leak sensitivecorporate information.

This special report will examine theseissues in detail. It will argue that social networks are more robust than their criticsthink, though not every site will prosper,and that socialnetworking technologiesare creating considerable bene�ts for thebusinesses that embrace them, whatevertheir size. Lastly, it will contend that this isjust the beginning of an exciting new era ofglobal interconnectedness that will spreadideas and innovations around the worldfaster than ever before. 7

1Who will be my friend?

Source: comScore

Social-networking sites, total unique visitorsOctober 2009, m

430.2

0 50 100 150 200

Facebook

Windows Live

MySpace

Baidu

Twitter

Orkut

Hi5

QQ

LinkedIn

deviantART

2Sociable types

Source: Nielsen

Average time spent on social-networking sitesOctober 2009, hours per user

0 2 4 6 8

Australia

Britain

Italy

United States

Spain

South Korea

Brazil

Germany

France

Japan


1

FACEBOOK has not only helped peopleto make zillions of new connections, it

has also inspired a screenplay. A �lm called�The Social Network�, due to be releasedlater this year, will trace the site’s meteoricrise from its foundation in 2004 to becomeking of the socialnetworking world. Howhave social networks managed to shoot tosuch prominence that they are already being given the Hollywood treatment?

The most important reason for theirphenomenal growth is something calledthe �network e�ect�. Originally coined todescribe the rapid spread of telephones,this states that the value of a communications network to its users rises exponentially with the number of people connected to it. This implies that the audience of asocial network will grow slowly at �rst,then explode once it passes a certain point.Je� Weiner, the chief executive of LinkedIn, which now has some 58m members,says it took the company 16 months toreach its �rst million users, whereas themost recent additional million came onboard in only 11 days. Facebook has had asimilar experience. It took almost �veyears to drum up its �rst 150m users, butjust eight months to double that number(see chart 3).

The network e�ect has been ampli�edby the internet’s global reach. Gina Bianchini, the boss of Ning, says that withintwo months of the �rm’s launch in 2005people from 80 countries had signed up tonetworks that it had created on behalf ofothers. The Ninghosted network of 50Cent, a rapper, has 490,000 members theworld over, from Australia to Zambia.Some �rms have specially tailored theirservice to broaden its international appeal.Facebook, which is available in 70 di�erentlanguages, o�ers Facebook Lite, a strippeddown version of its main site that is popular in countries without fast broadbandconnections.

All this has allowed social sites to growquickly without having to spend a fortuneon marketing. But it has also created a hugetechnical challenge. Most web businessescan add servers and databases in a fairlylinear fashion as they acquire more users,but social networks �nd it almost impossible to gauge exactly how much computing

power they will need because of the network e�ect. Some sites set up in the 1990ssu�ered a series of outages as they struggled to keep up with demand.

The latest crop of networks, most ofwhich were launched �ve or six years ago,have bene�ted from a dramatic fall in thecost of hardware needed to store and process data. They have also been able to usefree, opensource software to build systems that scale quickly and easily. Andthey have come up with some tailormadesolutions to cope with rapid growth.

Thanks for the memoryAt Facebook, for example, the �rm’s software engineers built a system called MultiFeed that searches databases nearinstantly for relevant news from a person’sfriends. This has allowed the network toadd many millions of new users withoutdamaging its ability to provide a constantstream of uptodate news to people’spages. In another feat of technical wizardry, its engineers have quintupled the performance of an opensource memory system called memcached, which allowsfrequently used data to be retrieved fasterthan if stored in a database.

Such creativity has enabled the networks to cope with a tsunami of data,many of which are being produced by another set of technologies that have alsohelped to drive the growth of social networking. Personal digital cameras and video recorders have greatly reduced the costof producing highquality images and

made it easy to publish them online. Over2.5 billion photos a month are uploaded toFacebook, making it one of the largest photosharing sites on the web. In Asia videocontent is hugely popular on services suchas Cyworld.

One reason that people are willing toshare so much private information on social networks is that many of the sites havedeveloped detailed sets of privacy controlsthat let users decide what others can andcannot see. This process has had its hiccups. Facebook, for instance, got into hotwater when in late 2007 it launched a service called Beacon that tracked users’ purchases on some other websites and automatically alerted their friends to them.After a furious reaction from users, Beaconwas �rst modi�ed and then buried forgood. Last year Facebook was named oneof America’s 20 most trusted companieson privacy issues by TRUSTe, an organisation that rates companies’ online privacypolicies�though there was another outcryin late 2009 when it modi�ed its privacypolicy yet again.

Another reason that the networks havebecome so popular is that there is so muchto do on them, mostly because companiessuch as Facebook and MySpace have allowed independent developers to createprograms, known as �apps�, which run ontheir networks and tap into their treasuretrove of customer data. These apps rangefrom the inane to the inspiring. SuperPoke!, for example, lets people �spank�,�grope� and �kiss� their Facebook friendsonline, whereas Causes enables them tocreate virtual groups to pursue charitableendeavours.

This division of labour pays dividendsall round. Developers get access to the networks’ huge audience, network users enjoy free access to thousands of clever appsand the networks acquire more users because the apps make their sites more addictive. Facebook now has over 1m developers creating software for it and its onlinedirectory contains over 500,000 apps.Twitter has spawned over 50,000 apps, including o�erings from �rms such as Twitpic, which lets people post photos to theirTwitter feeds, and Twitscoop, which highlights popular topics being talked about on

Global swap shops

Why social networks have grown so fast�and how Facebook has become so dominant

3Facelift

Source: Facebook

Facebook, number of registered users, m

0

50

100

150

200

250

UnitedStates

Rest of the world

2004 05 06 07 08 09


2

1

the service at any moment. That leaves the networks free to con

centrate on innovations that encourageeven more sharing. The most striking ofthese is Facebook Connect, which thecompany launched just over a year ago.Mark Zuckerberg, the company’s founder,describes this as �inverting the model� ofsocial networking. Instead of being obliged to come to Facebook’s website, userscan take their Facebook identity and network of friends to other websites and todevices such as game consoles. This meansthey no longer have to create a new onlinegroup of friends each time they visit a different destination on the web.

The way it works is that Facebook’spartner �rms install Connect buttons ontheir websites and devices which give Facebook users automatic access to information about their friends’ activities. AtHu�Po Social News, a site run by the Huf�ngton Post, a wellknown American blog,Facebook users can see what their friendshave been reading and exchange storiesand comments with them. At Net�ix,which hires out DVDs and Bluray discs bypost, they can see which �lms their friendshave watched and what other people havewritten about them. Facebook says thereare now some 80,000 Connectenabledwebsites and devices, such as Microsoft’sXbox console.

Connect is just the latest in a long line ofinnovations that have helped to turn Facebook into the dominant global social network. It also re�ects the scale of Mr Zuckerberg’s ambition. �For the social web, Ithink the killer app is Facebook,� he says.His goal is to connect as much of theworld’s population as possible via the network and then to get its users to use it as

their main doorway to the internet. He isso keen to realise his vision that he is saidto have turned down o�ers to buy the company which would have made him an instant billionaire.

Mr Zuckerberg also wants Facebook tomap out as much as possible of what people in the socialnetworking industry referto as the �social graph�, a fancy name for amodel of nodes and links in which nodesare people and the links between themrepresent friendships. He thinks that therelationships between people and objectssuch as their o�ce buildings, schools andother things can be represented in thesame way. The more people that join Facebook, the greater the insights the businesswill have into the nature of these relationships. And the more it knows about whatmatters to people, the better it should be atpro�ting from that knowledge.

Some people think that Facebook’s network e�ect is now so great that it will beimpossible to knock it o� its pedestal asthe world’s largest online meeting place.

�It’s basically Facebook’s to lose�, saysMark Pincus, the chief executive of Zynga,a socialgaming �rm that develops apps torun on the service.

Not so long ago, exactly the same thingmight have been said of MySpace. The sitewas riding high when News Corp bought itfor $580m in 2005. But a few years later itwas going downhill (see chart 4). Some seethis as a sign that large social networks aredestined to disintegrate when they become too big. But there was nothing inevitable about MySpace’s decline: the sitesimply made a series of strategic mistakes.Faced with demanding revenue targetsfrom News Corp, it neglected its technology and added new features such as joblistings and horoscopes that drove webtra�c but had nothing to do with its coreusers’ interest in music, �lm and other entertainment. As the site became more cluttered than a teenager’s bedroom, some ofthose users logged o� for good. MySpace’sshare of the American socialnetworkingmarket fell from 67% in September 2008 to30% in the same month of last year, according to Hitwise, a research �rm.

Network defectsOwen Van Natta, the network’s new boss,has already got rid of many of the productsthat were added and brought in a newmanagement team. MySpace is also cleaning up its pages and developing tools thatwill let its 100m users search its huge rangeof content more e�ciently. And it hasstopped pursuing Facebook to concentrateon a strategy that Mr Van Natta describesas �o�ering people the ability to engage incontent and socialise at the same time�.

The idea is that people with, say, similartastes in music will connect with one another on MySpace and then swap othermaterial too. Last year the �rm boughtiLike, which allows users to share playlists,and Imeem, a musicstreaming service. Itsnew focus, Mr Van Natta insists, will allowMySpace to rise Phoenixlike from themess in which he found it. But the�admittedly brief�history of social networkingsuggests that once a network e�ect hasgone into reverse it rarely returns to form.

Facebook, for its part, is unlikely tomake the same strategic mistakes as MySpace because it pays much more attention to the plumbing that connects peoplewith each other than to the content that�ows through it. �The people at Facebookare essentially utilitarians,� explains MattCohler, a former employee who is now apartner at Benchmark Capital, a venturecapital �rm. �They want to give people the

4MySpace invader

Source: comScore

Social-networking sitesUnique visitors in America, m

2004 05 06 07 08 090

20

40

60

80

100

MySpace

Facebook


2 very best technology for sharing and thenget out of their way.� That technology is sogood that people are willing to stickaround on the site as it grows, rather thanabandoning it for something edgier.

Another reason for optimism is the�rm’s hackertype culture which has produced the innovations that have made theservice so addictive. Mike Schroepfer, Facebook’s head of engineering, says that oneof its mottos is �move fast and break stu��.What matters is getting fresh products outto users quickly, even if they do not alwayswork as intended.

To help generate new ideas, the �rmholds allnight �hackathons� at which engineers work on their pet projects, fuelledby Chinese takeaways and energy drinks.It also gives its people plenty of freedom totry out their ideas on Facebook’s site. MrSchroepfer is particularly proud of the factthat the company has only one engineerfor every 1.2m users.

It is always possible that a betterplumber could turn up, which explainswhy Facebook’s bosses are so wary of potential competitors. The network has beenwatching Twitter closely and even tried to

buy it, but was rebu�ed. Despite their differences, both �rms are powerful communication tools that compete for people’s attention (see box). They also have something else in common: an enormous pricetag. Last year Twitter raised a round of venture capital that valued the company at $1billion, even though it had yet to turn a pro�t. And an investment in the preferenceshares of Facebook by a Russian companyvalued it at $10 billion. Such astronomicalsums are a sign that investors think thebest social networks will become bigmoneyspinners. 7

BIZ STONE, one of Twitter’s cofounders, uses the term �social alchemy� to

describe the way in which short, seemingly inconsequential 140character messages are often transformed into something of real value. Imagine, he says, thatyou are having a drink at an airport barwaiting to catch your �ight. You send out atweet explaining where you are and whatyou are drinking. Perhaps you get no response. But it is also possible that a friendwho is �following� you on Twitter happens to be in the airport at the same time,sees your tweet and comes over to say hello. Thus what would otherwise have beena solitary moment is magically transformed into a pleasant encounter.

Such serendipity helped Twitter attract58m web visitors in October last year, according to comScore. Recently its growthappears to have faltered in America, butthe service is still expanding in countriessuch as Japan and Germany. This has ledto speculation that it could eventuallymake a dent in Facebook’s fortunes, eventhough sizewise it is not in the sameleague. Those who see a looming clashnote that both companies are in the business of helping people to share information, and both have a realtime element totheir services.

That is true, but the services di�er intwo important respects. The �rst is the nature of the relationships that underliethem. On Facebook, users can communicate directly only if one of them hasagreed to be a �friend� of the other. OnTwitter, people can sign up to follow any

public tweets they like. The service, whichboasts Ashton Kutcher (4.3m followers)and Oprah Winfrey (3m) among its mostpopular users, is in essence a broadcastingsystem that lets users transmit shortbursts of information to lots of strangersas well as to their pals. Facebook, for itspart, is more of an intimate, continuingconversation between friends.

This di�erence is revealed in researchconducted by Mikolaj Jan Piskorski, a professor at Harvard Business School, andone of his MBA students, Bill Heil. Theysurveyed just over 300,000 Twitter usersin May 2009 and found that more thanhalf of them tweeted less than once every74 days. They also discovered that themost proli�c 10% of twitterers accountedfor 90% of all tweets. On other online so

cial networks the most active users typically produce just 30% of all content. Another survey published in June bySysomos, a research �rm that had analysed 11.5m Twitter accounts, found thatone in �ve people that were signed up tothe service had never posted anything.

Another big di�erence between Twitter and Facebook is in the kind of contentthat gets sent over their networks. Facebook allows people to exchange videos,photos and other material, whereas Twitter is partblog, part email. �There’s a realdi�erence here between the power ofmultimedia and the power of text,� saysDom Sagolla, the author of a book aboutthe art of twittering.

Even so, there are some tensions between the two services. Last year, after itstakeover talks with Twitter stalled, Facebook introduced several Twitterlikechanges to make it more attractive for realtime postings. It also gave more visibilityto its pages for athletes, celebrities andmusicians and lifted the limits on themaximum number of fans that they couldhave on the site.

Still, Mr Stone says he sees Twitter asmore akin to an out�t like Google than toFacebook. He describes the business as�an information company� whose usersare keen to �nd out answers to what ishappening in the world. The billions oftweets that Twitter is gathering up couldcertainly be the basis for a vast, searchablearchive. The challenge facing Mr Stoneand his colleagues is to �nd smart ways oftransforming those raw data into pro�ts.

The magic of 140 characters Twitter’s transmitters


1

ENTREPRENEURS in Silicon Valley, onlyhalfjokingly, call it the URL strategy.

The three letters usually stand for UniformResource Locator�the unique address ofany �le that is accessible via the internet.But in the world of internet startups, URL

has another meaning: Ubiquity �rst, Revenue Later. This pretty much describes thestrategy of most big online social networks, which over the past few years haveconcentrated on piling on users rather thanworrying about pro�ts. That has allowedthem to build huge followings, but it hasalso raised a big questionmark over theirability to make money from the audiencesthey have put together.

At issue is whether the socialnetworking industry can come up with a wildlysuccessful form of advertising that propelsit to stardom in the same way that Googlehas been able to make billions of dollarsfrom the targeted ads that run alongsidethe search results it serves up. Withoutsuch a formula, runs the argument, socialnetworks such as Facebook will neveramount to much.

Doubters claim that the networks facetwo big handicaps. The �rst is that peoplelogged into socialnetworking sites arethere to hang out with their friends, so theywill pay no attention to ads. The second isthat because the sites let users generatetheir own content, they will �nd it hard toattract advertisers because brands will notwant to take the risk of appearing alongside examples of profanity, obscenity ornudity�or all three at once.

Elusive clickthroughsThe sceptics have some evidence on theirside. Clickthrough rates on display ads atsites such as Facebook are a small fractionof those that Google commands for itshighly targeted search ads. And althoughmarketers love to promote their brands viatheir own (free) pages on social sites, someare wary of buying ads on them becauseof those abysmal clickthrough rates. �Wespend the majority of our time engagingwith people on these networks, not advertising on them,� says Scott Monty, the headof Ford’s socialmedia activities. Althoughuser numbers were sharply up last year,the socialnetworking industry’s revenues

in America, its biggest advertising market,rose only by a modest 4% to $1.2 billion,says eMarketer, a marketresearch �rm.

That was still an achievement, becausethe total online advertising market shrankin 2009. The picture would have been evenbrighter without MySpace, whose revenues are thought to have fallen last year.Another drop seems likely this year whena deal that MySpace struck with Google tohandle search advertising on its site comesup for renewal. Assuming a new agreement can be reached, it will probably beless generous than the old one, which offered MySpace $900m over three years if ithit certain minimum tra�c targets.

The broader outlook for networkingsites is more encouraging. This yeareMarketer expects revenues to grow byover 7% in spite of MySpace’s predicament.ComScore, another marketresearch �rm,has found that one in �ve display adsviewed by American web users last Juneran on socialnetworking sites, with MySpace still accounting for the biggest chunkof the total. Another study in Britain lastAugust came up with a similar proportion,with telecoms companies and retailersproviding a big chunk of the business.

Why are the networks becoming morepopular when their clickthrough rates areso low? One reason is that advertisers arebeing drawn to the leading sites by theirsheer scale. �Facebook’s audience is biggerthan any TV network that has ever existedon the face of the earth,� says RandallRothenberg, the head of the Interactive Advertising Bureau (IAB). Another thing thathas attracted companies is the networks’ability to target ads with laserlike precision, thanks to the data they hold on theirusers’ ages, gender, interests and so forth.Although there are still lingering concernsabout brands appearing next to racy content, �rms seem more willing to run thisrisk now that the networks’ advertisingproposition has become more compelling.

The other reason more money is heading the networks’ way is that some advertisers are seeing a great return on their investment. Michael Lynton, the boss ofSony Pictures Entertainment, a �lm studio,says he was deeply sceptical about usingsocialnetworking sites for advertising. In

deed, Mr Lynton is famous for having oncedeclared that nothing good had ever comefrom the internet, which was a jab at online piracy of �lm studios’ content.

But something good did come from anonline experiment that Sony conductedlast summer. The studio ran a series of adson Facebook promoting three of its �lmsafter they had just featured in a traditionaltelevision campaign. �District 9� wasaimed at young men, �Julie & Julia� at middleaged women and �The Ugly Truth� atyounger women. Awareness of the �lmswas measured after the TV ads had runand then again after the web ads had run.Each time the online ads signi�cantlyboosted awareness. Mr Lynton says he isnow convinced that social networks areradically altering the marketing landscape.

Rock, babyAnother �rm that has become convincedof that is Toyota, which last year workedwith MySpace to create a competitioncalled �Rock the Space� in which bandswere invited to send in demo tapes of theirmusic. Some 18,000 entries were receivedand MySpace’s users voted for the besttape, with a record contract as the prize forthe winning band. Doug Frisbie, who oversees socialmedia marketing for Toyota’sAmerican operations, says the promotionexceeded the company’s hopes for brand

Pro�ting from friendship

Social networks have a better chance of making money than their critics think


2 promotion �by a factor of several times.� Both �rms’ experience suggests that

people using social networks are morelikely to engage with brands than scepticsthink. Mr Lynton also reckons that the networks produce a powerful viral marketinge�ect because friends use them to tell oneanother about things they have discovered. Marketers have long known thatsuch recommendations are hugely important in purchase decisions (see chart 5). Social networks are harnessing technologyto accelerate this process by, for example,automatically alerting a person’s friendswhen he or she signs up to become the fanof a particular brand or product on a site.

The big question is whether all this willtranslate into an advertising bonanza.�There is a pretty strong argument to bemade that social networks are worth morethan they are being given credit for,� saysAndrew Lipsman, an analyst at comScore.But he cautions that the advertising industry may be slow to recognise the shift thatis taking place. In a bid to speed things up,Facebook has struck an alliance with Nielsen to create a series of benchmarks formeasuring the impact of socialnetworkadvertising on brands. Sheryl Sandberg,Facebook’s chief operating o�cer, says thiswill allow companies to get feedback onthe e�ectiveness of their campaigns muchfaster than before.

Facebook has also been experimentingwith new kinds of ads designed to drawpeople in, including some with embeddedonline polls or videos to which commentscan be added. So far it has not come upwith a killer format, but that does not seemto be holding it back. The company doesnot reveal numbers, but its revenues lastyear are thought to have been at least$500m and quite possibly more, whichhelped it to turn cash�ow positive inmid2009. Against the backdrop of a worldeconomy in recession and a dire advertising market, that is quite an achievement. Italso suggests that Facebook can do well using a variety of di�erent ad formats ratherthan a single, winning one. �There doesn’thave to be one enormous, oh my God hit,�says the IAB’s Mr Rothenberg.

Fun and gainsNor does there have to be just one advertisingdriven business model. In Asia several�rms such as Japan’s GREE and China’sTencent, which owns QQ, a service that includes a big online social network, are already making healthy pro�ts from sales ofgames and virtual goods. In 2008 Tencent,which is listed on the Hong Kong Stock Ex

change, reported revenues of just over $1billion, with $720m coming from onlinegaming and sales of items such as digitalswords and other virtual goods. ManyAsian networks such as South Korea’s Cyworld and Japan’s Mixi also mint moneyby selling users custom backgrounds andother paraphernalia that allow them topersonalise their network pages.

Inspired by this, �rms elsewhere areembracing elements of the Asian model.Hi5, which is based in America and has60m members around the world, haslaunched a number of games on its platform and created its own virtual currency,called Hi5 coins, for use in them. Alex StJohn, the �rm’s chief technology o�cer,says that gaming and advertising can easily be combined by, for instance, persuading an advertiser to sponsor a currencyused by players.

Ning is targeting gifts rather than games.In October it launched an initiative that allows people who have set up networks onits system to sell customised digital itemsto their members. These cost anythingfrom 50 cents to $10, and over 400,000 ofthem are now being exchanged everymonth, with Ning splitting the pro�t equally with its customers. This will add to therevenues that it makes from ad sales andnetworkmanagement fees. Even Facebook, with its focus on advertising, has avirtual warehouse of birthday cakes,champagne bottles and other goodies.

The beauty of this business for socialnetworks is that the cost of producing andstoring virtual inventory is minimal. Moreover, because these are closed markets,networks can �x prices at levels that generate fat margins. To some, the notion that

big money can be made from selling makebelieve items may seem bizarre. But thepractice replicates the physical presentsthat people give to one another to cementrelationships in the real world. AlthoughAsia remains by far the biggest market fordigital knickknacks, Inside Network, a research �rm, has estimated that sales of virtual wares in America on many di�erentkinds of websites reached $1 billion lastyear and could grow to $1.6 billion in 2010.

Plain or de luxe?Another business model that has provedlucrative involves charging users for premium services. The networks that havebeen best at this have been the businessoriented kind. LinkedIn, for example, provides a free basic service, but asks users topay a monthly subscription fee of up to$500 for extras, such as being able to send alarger number of introductory emails toother people on the site. The �rm, which issaid to have revenues of over $100m a year,also makes money by charging companiesfor online tools that help them track downtalent. This �freemium� model plus ahealthy dose of advertising from bigbrands aiming to reach its a�uent audience has helped the network to turn a pro�t for several years running.

Social networks have also bene�tedfrom search engines’ desire to get theirhands on more content. Twitter signed lucrative deals with Google and Microsoft’sBing search service in October that allowboth companies to include tweets fromTwitter’s database in their search results.Thanks to these transactions the networkis rumoured to have made a small pro�tlast year, though it will not con�rm this.

This year it plans to start making moremoney in two ways. The �rst involvescharging �rms for services such as tools foranalysing discussions on Twitter and forauthenticated accounts that let peopleknow tweets they are receiving come froma genuine business. It is also hoping to pro�t from advertising by serving up targetedads in the way Google does. Biz Stone, oneof the �rm’s cofounders, reckons thatTwitter’s fans will be receptive to these because they already use the service to seekout information from others. They regularly share links to commercial sites and onesurvey last year found that as people twittered, they mentioned speci�c brands orproducts in 20% of their updates. That explains why Twitter and other social networks have caught the attention of millions of small businesses, as well asthousands of big ones. 7

5In friends we trust

Source: Nielsen

Global consumer trust in advertising, Q1 2009% of respondents

0 20 40 60 80 100

Friends’recommendations

Brand websites

Consumer forums

Editorial content

Brandsponsorships

Television

Newspapers

Magazines

Radio

Billboards

Trust completely Trust somewhat


1

�HEY �rst peaches of the season arehere. Come and get your peach pie

@10am.� Simple tweets like that havehelped Mission Pie, a small shop in SanFrancisco, drum up interest in its mouthwatering array of sweet and savoury pies.As well as twittering about its wares, thestore also alerts customers to poetry readings and other events it organises. KrystinRubin, a coowner of Mission Pie, says thebusiness had just 150 or so followers for awhile after one of its bakers started sending out tweets almost a year ago. Then thatnumber suddenly shot up to over 1,000.Over the past few months business hasbeen very brisk and Ms Rubin reckonsTwitter deserves part of the credit. �It has asort of street credibility that’s not therewith traditional media,� she says.

Other companies have discovered thesame thing. Kogi BBQ, which has severaltrucks serving Korean food in Los Angeles,now has over 52,000 followers on Twitterand uses the service to tell customerswhere they can �nd its vans each day.Sprinkles, a cupcake bakery with stores allover America and nearly 94,000 fans of itsFacebook page, posts a password to thatpage each day which can be redeemed fora free cake by a certain number of visitorsto its shops. Such o�ers can attract a lot ofattention. A survey of 1,000 heavy users ofsocial networks and other digital mediaconducted in August 2009 by Razor�sh, anadvertising agency, found that 44% ofthose following brands on Twitter saidthey did so because of the exclusive dealsthe �rms o�ered to users.

As Kogi BBQ and Sprinkles show, socialnetworks are arguably having an evengreater impact on small businesses thanon the big league. By giving entrepreneursfree access to their audience, services such

as Twitter and Facebook are putting corporate tiddlers on a par with behemothssuch as Starbucks and Dell when it comesto broadcasting messages to a mass market. They have also created what SteveHasker of Nielsen calls �the world’s biggest, fastest and most dynamic focusgroups�, which can be a boon to entrepreneurs without fat research budgets.

Some small businesses are already using social networks to generate new ideas.After spending time on Twitter, employeesat Cordarounds.com, a small Americanclothing company, noticed that many folktwittering in their area were using bicyclesto get to work. So the �rm produced a newline of trousers, dubbed �biketoworkpants�, with builtin re�ective materialsthat make wearers more visible to tra�cwhile cycling at night. And of course itused tweets to get the word out about itsnew creations.

�Follow me on Twitter� signs are appearing on the doors and windows ofsmall businesses in other countries too. Asurvey last year by O2, a mobilephone operator, found that some 17% of Britain’ssmall businesses were using Twitter. Manyof the �rms that responded said they weredoing this to attract new customers. Somereckoned they had been able to save up to£5,000 (over $8,000) a year by cutting outother forms of marketing in favour of thenetworking service.

Charging for batteriesThe connections made possible by socialnetworks are helping to create new businesses as well as promote existing ones.When Henk van Ess, a Dutch technologyconsultant, posted a complaint about theshort lifespan of his iPhone’s battery onLinkedIn a couple of years ago, one re

spondent suggested that he contact ChinaBAK Battery, which produces a small,plugin battery for the iPhone. Impressedwith the product, Mr Van Ess told members of his online network about it andwas soon handling orders for them. After awhile he formed his own company,3GJUICE, to produce a plugin unit for theiPhone that incorporates the Chinese�rm’s battery.

Mr Van Ess’s �rm is tiny, but social networks such as Facebook and MySpacehave also served as launching pads formuch bigger out�ts. Among the largest ofthese are companies such as Zynga, Play�sh and Playdom, whose popular onlinegames run on the big networks’ platforms.Some of these games, such as Zynga’s�FarmVille�, have attracted millions ofplayers and produced mountains of money for their creators. Zynga says it has beenpro�table almost since it opened in 2007,and last month the business attracted aninvestment of $180m from a bunch ofprominent �nanciers convinced of its potential. Many of the socialgames companies are on a hiring binge, creating hundreds of new jobs at a time when theeconomy around them is in the doldrums.Their experience provides an insight intohow social networks can help propel smallbusinesses to much bigger things.

Like most games, the ones produced byZynga and its peers appeal to people’s natural competitive instincts. Leader boardsand a host of other features allow playersto show o� their status within a game totheir friends. But the games also encouragelots of cooperation among players, whocan build rapport by, say, sending virtualgifts to each other or handing virtual currency to new players when they join agame. �The best virtual goods have real

A peach of an opportunity

Small businesses are using networks to become bigger


2

1

currency,� says Mark Pincus, Zynga’s boss.He reckons that the games have become sopopular because they combine fun withthe various ways to strengthen relationships that Facebook and other networkshave brought online.

Better than the real thingSocial games have also become extraordinarily popular because they cleverly exploit those relationships. Once someonehas signed up for, say, �Ma�a Wars�, another Zynga invention, they are urged to invitetheir friends to join too. And players’ gruesome successes in such games are regularly posted to their personal page on Facebook, which can be seen by all of theirfriends. Thanks to such wheezes, onlinegames bene�t from a powerful network effect. �Café World�, which gives users theopportunity to run their own virtual restaurant, launched on Facebook at the endof September and within a week had attracted a mindboggling 10m players.

This astonishing growth has beenhelped by the fact that social games are freeto play. The companies make their moneyby selling digital goods in the games, bycarrying advertising and by getting playersto sign up for marketing promotions. Surprising though this may seem to some, virtual goods such as swords, tractors andeven digital boyfriends are much in demand. After users of its �Sorority Life�game complained in an online forum thatthe game lacked virtual men they coulddate, Playdom quickly introduced somelast November. Over 10m of the boyfriends were promptly snapped up, with afew players buying as many as 500 each.Some paid for their digital darlings withvirtual credits won in the game, but othersstumped up over $5 a time for their beaux.

The rise of the socialgaming �rms hasnot been without controversy. Last yearZynga came under �re from TechCrunch, aSilicon Valley blog, for allowing misleading marketing o�ers to run on its site. The

�rm subsequently removed them. Butsuch hiccups have not dented interest insocial gaming: last November Play�sh wassnapped up by Electronic Arts, a big videogame publisher that thinks the business isgoing to be huge. It may well be right. ThinkEquity, an investment bank, reckons thatrevenues in America from social gamescould hit $2.2 billion by 2012, a big leapfrom last year’s $375m.

Admittedly this is an extreme exampleof the bene�ts social networks can bring tosmall businesses. Rewards for out�ts suchas Mission Pie will be far more modest. Butif they were added up across an entireeconomy, they could have a signi�cant effect on growth. What a pity, then, thatmany small �rms are reluctant to take theplunge into the socialnetworking world.A survey of 500 small businesses in America conducted by Citibank last Octoberfound that most of them had not used online networks at all because they thoughtthey would be a waste of time. 7

AN ASTONISHING amount of time is being wasted on investigating the

amount of time being wasted on socialnetworks. Studies regularly claim that theuse of Twitter, Facebook and other suchservices poses a threat to corporate wealth.One published last year by Morse, an ITcompany, estimated that personal use ofsocial networks during the working daywas costing the British economy almost£1.4 billion ($2.3 billion) a year in lost productivity. Another, by Nucleus Research,an American �rm, concluded that if companies banned employees from using Facebook while at work, their productivitywould improve by 1.5%.

This assumes that people would actually work rather than �nd some other way topass the time they have to spare. In thesame vein, perhaps companies shouldalso ban water coolers and prohibit peoplesending emails to their friends. The assumption that �rms can block access to thenetworks altogether is also rather heroic.Some employees now have webenabledsmart phones, so trying to stop them fromsur�ng their favourite sites will be anotherwaste of time.

To veterans of the technology industry,

the fuss over social networking sounds alltoo familiar. Whenever a new and disruptive technology appears, there is initially abacklash against it before it becomesbroadly accepted. Even a seemingly innocent application such as Microsoft’s Excelspreadsheet was greeted with much scepticism because managers assumed workerswould use it to make lists of their fantasyfootball teams or their weekend shopping�which is exactly what they did andstill do. But along the way, Excel has alsobecome an invaluable business tool.

Social networks were not designed forbusinesses as Excel was. Instead they arepart of a growing trend known as the �consumerisation� of IT. Thanks to companiessuch as Apple, Google and Facebook, people now have access to communicationsdevices and web applications that are often far superior to those o�ered by theiremployers. And thanks to cloud computing, which allows all sorts of computingservices to be delivered via the internet,they can use these devices and applications pretty much wherever they like, including in o�ces and factories. This trendis accelerating as more digitally savvyyoungsters enter the workforce with their

iPhones at the ready.Moreover, as people become increas

ingly used to sharing and collaboratingoutside the workplace, they are coming toexpect �rms to be more open and collaborative places too. Many companies are organised into strictly separate regional, productline and functional �silos�, making ithard for people to share information beyond their immediate colleagues. And therise of vast, globespanning corporate empires with hundreds of thousands of employees has left many folk isolated in smallwork groups run by managers who careonly about their particular �efs. As a result,e�orts are duplicated and valuable information ends up being hoarded, not shared.

I spy ASpaceIn the corporate world such hoarding leadsto lost pro�ts. In the world of intelligence itcan lead to lost lives. The recent unsuccessful attempt by a terrorist to blow up anAmerican aircraft in �ight has highlightedthe need for better informationsharingamong security agencies. To improve matters, the intelligence community is developing a system called ASpace, a sort ofFacebook for spies that holds pro�les of

Yammering away at the o�ce

A distraction or a bonus?


2

1

WHEN it comes to online networking,cyberspace often mimics the real

world. There are networks such as Facebook and MySpace that are mainly for socialising with friends, and there are otherssuch as LinkedIn, France’s Viadeo andGermany’s Xing that concentrate onworkrelated matters. The sites aimed atprofessionals, although much smallerthan the ones for hanging out withfriends, are already having a big e�ect onlabour markets.

In many ways the world of commerceis a perfect place for a social network to�ourish. Doing business, after all, boilsdown to managing a complex web of relationships with customers, suppliers andothers. Professional networks make it easier for people to maintain such relationships and to forge new ones. LinkedIn, forinstance, has over 500,000 groups�somebetter than others�on specialised subjects that people can join to share ideasand make new contacts.

Such connections may prove usefullater on: research has shown that the moredistant members of people’s networks areoften the best source of new job leads.Jobhunters can also use their networks togather intelligence about prospective employers and to solicit recommendationsthat strengthen their candidacies, andthey can bene�t from some of the career

tools that networks provide. LinkedIn, forexample, is developing a service that aggregates data it holds to show career pathsfor certain professions. So someone whowants to become, say, head of softwareengineering at a large company in tenyears’ time can see what sort of jobs haveled on to such roles for others.

Online networks have attracted plentyof attention from corporate recruiters too.Olivier Fecherolle, the head of Viadeo’sFrench operations, says that for an employer the networks have several advantages over online job boards. One is thatpeople visit them frequently, so pro�leson the sites tend to be more uptodatethan those on job boards. Another bene�t, he says, is that the networks’ rich pro�les help recruiters get a good feel for acandidate without having to delve into adetailed curriculum vitae.

Bargain huntingBut perhaps the biggest attraction is thatthe networks help �rms to cut searchcosts. Don Cooper, a recruiter at Intel, reckons that the chipmaker saves millions ofdollars a year in fees by recruiting seniormanagers through LinkedIn rather thanusing headhunters. US Cellular, a telecoms company, says it saved over $1m lastyear by using a LinkedIn system that produced good candidates for its jobs faster

than traditional recruitment channels. Mr Piskorski of the Harvard Business

School thinks professional networks havebeen so successful because they o�er away for people to participate passively inthe job market yet still claim plausibly thatthey are seeking out information to dotheir current job better. Companies put upwith this, he says, because the bene�tthey get from betterinformed workersmore than o�sets the cost of losing them ifthey are poached.

All this makes labour markets more ef�cient. By cutting out middlemen such asheadhunters, �rms save money. And bylooking at rich online pro�les of candidates, they can cut the time it takes to getthe right people into jobs. Network users,for their part, get what Reid Ho�man, LinkedIn’s chairman, calls an �active sonar�system that publicises their skills to abroad marketplace with minimal e�ortand collects the responses that ping back.

Social networks have made the labourmarket more transparent in another waytoo. A survey by CareerBuilder.com ofabout 2,700 executives in America lastyear found that 45% of them looked at jobcandidates’ socialnetwork pages as partof their research, and more than a third ofthose had unearthed information therethat put them o� hiring someone. Time toturn up those privacy settings?

The smart way to hire workersSocial contracts

analysts from various agencies and allowsthem to contact one another and to sharelarge amounts of text, graphics, imagesand videos.

Before a pilot of the system waslaunched in 2008 it often took weeks,sometimes months, for spooks to trackdown relevant people to talk to at otheragencies. �The intelligence communitywas a bunch of stove pipes,� says AhmadIshaq, ASpace’s project manager. Now the14,000 people with access to the securesystem can easily and quickly get in touchwith each other.

Social networks are being used to breakdown internal barriers in the corporateworld too. A few companies, such as Zappos, an online retailer owned by Amazon,encourage employees to use public net

works such as Twitter to share information. The argument for using a system thatallows the world to see what a �rm’s employees are up to is that it helps make faceless corporations seem more human in theeyes of their customers. Networks such asTwitter are also free and very easy to use,which means people adopt them quickly.

But most companies are deeply uncomfortable with the notion of baring all tosuch a wide public. Among other things,they fret that employees might let slip con�dential data, that competitors will bealerted to forthcoming innovations andthat the public networks will be hard to integrate with their internal IT systems.Firms in highly regulated industries suchas pharmaceuticals and banking are especially wary of allowing information from

their sta� to circulate freely. This has generated interest in Enter

prise 2.0 networks tailormade for the corporate world. These work in much thesame way as a Twitter or a Facebook, butkeep information o� the public web andbehind a corporate �rewall. They have several other advantages too. Many automatically pull information from companies’humanresources systems into people’spro�les. Services such as IBM’s Lotus Connections and Salesforce.com’s Chatter canalso be easily integrated with other IT toolsthat workers use, so they are more likely tobe adopted than public networks.

These corporate �Facebooks� can alsobe tweaked to �t �rms’ speci�c needs. Nicolas Rolland, who is helping to bring in anonline social network for the almost


2 90,000 employees of Danone, a globalfood group based in France, says that thecompany added invitationonly privatediscussion groups after getting requestsfrom sta� who wanted to share con�dential information. Danone, whose workersare spread across more than 100 countries,is testing its network in several locationsbefore making it more widely available.

Goodbye to silosAlthough these are early days, companiessay such network initiatives are alreadyspeeding up knowledgesharing and internal communications. Samuel Driessen,who is overseeing the introduction ofYammer at Océ, a large printer companybased in the Netherlands, says the messaging system has helped the �rm spot wherework is in danger of being duplicated andshare information about sales prospects.Danone’s Mr Rolland reckons its systemhas already led to smart operating practices being shared more e�ciently.

Marc Benio�, the chief executive of Salesforce.com, predicts that demand for corporate socialnetworking services willtake o� as managers realise that they nowknow more about strangers on Twitter andFacebook than they do about the people intheir own organisation. Some analystsagree with him (see chart 6). Mr Benio�even thinks social computing could be thenext big business for the IT industry aftercloud computing. Perhaps so, but socialnetworks must clear several hurdles beforethey can enter the corporate mainstream.

The �rst of these is the lingering doubtabout networks’ ability to deliver genuinebene�ts. �The biggest challenge most companies are facing is that the value propositions for social networks are all soft,� explains Greg Lowe, who champions the use

of Yammer and other social media at AlcatelLucent, a FrancoAmerican telecoms�rm. Yet there are grounds for thinking thebene�ts they create are worth having. Astudy last year by IDC, a research �rm,found that knowledge workers spend between six and ten hours a week huntingfor information. By using social networksto �nd data faster, employees can free up achunk of that time for other things, saysCaroline Dangson, an analyst at the �rm.

Yet even if they can make a good business case for a network, some managershesitate to introduce one because they fearthat sta� might use it to broadcast politically incorrect comments. Andrew McAfee, aprofessor at MIT who has seen many corporate networks in action, thinks that thisconcern is overblown. �I �nd it hard to believe that employees were waiting for social networks to come around to be able topost something inappropriate,� he sco�s.He points out that because all commentscan be traced to their authors, people arevery careful about what they post.

A �owering of ideasA third hurdle is that bosses are worriedabout allowing informal groups of workers to spring up that managers cannot control. Yet this is precisely why the systemsare so valuable. Often new ideas and insights�as well as warnings about potentialthreats�come from informal contacts rather than from formal meetings. The troubleis that existing IT systems are geared towards reinforcing separate silos ratherthan building bridges between them.

Services such as Yammer and Chattercreate a more open workplace by lettingpeople see what others are working onand encouraging sharing. The upshot is

that good ideas can emerge from anywhere. This should be a reason for celebration rather than a cause for suspicion. �Ifyou trust your employees, then you havenothing to worry about when deploying asocial network,� says Eugene Lee, the chiefexecutive of Socialtext, which provides socialmedia services to �rms.

The networks are also a great way tocapture knowledge and identify expertson di�erent subjects within an organisation. Mr Driessen at Océ says that manyearlier knowledgemanagement systemswere little more than boring collections ofdocuments. Social networks are a huge improvement over them because they combine content with commentary from people whose knowhow might previouslynot have been recognised. Suzanne Livingston, the head of IBM’s socialsoftware operations, says that �rms can even createnew, jointly owned social networks orsplice existing ones together to shareknowhow with outsiders.

Some executives see another big bene�t of networking. A few of the systems ono�er have analytical tools built into themthat let managers track information suchas which people are regularly in contactwith one another and what subjects theyare discussing. This �social business intelligence� can then be used to, for example,identify people for a project team based ontheir expertise and their links to otherswhose support will be needed to make theproject a success. But the data could also beused to make judgments about candidatesfor a promotion or to spy on colleagues. Allthis makes some people queasy. Whathappens with personal data is a big issuenot just within companies but for the bigpublic networks too. 7

6Money talks

Source: Forrester *Estimate †Forecast

Web 2.0 revenues by technology, $m

0 200 400 600 800

Socialnetworking

RSS

Blogs

Wikis

Mashups

Podcasting

Widgets

1,997

2009* 2013†


1

IF THERE is one thing that could halt theascent of social networks, it is the vexed

question of privacy. This is controversialbecause it goes right to the heart of the socialnetworking business model. In orderto attract users, sites need to o�er ways formembers to restrict the information aboutthemselves that gets shared with a widerpublic. Without e�ective controls peoplewould be reluctant to sign up. But if a siteallows members to keep too much of theirinformation private, there will be less traf�c that can be turned into pro�t throughadvertising and various other means, sothe network’s business will su�er.

�There is a tension here because thesenetworking sites are based on the idea thatpeople will share information about themselves,� says Amanda Lenhart of the PewInstitute for the Internet & American Life, anonpro�t research group. �If people stopswapping content then the sites will fadeaway.� There is some evidence that peopleare starting to become more sophisticatedabout the way in which they manage theirdata, which could have longerterm implications for the networks’ growth.

Research published last year by Pewshowed that some 60% of adults are restricting access to their online pro�les. Inan earlier study the institute had foundthat, contrary to received opinion, manyteenagers and young adults are also usingprivacy controls to restrict access to onlineinformation about them. Nicole Ellison, aprofessor at Michigan State Universitywho studies social networks, says thatover the past few years she has noticedthat her students have become steadilymore cautious about whom they share information with.

As it happens, the social networks havepartly brought this on themselves. In orderto o�er a better service, many have createdextensive sets of privacy controls that allow users to toggle between di�erent levels of protection to shield their online data.Hemanshu Nigam, MySpace’s chief security o�cer, says the site now o�ers 65 di�erent features that people can use to determine what, if anything, can be seen byother users. Facebook also has a plethoraof controls that can be adjusted to createdi�erent levels of con�dentiality. Default

settings for younger people on socialnetworking sites are often more restrictivethan those for adults to ensure they areprotected from unwanted attention.

Social networks deserve applause fordeveloping these �negrained controls,and for their e�orts to educate youngstersin the appropriate use of socialnetworking sites. But their desire for pro�t can putthem on a collision course with privacy activists, regulators and their users.

One bone of contention is social networks’ reluctance to draw attention totheir privacy statements. A study published last year by two researchers at Cambridge University, Joseph Bonneau and Sören Preibusch, looked at 45 networks andfound that many of them buried their privacy statements in obscure corners of theirsites. Speculating about the reason for this,the researchers thought it might be concern about �privacy salience�: the worrythat alerting people to privacy as a potential issue will make them less inclined toshare things, even if robust privacy controls are available.

That matters, because networks are doing their best to lock in users. Messrs Bonneau and Preibusch found that none of thesites they looked at made it easy for peopleto export their pro�le data, friendshiplinks, photos and other material. The morecontent that a user produces, the more likely he or she is to remain on a particular sitebecause moving becomes too much trouble. That explains why most sites like toplay up the bene�ts of contentsharingand play down talk about privacy.

We’d like to see more of youSome of the tactics employed to encouragegreater sharing are more blatant. Lastmonth Facebook caused a storm of protestfrom privacy groups and users when it unveiled plans to simplify its privacy settings.Critics welcomed some of the changes, including one that allows users to specifywho can see an individual piece of content�a level of detail not available before.But privacy activists are deeply unhappywith the site’s decision to make more datafrom individuals’ Facebook pro�les available by default to anyone with access tothe internet.

Earlier this month Mr Zuckerberg toldan audience in California that he believedsocial norms had shifted and that peoplehad become willing to share informationabout themselves more widely. On thisview, what Facebook did was simply a re�ection of a new social reality. But the�rm’s critics argue that Facebook is tryingto drive change on privacy rather than react to it.

Some privacy groups have �led a complaint against Facebook to America’s Federal Trade Commission, arguing that the recent changes to its privacy policies andsettings violate federal law. The complaintnotes that before Facebook’s latest movethe only data about individuals that werepublicly available were their names andthe regional or national network withinFacebook that they belonged to. Now farmore information is being put on showautomatically, though users can changetheir default privacy settings to restrict access to some of it. Critics argue that Facebook has loosened privacy protections inorder to increase tra�c and to competewith upstarts such as Twitter.

There may well be more clashes withprivacy regulators and privacy groups.Facebook made a number of changes to itsprivacy policy last year after Canada’s privacy watchdog raised several concernswith the �rm. In particular, the watchdogwanted Facebook to give members more

Privacy 2.0

Give a little, take a little


2

1

WHAT will the future of social networking look like? Imagine this: your

digital video recorder automatically copiesa television show that several of yourfriends were talking about on a social network before the show went on air. Or this:you get into your car, switch on its navigation system and ask it to guide you to afriend’s house. As you pull out of the driveway, the network to which you both belong automatically alerts her that you are

on your way. And this: as you are buying apair of running shoes that you think one ofyour friends might be interested in, youcan send a picture to their network pagewith a couple of clicks on a keypad next tothe checkout counter.

Networking types like to talk about theidea that there is a pervasive social element in all of the things people interactwith. Listen to them long enough and youcome away with the impression that your

teapot will soon be twittering about whatyou had for breakfast. Some of the ideasoutlined above may sound farfetched, buta service such as Facebook Connect, whichalready lets people export their socialgraph of online relationships to other webenabled gizmos, suggests they are not completely outlandish. Everything from cars tocookers could ultimately have social connectivity embedded in it.

But when it comes to helping social networks achieve ubiquity, none of thesethings will be remotely as important as themobile phone. Using a webenabledphone to post status updates and sendmessages is still a niche activity in manycountries, but it will rapidly become amainstream one as mobilebroadband services overtake �xedline ones in a fewyears’ time. One estimate by eMarketersuggests that just over 600m people willuse their phones to tap into social networks by 2013, a morethanfourfold increase on last year’s 140m.

DialapalThis shift has big implications. For a start,mobile phones in emerging markets�ordevices such as cheap netbooks linked tothe internet via mobile networks�willopen up a brand new audience whose useof social sites has so far been hampered bya frustrating lack of fast, PCbased internet

Towards a socialised state

The joy of unlimited communication

control over the way their information isused by apps, which the �rm agreed to do.Privacy bodies in Europe are also lookinginto social networks, hoping to establishpanEuropean guidelines.

Sharing information with apps developers is an especially sensitive issue. If severe restrictions are placed on networks’ability to pass on data, both they and thedevelopers could end up making less money than envisaged. Advertising is anothertouchy subject. Je�rey Chester of the Centre for Digital Democracy, a privacy group,sees social networks as part of a broaderset of companies that are trying to track individuals’ behaviour online to gather datathat can be used by marketers for preciselytargeted advertising.

Elliot Schrage, Facebook’s head of public policy, sees things di�erently. He points

out that companies engaged in socalled�behavioural advertising� are tracking individuals’ activities on the web withouttheir knowledge, whereas Facebook seeksits members’ explicit permission whenthey sign up to the service to let it use theirdata for adtargeting purposes. He alsostresses that the company provides advertisers with data only in aggregated form sothat individuals’ personal information isnot divulged to anyone.

How much is a free lunch?Most people who use Facebook and othersocial networks seem prepared to acceptthe idea of targeted advertising as the priceof getting free access to the service. It is lessclear whether they are prepared to goalong with Facebook’s attempts to persuade them to share ever more informa

tion about themselves. But Mr Zuckerbergand his colleagues clearly believe that people are happy to do so.

Twitter’s Mr Stone also sees a longerterm trend towards greater openness, andclaims that his service’s users are quitehappy to share more information aboutthemselves. The network has recentlychanged its own terms of service to give itgreater leeway to add data about users’physical location to its tra�c. Mr Stonesays this is critical because the next bigwave of social networking will revolvearound mobile phones and the places thatpeople take them to. A new crop of networking �rms has already sprung up tocapitalise on the opportunities o�ered bymobile phones. That opens up the prospect of even broader changes in the socialnetworking landscape. 7


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connections. Companies such as Sembusein Kenya, which bills itself as east Africa’s�rst mobile social network, and South Africa’s Mxit are already gearing up to connect millions more people to one anotherthrough their mobile phones, providing abig �llip to the amount of informationsharing going on around the world.

The rise of mobilephonebased networking will have an impact on richworld markets too. Thanks to fast and relatively cheap mobile broadband services,phones have already become the device ofchoice for accessing some sites in Asia. Shigeya Kawagishi, an executive at Mixi, oneof Japan’s largest social networks with 18mmembers, says the vast majority of its traf�c now comes from phonetoting customers who check in to get updates four or �vetimes a day (see chart 7). Facebook, whichhas some 65m mobile users, says they arealmost half as active again on the site asother folk.

On locationThis trend towards mobile usage is fuellingspeculation that the next big thing will begeonetworking apps, which use virtualdata to broker realworld encounters.These apps encourage the serendipity thatTwitter’s Mr Stone talks about by allowingpeople to use their mobiles to signal wherethey are to friends who may be nearby.Several startups such as Foursquare andGowalla are building businesses aroundthis idea and Twitter plans to do so too.Asking people to add their whereabouts totheir tweets, the �rm hopes, will enable itto use these data to direct advertising andother services at people as they move fromplace to place.

To some, the idea of a technology thatcan arrange chance meetings with theirfriends will seem like a dream come true.To others, the thought of being trackedfrom place to place is a nightmarish prospect that has a Big Brother feel about it. Topeople who run social networks, locationbased networking is a logical extension oftheir e�orts to humanise technology andharness it to the cause of greater globalopenness.

The networks’ founders seem to havean almost Utopian belief in the bene�tsthat their creations will deliver. Facebook’sMr Zuckerberg, for example, describes thegreater openness he believes his �rm andothers like it are bringing to human interactions as �probably the greatest transformative force in our generation, absent a majorwar.� Mr Stone, for his part, reckons Twitter�is something important that has the po

tential to change the world, though wehave a long way to go.�

Much the same sort of thing was saidabout the internet when it �rst emerged.But it was also met with a great deal ofscepticism by those who thought the webcould never be used to make money, andfrom bosses who assumed that workerswould use it simply to watch pornographyand play online poker. The sceptics wereastonished when it went on to producecorporate powerhouses such as Amazonand Google, and provided businesses withremarkable new tools for boosting productivity and generating fresh ideas.

The parallels with social networks arestriking. That should come as no surprise,because those networks too are creaturesof the internet and the ultimate expressionof what its founding father, Sir Tim BernersLee, wanted it to be. In his book�Weaving the Web� Sir Tim explained thatthe internet was always meant to be moreof a social creation than a technical one.

The ultimate goal, he wrote, was to comeup with something that, �rst and foremost,would make it easier for people to collaborate with one another.

This special report has argued that social networks have already done much toachieve that goal. They have createdtrusted online venues where people canmeet up using their real identities. Theyhave provided �rms with new ways toreach their customers and those who in�uence them. They have reduced friction inthe labour market by allowing employersand prospective employees to connectmore easily than ever before. And theyhave speeded up the �ow of informationwithin companies.

All of these are impressive achievements. But arguably the most importantcontribution that the sites have made is too�er a free and immensely powerful set ofcommunication and collaboration tools toeveryone on Earth who has access to abroadband internet connection. This democratisation of technology is driving thesocialisation of the web and fundamentally changing the way that people interactwith one another, as well as with businesses and governments.

It has also made it easy for anyone toform a globespanning discussion group oftheir own with just a few clicks of a mouse.Not so long ago that would have been thepreserve of an elite group of companiesand institutions which had the necessary�nancial and technical clout to performsuch feats. Now, thanks to the technologycreated by Facebook and its peers, millionsof these conversations can take place simultaneously with the greatest of ease.The world is better o� for it. 7

7On the move

Sources: Company reports; Morgan Stanley

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"A World Of Connections" - Special Report on Social Networking (The Economist)

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Transcript of "A World Of Connections" - Special Report on Social Networking (The Economist)