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Page last updated at 06:44 GMT, Friday, 15 April 2011 07:44 UK

How can social networks make money?

By LJ Rich
BBC Click

Facebook page on an Apple iphone
Mobile "check-ins" increase advertising possibilities of social networks

With social networks now big business, what can the companies do to turn free services into hard cash?

Over the past month, US Facebook users have been enjoying a selection of Warner Bros blockbusters streamed through the site in exchange for about $4 (£2.45) in Facebook credits.

Facebook takes a 30% cut of each credit spent, much like Apple and its app store.

There are over 400 apps and games where the site's 500 million users can go on a social spending spree.

It is easy to see how money can be made - a valuation last month valued Facebook at around $50bn (£30.6bn)- more than Warner Bros and almost twice that of computer giant Dell.

Advertising is at the heart of most internet success stories. But in some ways social networks are uniquely engineered as money-making machines.

"Because you're creating the content and you're making up the content for free, all that social networking has to do is put the ads next to it," says Paul Lee, of Deloitte Research.

"There aren't the costs that say a newspaper would have in paying for the journalists to create the content and then serve the advertising next to it."

Oblivion rollercoaster vertical drop ride at Alton Towers
Rides at this theme park could only be accessed by checking in on Facebook

But crucially, cash is generated by clicks and views. Experience has shown if users do not get the experience they want, they just move on.

"There's been this pattern where it started with Friendster," says Jeffrey Mann, of technology research company Gartner.

"It more or less got replaced by MySpace. MySpace more or less got replaced by Facebook. The question is - will Facebook stay on top? So far they seem to have."

And reaching out to the real world is one way Facebook is trying to guarantee its longevity.

Social rollercoaster

UK theme park Alton Towers is holding an event where you are only allowed in if you let Facebook know you have arrived using its geo-location Deals service.

The promise of matching people with products makes social networks attractive to advertisers, and Facebook deals add location into the mix. Users check in on their mobiles and get special offers in return.

I think people are prepared to give up some of their data without too much effort and, in exchange for that, get a free service
Paul Lee, Deloitte Research.

It is similar to Foursquare, another location-based network, which has recently partnered with American Express. Users check in at selected venues to receive cashback.

In many ways, this concept simply extends the notion of targeted advertising which has always existed online. And what you say in your profile gives advertisers something to aim for.

But before everyone starts checking in, there are some worries about exactly how these transactions work.

"You can target me as someone that's 38 years old in Wandsworth that likes football or you can target all the men in the UK that like football," says Stephen Haines, managing director of Facebook UK.

"You can go very broad or very narrow with your advertising."

To people who are not familiar with social networking, that could sound a bit frightening.

MySpace logo surrounded by glasses
MySpace has been "more or less replaced by Facebook" in recent years

"I can sort of understand it," says Haines. "[but] I think if we're giving the user relevant advertising that's targeted towards them, they actually respond better to it [rather than] to the traditional sort of pushing advertising in their faces."

If entering into a public social pact with that product is too much for you, however, there is a workaround. If you change the "connecting on Facebook" settings you can keep your "Likes" - or recommendations - to yourself.

If you choose not to, then you are effectively engaging a uniquely powerful form of product endorsement to all your Facebook friends.

"When ads have social context in them, when you can see what your friends have already done with that brand or if I've liked Nike, that ad performs much better," says Haines.

"We would never give brands like Nike [details of] an individual person. What we would say is there's 10 million 18-24 year olds that have football in their interest."

And for all the hype surrounding online privacy, most people do not seem to be too worried as long as there are benefits.

Kim Kardashian
US star Kim Kardashian reportedly gets $10,000 a tweet to advertise

"I think people are prepared to give up some of their data without too much effort and, in exchange for that, get a free service," says Lee.

"There are some who think that the amount of information giving out is far too much, but they are in the minority.

"There's is certainly legislation being proposed at the moment - at an EU level and also in the US and Canada - to make sure that there is the right balance between the amount of information given out and the extent to which it is made very obvious what information we are giving out".

'Firehose' future

One of the most notable social networks is now fielding 1,000 tweets per second.

Twitter was valued at around $8bn (£4.9bn) at a recent auction. Advertisers can buy promoted tweets or trends, but now the network has something else to shout about - a rich data set accumulated about us.

"Twitter licenses its complete feed - what they call the firehose," says Mann.

"Every message that gets sent out can be used by companies like Microsoft and Google to analyse trending topics and what people are talking about right now," he adds.

A company called Gnip licences percentages of that firehose to the rest of us. Just half of that firehose will cost you $360,000 (£220,321).

So what of the future? Well, those who've been studying it say it's just the beginning

"Probably the next phase of social commerce is about extracting commissions from products which are sold directly as a result of recommendations made," says Lee.

"So rather than selling advertising, what you're doing is taking a commission against a product sold.

"What we can be sure about in terms of social networks of all types, is that there will never only be one model which works for everyone."

Another thing we can be sure of is that not all of us will be happy to go along for the ride.

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