Mission Creek

Last night I was fortunate to attend the Silicon Valley Alumni Association Entrepreneur Series presentation, Building and Monetizing Sustainable Online Communities (link to agenda). The panel included

• Brad Horowitz, Vice President of Product Strategy/Advanced Products, Yahoo!
• Matt Cohler, VP, Strategy and Business Operations, FaceBook.com
• James Hong, CEO, Hotornot.com
• Gus Tai, General Partner, Trinity Ventures

The event was moderated by Safa Rashtchy, Managing Director/Senior Analyst, Internet Media and Marketing. Piper Jaffray.

The panel represented a cross section of companies where a key component of their business strategy includes the identification and nurturing of an online community.

• Facebook, the current darling of this class of business
• Yahoo!, sites such as del.icio.us & Flickr
• hotornot.com, one the more interesting entertainment sites

Each went to a different path to first building their online community, and then shared similar attributes in monetizing their online community.

Hotornot.com was perhaps the most basic of communities. Hotornot.com was started in 2001 to emulate the experience of people watching in a café for those people stuck in a cubical. The site took advantage of the key components of being part of a community, communication and participation. When a user came to the site, they were presented with a user uploaded photo and asked to rate. Humans by their very nature make snap decisions and all that it took was a few simple clicks to share a user rating. They immediately were then shown a new photo and the results of other community members who rated the last photo, to see how their rating compared to others. By this time a visitor has already seen the next photo, formed an opinion, and the addiction of continuing to rate and see how your rating compares to the greater community beings. The CEO likened this approach to the potato chip syndrome- you cant just rate one.

Facebook addresses a community in a different format. The website started by a Harvard student is meant to connect college friends. Recently, though some faculty members have joined the site to connect to their students. It seems that this site is becoming a one-size fits all solution to communication between students, professors, and High School friends. It is interesting to see how extensive this service has become. Facebook bonds a community together online that have common interests offline.

Flickr has taken a different approach. Flickr is an online expressive community based on visual presentation. Flickr entered at the right time, just as digital cameras were passing the tipping point over film, and focused on an innate aspect of photography, the desire to share. Add to this a loyal following, and the cornerstone for one of the best known online communities was laid.

But, how do these online communities convert this participation into revenue?

The organizing tenet around the conversion from participation to revenue is simple, provide a value to the end use that is a direct extension of the community experience- either to the community itself, or to advertisers who want to reach that community.

For hotornot.com, the value came in the demographic of the user. The vast majority of the users were between 18-25, a key advertising demographic. However, early on, online advertising was not a viable option. However, the founders realized another way to monetize, a pay online dating service. The leap between finding someone attractive and dating was not that far. The market was ripe, as the major competitors in this space had ignored this demographic. The common wisdom at the time was that this demographic would not pay for this service. The reality was quite different, with a conversion rate of 15% from visitor to pay account; the conversion rate is among the highest in the space.

Flickr based its monetization on the delivery of premium or “Pro” services. Pro community members have access to additional features that would extend their ability to share, comment, and participate in the larger community. Additionally, Yahoo! being Yahoo!, advertising was a key element of the monetization of this community. Certain target advertising, such as advertising tied to travel and destination photos posted by users have provided significant revenue.

Facebook is the newest kid on the block. They have aggregated a community that is dear to the advertising world and have evolved at a time when online advertising is back in favor. Since some reports have 85% of college students using Facebook, they clearly have a desirable and lucrative advertising market within their community- one which replenishes itself each fall.

The question is where Facebook will go and how they will mature their revenue model as the community base ages. Will people continue to use Facebook after graduation?

This questions is not one which is unique to the Facebook community. One needs to look no farther then the recognized originator, and greatest flame out (arguably) of online social communities, Friendster. Millions flocked to this community, were caught up in the rush of connection to the larger community, only with no reason to stay engaged after joining.

It will be interesting to see if and how, Facebook can avoid this problem- will there still be a reason to stay in this online community once the bonds of college and High school are gone?

If there are key touchstones from these companies on the monetization of online communities, they are to either:

• aggregate an online community based on a offline community that will provide a focused and strong organizational and persistent connection. And provide a service or feature that will keep that community engaged on a regular basis. If the community can replenish or renew itself offline, then by natural extension, the online community should follow; or,
• Provide a compelling and unique set of features that are a core extension of the communities organizing precepts. Make these tools and the community will pay for access for these features and the tools themselves will serve as organizational glue that will keep the community involved and engaged.

In both of these instances, it is key that the features and service provided to that online community are so persuasive or flexible enough to evolve with that community, otherwise the community may die.