Online social networks are one of the hottest investment sectors. Valuations defy conventional investment analysis. These networks can assemble communities of millions of users in the first few months and some have grown to communities of tens of millions of people.
Online social networks provide internet applications to facilitate social interaction between people. An online industry network provides internet applications to facilitate collaboration, information distribution and markets between participants within an industry.
The fundamental defect in online social networks is that they do not manage valuable information. The consumer is not willing to pay to see information, and the owners of information are not willing to distribute it. The default revenue opportunity is third party advertising. These networks typically have an average revenue per user of less than two dollars. Online social networks should target opportunities which manage valuable information. Many providers of generic applications like email charge US$30 per user per annum.
An online industry network does more than just provide generic applications like email and calendar for indiscriminate users. It provides specific applications to what industry participants do every day. It moves the people, functions and market online. The more an industry consists of information, the greater the potential of moving people and performing market functions with specific applications. The applications include profiles, matching buyers and sellers of services and products, facilitating collaboration, information distribution and classifieds. Different industries will have different applications. An online industry network can charge a premium over an application service provider.
Types of online networks
The types, characteristics and opportunities for online networks are listed below:
- An Online social network provides internet applications to facilitate social interaction between people. The Average Revenue Per User (ARPU) per annum of $0-25.
- An Online industry network provides internet applications to facilitate collaboration, information distribution and markets between participants within an industry. A focus on industry increases ARPU to more than USD1,000+ per annum.
- A virtual financial market provides internet applications to facilitate collaboration, information distribution, order execution, product distribution and markets between participants in multiple asset classes within the financial market. (ARPU > $1,000 per annum). Financial markets become transparent and pricing moves from premium pricing based on opaque channels toward the cost of “freelancer” information manufacture and internet distribution.
- A gross profit margin of 90+% is achievable on the ARPU above by using Amazon web services. This service reduces the cost of transferring/storing data to less than USD0.020 per gigabyte.
- domain name owners could move beyond PPC revenue and apply an online network to increase ARPU. The time and cost to deploy could be significantly reduced by participating in an open source software “solution” project.
- Online political networks provide internet applications to facilitate the exchange of information, collaboration and the political process between citizens, government executives, politicians and companies.
- Online social, industry and political networks will drive the next stage of economic development. An open source software “solution” could empower a generation of social and commercial entrepreneurs. Online networks provide transparency, market access and the potential for immediate liquidity in services, capital and information.
Market opportunity – online industry network for financial markets
There is an enormous opportunity in re-casting the financial services markets and service delivery by applying social networking concepts to the participants in these markets. An online industry network for the equity market can bring together companies, advisors and investors in an online space where they can collaborate and distribute information to facilitate the growth of small and medium enterprises.
Existing investment banking and equity markets are essentially a cottage industry with asymmetric information flows between potential customers, customers, advisors, brokers and sources of capital. As such they are highly ineffective and deliver bottle-neck returns to some brokers and investment bankers. Importantly, many small and medium-sized companies find it very difficult to access correct skills and capital, while the full universe of experts and potential investors is not fully utilized.
An dedicated online industry network could apply the transformative power of social networking to address these problems. We are building an online industry networks for the financial market. Unlike online social networks, consumers are willing to pay to see and/or distribute information. The potential average revenue per user is USD1,000 to USD2,500 per annum. A focus on an industry fundamentally changes the economics of an online social network in terms of profitability, time to break-even and investment funding required.
Financial institutions also have an opportunity to apply online networks. A Bearing point report titled “Shifting from Defense to Offense: A Model for the 21st Century Capital Markets Firm “ provides an insight into the potential market opportunity for stock exchanges.
“Another dramatic change ahead is an expanding role for the exchanges. From their traditional function as a price discovery venue, the exchanges will begin to permeate other portions of the capital markets value chain, from facilitating investment banking services to creating enhanced clearing and settlement utilities. Exchange consolidation, an initial step in this direction, is already under way.
Financial institutions may not execute on the market opportunity for online networks. Selling an online network to a financial institution may be like trying to sell airplanes to railroad companies during the golden age of railroads. Airplanes were just never going to take off!