Social Media Economics Part 1

There was a fairly interesting discussion on just what a "Social Media Expert" is a few days ago (see this stream here) and one of the things I realised we at Broadsight could add, even to existing experts' knowledge, is how the economics of Social Media works. So, here is an N part series, starting with with the Social Media Supply/Demand curve (above)

Supply

The Red Line is Social Media production. The x axis is the total number of people in the population, the Y axis is the cumulative time spent producing the social media (a proxy for volume). The first small % of users - 1% or so - are Creators and generate a LOT of the media, The next 9% or so (there is a mathematical law here, which we will deal with in Part 2) are more Commentators than creators but do produce some content (which is why the curve starts to drop off as population grows - the last 905, the Consumers, produce very little content

Demand

The Blue Line is the available time to consume content per person, there is a small % of people who have a huge amount of time and proclivity to consume the content. However, as you expand into the population you hit people who are busier, or less interested, or both, so the average amount of time per person reduces.

In other words, in the early days of supply expansion the demand seems huge, but just as supply expands at a faster rate to fill the gap, the gap itself starts to expand at a slower rate.

This leads us to the crossover point, at which supply exceeds demand (the vertical dotted line). Forgive me for pointing out the obvious, but when demand exceeds supply then the returns are positive, but when supply exceeds demand then the total market value is negative and returns are likewise therefore negative. In other words, in the above diagram, the Left hand Side is Happiness, the Right Hand Side is Misery.

To see when this point is reached, two things need to be watched to see if there is any value in the market:

(i) Are there players who are using offset funding (ie money made elsewhere) to "strategically" fund the space, and thus leading to "Irrational Oversupply"?

(ii) Are there players (is it even possible?) who are differentiating their offering into higher value output, and thus shifting the supply curve downwards by removing some of the suppliers as viable competitors?

So, where are we now with Social Media's economics, given its damn hard to get real stats?

Well, taking point (i) there are a plethora of players using offset funding - from "Free" Time to Offset funding - to produce the content. Looking at point (ii) there is some evidence that quality is coming into it - Technorati reckons that only about 100,000 blogs of the roughly 7 million registered get any significant traffic, but given that online Ad rates are falling (too much inventory for too few Ads) faster than one would expect even in this Crunch, we are probably still past teh point of Negative Value.

In other words, as an industry it is economically to the right of the zero value line, which traditionally forces poorer suppliers to the wall. But with many large players staying in via offset funding, don't expect to make money out of it unless you can find a way of increasing (continually, it will get increasingly pressured) your value proposition.

(The mathematicians among you will of course have thrown up your hands in horror at me conflating a cumulative and a unitary curve, but the picture is better at conveying the issue in my opinion)