Measuring the wrong things

Over at CNNMoney, writers are hailing the end of Web 2.0 and the emergence of Web 3.0.  Let’s leave out, for the present, that they completely miss what Web 3.0 is purported to be, and have in fact shown no evidence at all of what they claim are ‘Web 3.0 startups’. Let’s just focus on their problem with what they identify as ‘Web 2.0’.

The issue, they say, is that social media products like Facebook, MySpace, Twitter and YouTube are not making money. Hardly a profound observation, but the ‘problem’ takes up the vast majority of the article and only in a vague reference in the final paragraph is there any reference to why these companies are all going to tank and what might replace them.  Bizarrely, the writer sugests that these ‘Web 3.0’ initatives are going to be “location-based services and financial payment systems that can be bolted onto existing sites”, and that these services “are frequently profitable and may get acquired quickly”.

I’m sorry, but what?

There’s so much wrong with this article it’s hard to know where to start, but I think a good place is in its entire premise: it’s measuring the success of Web 2.0 initiatives on the basis of company/product profitability.  But Facebook wasn’t set up as a company to make money.  It was set up for a bunch of Harvard Uni students as a means of keeping in touch with their networks of friends and sharing photos.  YouTube was set up as a means of overcoming video sharing online.  MySpace began life as an online data storage initiative but was later co-opted by music fans and came to be a place where new bands could distribute their music online and access new audiences.  The initial investors in each of these projects may have had a vague sense of building something compelling and perhaps being acquired, but none of them were focused on revenue generation. If anything, revenue generation was the focus of the companies who later invested in, or acquired the products.  But the creators, and indeed, the users of these social media couldn’t care less about making money.  So long as the platform was stable, the service was free and the contact with networks of friends was established and maintained, that’s all they cared about.

This is a classic example of measuring the wrong thing.  And I’m afraid that corporate entities and journalists do this on a regular basis.  Because it’s difficult to ‘monetise’ social media, both mainstream media and the executive set assume that social media products either have already failed or are on the brink of collapse.  Nothing could be further from the truth. Yes, it is hard to make money from a social media product, but profitability isn’t the basis upon which the product survives or dies.  Thus it is a nonsensical measure of success.

In measuring social media – or indeed any activity – it is always the purpose of the activity, and the conditions in which the activity takes place that should contribute toward performance.  You wouldn’t measure the result of a an international cricket test or premiership football season by the bank balance of the teams.  You wouldn’t measure the success of a school by selling off the schoolwork of its pupils for cash.  You wouldn’t measure the beauty of a garden by the income generated from banner advertising on site.  You measure products – tangible or intangible – on the basis of what they are supposed to do.  And social media are supposed to enable effective or at least satisfying communications between participants in a network, and to some extent at least, there is a network effects phenomenon which applies – that is, the more users participate in a network, the higher the potential return for all users of a network.

So in reality, we should be measuring social media on the basis of the reliability and usability of the platform, the ease with which communication is achieved, and the satisfaction of all users about their sense of connection to their networks.

Business executives and investors might be throwing their hands up in the air right now and asking me who pays the bills and why anyone should invest in social media right now, but they are still missing the point. Social media products may be able to pay for operational costs of surviving online, but it is unlikely they will ever be madly profitable.  It is the access to audiences and the opportunity to cut costs of marketing, improve customer service, test new products and gauge user responses that makes these tools a worthy investment.  Again, you measure success by engagement and efficiencies, not by advertising dollar.

Of course there is a lovely irony in the final paragraph of the dreadful article identified above, and that is that they seem to regard new startups that are “frequently profitable” and get “acquired quickly” as a paragon of success. But using those measures, including the capacity to raise capital investment and funding, I don’t think you could ever find more fabulously successful companies than Facebook, MySpace, YouTube and Twitter.

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