Business Models for Web 2.0 Firms: The Case of Facebook and Twitter: October 2010

Research Topic

This research will be based on Web 2.0 business models, revenue models and how this will have an impact on ecommerce development today. The research will first have a general look at web 2.0 firms and their business and revenue models. Then the research will concentrate on two virtual community firms Facebook and Twitter to evaluate their case of starting their firms without a business model or a revenue model. The report will acknowledge how business models have been applied and need to be applied to major Web 2.0 social networking firms.

In general, Web 2.0 is the network in which individuals contribute to the distribution and expansion of contents, tools and applications over the Internet. This concept helps to increase complexity of ecommerce development. For instance, various innovative business models have emerged as a result from the widespread technology of Web 2.0. These models have provided customers as well as service providers with different values and experiences.

Rationale of the research

Firstly, the idea of free online social interaction and networking sounds great and it has been proven to be successful, at least, in capturing popularity and participation of the majority of Internet users however the profitability part has been questionable when it comes to popular web 2.0 sites such as Facebook, Twitter, My Space and so forth. Therefore it makes us wonder about how long these firms last when they have not implemented a business model or a revenue model and if they can last at all without one. With that in mind, we exploit different business models to have a better understanding of how Web 2.0 can be used as an ecommerce tool to make profit.

Secondly, miraculous growth of popularity of social networking sites such as Facebook and Twitter in the past years raises a question of how much profit they could gain if they had initially implemented a business model or a revenue model. Without the means of revenue or a business model, it can be assumed that Facebook and Twitter has been operating on their own expense as well as their investors for the past years that they have been operating.

Research Objectives

1. The research report will first introduce and explain the term “Web 2.0” specifically social networking. Thereafter, we will go into detail to have a thorough understanding of how Web 2.0 develops, varies and benefits the society.

2. We will study how Web 2.0 concept can be profitable in ecommerce by examining different Web 2.0 business models and Revenue models.

3. Examine the key elements of a business model.

4. The report will also look at issues such as why web 2.0 firms cannot sustain their businesses without the help of investors since they have a large number of members, what makes a web 2.0 firm e-commerce, why firms do not make a huge sum of profit when they initially start to operate, the necessity of a business and revenue model, and the effects of growth first and profit second strategy.

5. Lastly the profitability issues of two of the most popular social networking sites at the moment Twitter and Facebook in applying business models will be investigated. The challenges that they face in the web 2.0 social networking marketing.

Structure of Report

Executive Summary
Table of Contents
1. Introduction
2. Literature Review
3. Methodology
4. Web 2.0 Social Networks
4.1 History
4.2 Web 2.0 Business Models
4.21 Key Elements of a Business Model
4.3 Types of Web 2.0 Revenue Models
4.4 Facebook
4.5 Twitter
5. Findings
5.1 Types of Social Networking Firms
5.2 Facebook and Twitter's Business and Revenue Models
5.21 Business Strategies Implemented by Social Networking Firms
5.22 The Necessity of a Business and Revenue Model
5.3 Factors Affecting Social Networks from Making Revenue
5.31 Competitors
5.32 Customers (B to B)
5.33 Investors
5.4 Facebook and Twitter's Costs and Sources of Capital
5.5 Web 2.0 Firms that are making a Profit
5.6 The effects of "Growth first, Profit Second"
6. Limitations and Recommendations
7. Conclusion
8. Appendices
9. References

Literature Review

Not much of research has been conducted specifically on the importance and relevance of a business model to a web 2.0 firm or virtual community firm. However issues surrounding the matter have been researched and explored. A paper by Harris and Rae (2009) stated that social networking is playing a role and will be playing a major key role in future of marketing. The paper furthermore states that “externally social networking can replace customer annoyance with engagement, and internally help to transform the traditional focus on control with an open and collaborative approach that is more conducive to success in the modern business environment” (Harris, Rae, 2009).

According to Gills and Pitta (2009), Twitter, one of the premier social media, offers marketers some valuable potential not only in networking but also in gauging the concerns and desires of a variety of target audiences. This could be further explored into being one of their revenue models. And it was further suggested by Strategic Direction (2009), that twitter proves to be economically viable because even though it has promised to keep the service free for ordinary users, it will be looking into charging businesses for extra functions. Giles and Pitta (2009) further shows that Twitter has been found to be effective in connecting with three important groups, namely, industry professionals, decision makers, and influencers. Giles and Pitta (2009) concludes that Overall, social networking has become a tool that can enhance marketing effectiveness.

Tikkanen et al (2009) illustrate in a study that conventional marketing parameters such as web advertising or product placement may not be the most effective revenue model due to reason that every virtual community provider has prompted to use this type of revenue model and also that there are many other options due to its special characteristics.

Turban and King (2003) stresses that the structure of a business model varies because there are many ways that companies can generate revenue however all business models must specify their revenue model. A revenue model outlines how a web 2.0 firm will earn revenue. However Leimeister et al (2004) stresses that a virtual community business model must have innovative components in order to achieve the “first-mover-advantage” and also to differentiate itself from other existing models on the market. This is essential for successfully entering and surviving in the market. Leimister et al (2004) goes on to state that the combination of different revenue sources and funding sources guarantees security against short-term fluctuations and minimizes financial risks.

In addition Leimeister et al (2004) states that another component that is important to the revenue model and the business model is high investments in personnel and marketing; Leimeister et al (2004) furthermore informs that these are the major expenditures in operating a virtual community/Web 2.0 firm.

Leimeister et al (2004) concludes that according to current research, communities with a supporting function in a company and not a dependency on direct earnings seem to be most promising when it comes to realizing the Virtual Community business model. Most existing web 2.0 firms seem to focus on indirect earnings for example advertising fees. For web 2.0 firms to be considered as stand alone communities they would be required to change their revenue models to direct earning such as member fees and it is only at this time that they will be able to achieve more stability in their business models.

References for Literature Review:

1. Harris. L, Rae. A, 2009, Social networks: the future of marketing for small business, Journal of Business Strategy, volume 30, viewed on 27th October 2010

2. Giles. D, Pitta. D.A, 2009, Internet Currency, Journal of Consumer Marketing, Volume 26, issue 7, viewed on 21st of October 2010.

3. Turban. E, King. D, 2003, Intrdocution to e-Commerce, Prentice, New Jersey

4. Leimeister. J. M, et al, 2004, Revisiting the Virtual Community Business Model, Proceedings of the Tenth Americas Conference on Information Systems, New York, New York, August 2004, viewed on 28th October 2010.

5. Tikkanen.H, at el, 2009, Exploring virtual worlds: success factors in virtual world marketing, Management Decision, Volume 47, viewed on 20th October 2010.

6. Strategic Direction, Strategic Direction, 2009, Ways to Exploit Emerging Technology: Marketing on new Platforms, Strategic Direction, volume 25, viewed on 27th October 2010

List of References for the Report:

1. DonDodge, 2007, Web 2.0 = web app + 2 founders + 0 revenue, viewed on 9th October 2010, http://dondodge.typepad.com/the_next_big_thing/2007/08/web-20-web-app-.html

This article demonstrates the different kinds of revenue models that are available to web 2.0 firms.

2. Bernoff, J, 2008, The Real Business Model for Web 2.0: Corporate Clients, viewed on 30th of September 2010, http://forrester.typepad.com/groundswell/2008/06/why-id-bet-on-w.html

This article will be used to illustrate on other kinds of web 2.0 social networking firms that are making money and had been making money when they initially started their firms. These businesses show different strategies that they have been implemented as compared to facebook and Twitter.

3. Drama 2.0, 2009, Web 2.0, Revenue Models and Profitability: A Web 1.0 Comparison, http, viewed on 29 September 2010, htt//www.centernetworks.com/web-2-revenue-models

This article will be used to compare web 2.0 applications to web 1.0 applications. This article will also be used to show how the internet has developed and where it might be heading in the future in terms of ecommerce.

4. O’Reilly, Tim, (2005), “What is Web 2.0?”, O’Reilly media, viewed on 23 October 2010, http://oreilly.com/web2/archive/what-is-web-20.html

This article explains what web 2.0 is, its applications, platform and so forth. This article will be used to explain and to define web 2.0 and it will also be used to narrow down the study to online social networking. The article so illustrates the core competencies of web 2.0 companies.

5. Miller, C, C, 2010, Twitter Unveils Plans to Draw Money from Ads, viewed on 27th September 2010, http://www.nytimes.com/2010/04/13/technology/internet/13twitter.html

This article will be used to investigate Twitter’s revenue plan, how it took the firm to implement a revue plan and the contents of the revenue plan.

6. Yarmosh, K, 2005, Web 2.0 Business Models, viewed on 27th September 2010, http://kenyarmosh.com/web-20-business-models/

This article will be used to illustrate web 2.0 business models. It defines what they are and explains how they are used for a web 2.0 firm.

7. Deitel, 2008, “Dive into Web 2.0 e-book”, DeitelEbook, viewed on 29 October 2010, http://www.deitel.com/Books/Web2eBook/Web20BusinessModels/tabid/2498/Default.aspx

This is a chapter of the e-book “Internet & World Wide Web – How to Program” (2008) which helps us as a main source for our Web 2.0 business models. It lists different Web 2.0 business models available on the World Wide Web.

8. Crotty, D., 2009, “Successful Web 2.0 Business Models”, The Scholarly Kitchen, viewed 2 July 2009, http://scholarlykitchen.sspnet.org/2009/07/02/successful-web-2-0-business-models/

This author reveals some secrets that people have been using to make money on free social networking sites. He also states that most of big social networking sites have been building up on its size without an obvious business model.

9. Wasserman, T., 2009, “What if social media can’t be monetized?”, Brandweek magazine, viewed 29 October 2010, http://find.galegroup.com/gtx/infomark.do?contentSet=IAC-Documents&docType=IAC&type=retrieve&tabID=T003&prodId=AONE&docId=A202706076&userGroupName=swinburne1&version=1.0&searchType=BasicSearchForm&source=gale&infoPage=infoMarkPage

The article mentions why social networking sites are not good places to make profit. The article also suggests that social networking site should be used to generate awareness instead.

10. Hempel. J, 2010, Ning's fix for the Web 2.0 profit problem, viewed on 23rd October 2010, http://tech.fortune.cnn.com/2010/05/04/nings-fix-for-the-web-2-0-profit-problem/

This article talks about a company that had been implementing a freemium revenue strategy however, they then suddenly decide to charge their users, the out come is usually the users decided to leave or they are left unhappy. Therefore this article will be useful in that it looks at what happens when you do not choose the right business strategy, business model and revenue model. And when it is too late you decide to implement one. This article also looks at situations where the firm concentrates on growth first and then when it wants to make a profit, the out come that is expected.

11. WebHotstingReport.com, 2009, The History of Facebook, viewed on the 27th October 2010, http://www.webhostingreport.com/learn/facebook.html

This article will be used to find out the history of Facebook.

12. Wijiya. S, et al, 2008, Webstrategy Formulation: Benefiting from Web 2.0 Concepts to Deliver Business Values, viewed on 28th October, http://www.open-knowledge-society.org/sample.pdf

This article shows the strategies that need to be implemented by web 2.0 firms in order to be successful in their market. The article talks about how The emergence of web 2.0 technologies has led many internet companies, such as Google, Amazon, Wikipedia, and Facebook, to successfully adjust their webstrategy by adopting web 2.0 concepts to sustain their competitive advantage and reach their objectives.

13. Strickland. J, 2010, How stuff Works, viewed on 27th October 2010, http://computer.howstuffworks.com/internet/socialnetworking/networks/twitter.htm

This article gives a brief history on Twitter.

14. Eldon. E, 2010, Facebook Revenues Up to $700 Million in 2009, On Track Towards $1.1 Billion in 2010, viewed on 28th October 2010, http://www.insidefacebook.com/2010/03/02/facebook-made-up-to-700-million-in-2009-on-track-towards-1-1-billion-in-2010/

This article looks at Facebook’s financial report.

Business Models for Web 2.0 Firms: The Case of Facebook and Twitter

Friday, October 29, 2010

PROPOSAL FOR SUBMISSION

Saturday, October 9, 2010

Revenue Models

Here are some web 2.0 revenue models suggested by DonDodge (2007):

Discussion!!!

Do you know any other revenue models that can be used by Facebook or Twitter?

DonDodge, 2007, Web 2.0 = web app + 2 founders + 0 revenue, viewed on 9^th October 2010, http://dondodge.typepad.com/the_next_big_thing/2007/08/web-20-web-app-.html