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Comment by symbiotic | Hacker News Reader

I agree that social networks need better business strategies in general, but if the advertisers are making more money than the social networking sites, why make the SN site in the first place? Why not just try to beak your way into porno, gambling, credit repair (the list goes on) business and just sell adds like everyone else?

I think the answer is that we believe SN sites should be able to make more money than these other businesses. The person who figures out how to make that happen will be rich, but I don't think the answer is to just add another business onto your SN.

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Sell ads on what? Those sites are buyers of ads. They do the conversion of traffic.

I should have made more clear that this is a longer term strategy, and yes, indeed more expertise is needed in these industries. However, what these industries do is not rocket science, and can be reproduced over time.

My point is that SN sites could eventually do the conversion of that sort of traffic themselves, and gain higher CPM In the Long Run. This process would take years, but is rewarding in the end.

I understood what you're saying. I think it's a great idea.

To the downmodders:

In terms of real money, what comes out of it, is affiliate sales for companies + brand advertising.

Brand advertising is mostly worthless and gets talked up in value because it is even more worthless on national television.

But the kind of advertising that results in a sale is worth real money. Facebook either needs to start selling mortgages in house or develop better relationships with someone who sells mortgages.

Yeah, I haven't even added in the thought of brand advertising as well. That would add to the effect, as the child company also gains eventual brand recognition over time in that situation.

But it's not really a higher CPM at all. There's no benefit to Facebook starting a mortgage brokerage and advertising that on Facebook (which apparently isn't a very valuable seller of advertising, or they'd already have decent CPMs) over just switching to a mortgage company entirely and advertising on other social networks. Or better yet, switch to selling mortgages and advertise on sites that are valuable to mortgage brokers.

You're assuming perfectly priced traffic, in an arbitrage-free environment where the buyers of traffic pay perfectly for the traffic, an exact amount proportional to their revenue that they will get from that traffic.

It doesn't always work that way in the real world. Some random company buying the ads at 10 cents CPM is not always getting traffic that is worth that much 100% of the time. By actually getting the entire revenue stream, the "child" company, and thus its parent would capture the true value of the traffic over a long period of time.

No, I'm assuming that they could just buy ads with the same ROI in many places. For instance, if Facebook ads cost 20 cents cpm, but they earn 40 cents, then their ROI is 2x. I would assume they would have no trouble finding ads elsewhere with a 2x ROI. In fact, I'd be surprised if the market didn't function to make their ads be a 2x ROI at MySpace, Bebo, Hi5, and maybe Digg, Reddit, etc.

Spotting market inefficiencies like that should be really hard to do, considering that all of the mortgage brokers, for instance, already know their ROI on various sites, and the market will make it roughly equal everywhere over time.

Your putting too much faith in the buyers of ads reacting to the changes in prices and knowing exactly how much the traffic they are buying is actually worth. All mortgage broker's/free i-pod scam/dating site/etc know the exact ROI they get back from each and every little bit of traffic? No way. In some industries, theres even a bunch of buyers, some less sophisticated than others, but are yet still able to buy the traffic at a certain rate because they are making a profit at that rate. That isn't optimization. In industries with fewer buyers (high traffic dating sites), one site might have to purchase traffic from a multitude of different sources, or indirectly purchasing it from their own affiliates who might purchase it themselves, to keep up their market share against other big competitors.

This isn't about spotting temporary market inefficiencies, its about spotting long term ones that lurk beneath the surface.

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