Senator Orrin Hatch: “How do you sustain a business model in which the users don’t pay for your service?”

Mark Zuckerberg: “Senator, we run ads”

The simple answer Mr Zuckerberg gave to the US Senate’s commerce and judiciary committee in April 2018 is all you need to know about the business model of a social media platform. And not just Facebook’s business model, but pretty much everyone’s. And those platforms whose non-advertising revenue represents a material part in their income statement have this only because they cannot sell more advertising.

Meta Platforms Inc., as Facebook is now called, continues to make nearly all their revenue from advertising, despite their investment in the metaverse, new cryptocurrencies, and Ray Ban sunglasses. In 2021, they generated $118 billion of revenue, 97% of which came from selling ads. And although they are comparative minnows in the pond where Meta is the biggest fish, the same story goes with all the other social media platforms: Twitter made $5 billion of revenue of which $4.5 billion came from advertising, while all of Snap’s $4 billion and Pinterest’s $2.6 billion revenue was generated by ads.

Social media isn’t the only online service funded by advertising, which we get “for free”. Alphabet, who provides us with Google Search, Gmail, YouTube and Google Maps, generated $209 billion from selling ads last year, which was 81% of their total revenue. If Google’s ad business was a country, they would be fighting it out with New Zealand to get the 50th spot among world’s largest economies. In 2023 they would probably knock out Chile and Pakistan to get into top-45 (having said that, there are some signs from recent quarterly releases that even the biggest of the internet majors and their ability to sell ads is not entirely immune to what’s happening in the rest of the world economy).

There is no real insight to note that all social media platforms make nearly all their money from advertising. But what is interesting is that despite the scale of these companies, the legions of super smart people they employ, and the advice they get from their billionaire owners and management consultants, none has figured out an alternative to the business model Mr Zuckerberg explained when asked by the US senators, which is “we run ads”. And the very probable reason is because there isn’t one.

And if advertising is the only way to make money in social media, it will be even more interesting to try and solve that in a decentralized world.

“But no!”, I hear some web3 puritan cry. “We can give the creators tokens by liking their posts! And then I can mint an NFT of my like, which I can sell in Opensea! Surely an NFT of the 283rd like for one of the Kardashian’s holiday pictures will be worth a lot of money!” Of course, in a world where a jpeg of a cartoon ape is selling for close to $200,000 at the time of writing, anything seems possible. And several big brands are already investing to build a presence in decentralized metaverses and minting branded NFTs.

But back in the real world, for any social media business — decentralized or not — to remain financially sustainable, it needs advertising. And it is decentralization that makes advertising so difficult to do in a web3 world.

Currently, if you are an advertiser, you can go to Meta, Twitter, Snap etc. and ask them to show your ad to a specific number of users within specific demographics. These social media companies can then go to their database of users where they have collected all sorts of information on them and put the ad on the feeds of those who match the requirement.

In a decentralized world, there is no such database. Individuals do not have profiles in any application, but instead they access the various applications through their wallets, which are part of their Self-Sovereign Identities. And even though every node on the blockchain network might have a list of all the wallet addresses that have made transactions, there is no data in the address and no way of tracing them to any individual. You can only know who is behind a wallet if you have specifically exchanged keys with that wallet and formed a connection that way. And even then, you would only see the information the owner of the wallet has agreed to show to you.

If you are an advertiser, this is a big problem as the return on investment for any ad campaign depends on your ability to identify and target the part of the population most likely to buy your product. As an example, if you are selling insurance in the UK, you would only like to target people living in the UK and who are over 18 so that they can buy your insurance. Secondly, you might be more interested in home or car owners, or those married with children and so on. Meta can help you find these people without you having to show your ad to all their 2 billion users.

The other problem is how would an advertiser orchestrate and manage their campaigns across multiple decentralized applications (dApps), and how would the costs be allocated and by who? Will we see the days of the 1990’s and early 2000’s return, when advertisers needed to contact every single website their target audience might be visiting, to buy banners? Would advertisers now need to find a specific content creator and pay them directly, and with what? Even the most tech savvy CMO might struggle to make the business case to multiply the size of their team just to manage all that, especially if the effectiveness of their campaigns will not improve. And as long as these CMOs keep their ad money in the centralized platforms, the content creators will stay as well in order to get paid.

At UNITT, we have been working on the dilemma of decentralization, social media, and business models as we are convinced a new approach away from the centralized platforms will be ultimately better for individuals, content creators, advertisers and indeed, most application developers.

We believe the solution depends on two factors: an SSI environment that enables the utilization of every user’s social graph between applications, and a standard for tokenizing every transaction that happens in the ecosystem across applications.

Through an SSI system and tokenization, an individual can effectively transfer their social currency, which consists of their demographic details, networks, and connections, into actual money to buy services. By interacting with SSIs, advertisers would know exactly who they have reached with their ads, most likely at lower cost than currently, thus improving their ROI. And content creators, who are no longer a party in the relationship with the advertiser and the individual, only need to focus on creating content and getting people to see it.

For developers and innovators of new social media applications, barriers will be lowered as the effort for people to adopt new services is less due to the interoperability of SSIs and transportability of social graphs.

If decentralized social media becomes a reality, it is because it is somehow better than the current centralized and sometimes monopolistic platforms for all users. However, good intentions and humanist philosophy alone will not displace companies with hundreds of billions of dollars at their disposal, unless a better business opportunity is created for those who ultimately write the checks.

Jussi Makela, co-founder, and the UNITT team

Senator Orrin Hatch: “How do you sustain a business model in which the users don’t pay for your service?”

Mark Zuckerberg: “Senator, we run ads”

The simple answer Mr Zuckerberg gave to the US Senate’s commerce and judiciary committee in April 2018 is all you need to know about the business model of a social media platform. And not just Facebook’s business model, but pretty much everyone’s. And those platforms whose non-advertising revenue represents a material part in their income statement have this only because they cannot sell more advertising.

Meta Platforms Inc., as Facebook is now called, continues to make nearly all their revenue from advertising, despite their investment in the metaverse, new cryptocurrencies, and Ray Ban sunglasses. In 2021, they generated $118 billion of revenue, 97% of which came from selling ads. And although they are comparative minnows in the pond where Meta is the biggest fish, the same story goes with all the other social media platforms: Twitter made $5 billion of revenue of which $4.5 billion came from advertising, while all of Snap’s $4 billion and Pinterest’s $2.6 billion revenue was generated by ads.

Social media isn’t the only online service funded by advertising, which we get “for free”. Alphabet, who provides us with Google Search, Gmail, YouTube and Google Maps, generated $209 billion from selling ads last year, which was 81% of their total revenue. If Google’s ad business was a country, they would be fighting it out with New Zealand to get the 50th spot among world’s largest economies. In 2023 they would probably knock out Chile and Pakistan to get into top-45 (having said that, there are some signs from recent quarterly releases that even the biggest of the internet majors and their ability to sell ads is not entirely immune to what’s happening in the rest of the world economy).

There is no real insight to note that all social media platforms make nearly all their money from advertising. But what is interesting is that despite the scale of these companies, the legions of super smart people they employ, and the advice they get from their billionaire owners and management consultants, none has figured out an alternative to the business model Mr Zuckerberg explained when asked by the US senators, which is “we run ads”. And the very probable reason is because there isn’t one.

And if advertising is the only way to make money in social media, it will be even more interesting to try and solve that in a decentralized world.

“But no!”, I hear some web3 puritan cry. “We can give the creators tokens by liking their posts! And then I can mint an NFT of my like, which I can sell in Opensea! Surely an NFT of the 283rd like for one of the Kardashian’s holiday pictures will be worth a lot of money!” Of course, in a world where a jpeg of a cartoon ape is selling for close to $200,000 at the time of writing, anything seems possible. And several big brands are already investing to build a presence in decentralized metaverses and minting branded NFTs.

But back in the real world, for any social media business — decentralized or not — to remain financially sustainable, it needs advertising. And it is decentralization that makes advertising so difficult to do in a web3 world.

Currently, if you are an advertiser, you can go to Meta, Twitter, Snap etc. and ask them to show your ad to a specific number of users within specific demographics. These social media companies can then go to their database of users where they have collected all sorts of information on them and put the ad on the feeds of those who match the requirement.

In a decentralized world, there is no such database. Individuals do not have profiles in any application, but instead they access the various applications through their wallets, which are part of their Self-Sovereign Identities. And even though every node on the blockchain network might have a list of all the wallet addresses that have made transactions, there is no data in the address and no way of tracing them to any individual. You can only know who is behind a wallet if you have specifically exchanged keys with that wallet and formed a connection that way. And even then, you would only see the information the owner of the wallet has agreed to show to you.

If you are an advertiser, this is a big problem as the return on investment for any ad campaign depends on your ability to identify and target the part of the population most likely to buy your product. As an example, if you are selling insurance in the UK, you would only like to target people living in the UK and who are over 18 so that they can buy your insurance. Secondly, you might be more interested in home or car owners, or those married with children and so on. Meta can help you find these people without you having to show your ad to all their 2 billion users.

The other problem is how would an advertiser orchestrate and manage their campaigns across multiple decentralized applications (dApps), and how would the costs be allocated and by who? Will we see the days of the 1990’s and early 2000’s return, when advertisers needed to contact every single website their target audience might be visiting, to buy banners? Would advertisers now need to find a specific content creator and pay them directly, and with what? Even the most tech savvy CMO might struggle to make the business case to multiply the size of their team just to manage all that, especially if the effectiveness of their campaigns will not improve. And as long as these CMOs keep their ad money in the centralized platforms, the content creators will stay as well in order to get paid.

At UNITT, we have been working on the dilemma of decentralization, social media, and business models as we are convinced a new approach away from the centralized platforms will be ultimately better for individuals, content creators, advertisers and indeed, most application developers.

We believe the solution depends on two factors: an SSI environment that enables the utilization of every user’s social graph between applications, and a standard for tokenizing every transaction that happens in the ecosystem across applications.

Through an SSI system and tokenization, an individual can effectively transfer their social currency, which consists of their demographic details, networks, and connections, into actual money to buy services. By interacting with SSIs, advertisers would know exactly who they have reached with their ads, most likely at lower cost than currently, thus improving their ROI. And content creators, who are no longer a party in the relationship with the advertiser and the individual, only need to focus on creating content and getting people to see it.

For developers and innovators of new social media applications, barriers will be lowered as the effort for people to adopt new services is less due to the interoperability of SSIs and transportability of social graphs.

If decentralized social media becomes a reality, it is because it is somehow better than the current centralized and sometimes monopolistic platforms for all users. However, good intentions and humanist philosophy alone will not displace companies with hundreds of billions of dollars at their disposal, unless a better business opportunity is created for those who ultimately write the checks.

Jussi Makela, co-founder, and the UNITT team