Web 2.0 may be social, but is it profitable?

Web 2.0 and social networking is drawing a lot of eyeballs and visitors, but is it likewise generating dollars?

That was a question asked during a panel discussion on the topic, Is Web 2.0 Sustainable, during Microsoft’s MIX08 event in Las Vegas last week.

Microsoft Corp. director of business development Don Dodge and a panel of social networking business experts considered where and how money can be made from online social communities.

Kevin Rose, founder of online content sharing community Digg, said success for him began modestly and grew rapidly as other online bloggers began to take notice of the modest community he began building. Rose started with a few hundred people who read his blog. He spent approximately $10,000 to run his Digg community site during the first six months.

“Good articles were getting promoted in Digg and users were taking notice,” he said. Webmasters on other sites would see traffic directed to and from Digg, blog about it, post Digg articles and tell other communities about it.

“People see the traffic coming to blogs and sites and take notice of (where it came from) and tell people about it.”

In general, social network communities don’t generate a great deal of money, the panel noted. Most revenue generated by online social communities comes from advertising, but it can take a whole lot of page views by visitors to generate significant advertising dollars. Dodge presented a model that showed, at a CPM (cost per thousand impressions) rate of 50 cents, it takes 42 million impressions a month to generate $250,000 or 4.17 billion impressions to generate $25 million dollars.

A CPM rate of $10 takes two million impressions each month to generate $250,000 or 208 million to generate $25 million.

Ryan McIntyre, a venture capitalist for Foundry Group said audience targeting is key. “The more targeted you are the higher the CPM (rate) you can achieve,” he said.

Dave McClure, a blogger and self-described Silicon Valley geek who hosts online community500 Hats, warned that it’s dangerous to rely too heavily on sponsorship and advertising to sustain your online community, particularly with the spectre of a significant downturn in the U.S. economy. Such advertising dries up quickly.

Subscriptions and lead generation are other more creative and sustainable approaches, McClure said, although he admitted there are currently few successful paid subscription models that work.

“They have to be unique,” he said. And subscription fees should be somewhere less than $20 dollars a month, which most subscribers would consider “effectively free.” You should look to incorporate some element of subscriptions for under $20 dollars,” McClure advised.

However, Kimbal Musk, CEO of Me.dium, a company that is pioneering a new “social browser” tool warned of competitors seeded and funded by venture capitalists that often undermine subscription-based content models by offering low-cost or free high-quality content

“Prices keep getting driven down by competitors who offer stuff for free,” Musk said. “VCs (venture capitalists) look to monetize these competing alternatives in other ways, beyond subscription.”

McClure made the point, that the successful approach taken by most online content providers is to start out providing a free service and ultimately introduce a unique service that’s based on paid subscription.

He added that the trick is to figure out what’s unique about what you’re doing and charge a fee for what people would consider unique value – a sort of up-sell.

McClure estimated that a paid subscription model might stick with 10 per cent or less of your total subscriber base. Most of the panel insisted that a more reasonable target is probably closer to 2 per cent or 3 per cent of regular subscribers who could be converted to paid subscribers.

On another point, Digg operator Rose was asked whether those who contributed content should be compensated for their contributions, particularly if Digg and other online businesses make money from their work.

“I hope it’s not work,” Rose said, explaining that Digg and other sites like his are a way for people to promote and share their passion and interests. It shouldn’t be their job, he said. Rose explained he listens to the folks from whom he leverages content, and then build the tools they want and evolve the site to something that this community of contributors wants it to become. That’s the value for them.

“They realize we have to make money,” he said. “At the end of the day the most important thing for us is innovating in our own way and listening to where they want to take it. As long as we let them shape the future direction of the site, we’ll be OK. Without the community we’re nothing so we have to listen to them.”

The future of monetizing online communities is all about being smart. Me.dium, for example, is building a means of tracking the online activity of users, through Internet Explorer 8. Among other things, Me.dium’s service will allow users to know what are friends – and others who share similar online habits and activities – doing. Those who use the tools will be able to understand what these people do on the Web, based on an analysis of their online activity.

“People will be able to see where their friends go – and follow them,” Musk said.Eventually Me.dium will be able to create a Web advertising serving engine that serves uniquely targeted advertising based on the history of what people do and an analysis of what are their activity patterns.

It begged the question to the panel – What about privacy? What are the privacy implications of targeted advertising?

Robert Scoble of FastCompany.com put it bluntly.”Privacy is dead,” he said. “My 14-year-old kid just doesn’t care about privacy.”

Kimbal claimed he hasn’t had a single negative comment on privacy, while Rose said Digg is open about what it does with information.

“If we share information with advertisers,” he said. “We’ll be up front about it…we’ll tell people and give them the means to opt out.”

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