Social Media Business Model Analysis - Case Tencent, Facebook, and Myspace Logistics Master's thesis Xiaoyan Hu 2011 Department of Information and Service Economy Aalto University School of Economics ABSTRACT The term of social media is becoming increasingly popular presently, the amount of social media users is growing dramatically, and the monetization of social media has been discussed in publications but not in details. Nowadays, the most frequently used approach to make money for social media is online advertising. However, the successful company like Tencent proves other potentials of monetization. Because the business model is critical to make profit for a company, a company’s financial performance could be better achieved when it has a good business model. This study will focus on business models analysis of social media companies. The study is conducted based on three case companies, Tencent, Facebook, and Myspace. The objectives are to build the business model framework for social media services analysis, apply this framework into case companies to examine their business models and find out the best performed one, and finally to improve other two less well-performed companies’ business models. Case study, observations, focus group are main methods for collecting data and empirical analysis. Based on literature reviews of social media and business models, this paper formulates a new business model framework, it provides a structure for empirical case analysis. The framework is modified mainly based on Osterwalder’s (2002) e-business model ontology, and other three attributes have also been added into. New framework components include customer relationship, infrastructure management, product innovation, market considerations, technologies, regulations, and financial aspects. Through empirical studies on business models, Tencent emphasizes to focus on users’ personalization and provides integrated solutions, it achieves high financial return mostly through virtual goods channel. Facebook offers young people a specific social networking platform, enable the communication and maintain people’s relationships in a way of content sharing, it collects revenues mainly from online ads. Myspace gives users high personalized experiences through social entertaining platform, and also generate revenues from online ads. Tencent has been found to be the most successful in its business model and financial performance among three companies. To achieve better performance for other two companies, Facebook is suggested to improve its value proposition and provide more social media services based on young people’s needs, to include new mechanisms that can maintain customer relationship, to have new revenue channels like increase virtual item sales and bind with telecommunication services. For Myspace, it is critical to enhance main music solution service in order to keep its competitive advantage. Real name registration policy should be applied to enhance users’ strength of ties and environment safety. Customer relationship is the most important issue due to significant amount of lost users. The study recommends it to develop more features that keep users active on the site, to give them caring service, and to listen to their voices. Finally, Myspace can also try to add new revenue streams besides traditional ads approach. Keywords: social media, business model, Tencent, Facebook, Myspace, business model framework, business model improvement Table of Contents ABSTRACT ............................................................................................................................... 1 List of Figures ........................................................................................................................... 3 List of Tables ............................................................................................................................ 4 1. Introduction........................................................................................................................... 5 1.1 Motivation of Research ................................................................................................. 5 1.2 Objectives and Research problems ........................................................................... 6 1.3 Thesis Structure ............................................................................................................ 7 1.4 Study Methods ............................................................................................................... 8 2. Literature Review of Social Media .................................................................................... 9 2.1 Definitions of Social Media .......................................................................................... 9 2.2 Social Media and Web 2.0 ......................................................................................... 10 2.3 Classification of Social Media.................................................................................... 13 2.4 Use of Social Media .................................................................................................... 19 2.5 Networks Effects.......................................................................................................... 20 2.6 Social Media as a Marketing Tool ............................................................................ 21 2.7 Social media issues and challenges ........................................................................ 24 2.8 Monetizing Social Media ............................................................................................ 26 2.9 Summary and Questions Raised by Literature Review ........................................ 27 3. Business Model Framework ............................................................................................ 29 3.1 Definitions of Business Model ................................................................................... 29 3.2 Business Model Components Framework .............................................................. 30 3.3 Modified Business Model Framework ...................................................................... 34 4. Research Methodology .................................................................................................... 40 4.1 Research Framework ................................................................................................. 40 4.2 Research Methods ...................................................................................................... 42 5. Empirical Study .................................................................................................................. 46 5.1 Background of Case Companies .............................................................................. 47 5.1.1 Tencent .................................................................................................................. 47 5.1.2 Facebook ............................................................................................................... 49 5.1.3 Myspace ................................................................................................................. 50 5.2 Business Model Ontology .......................................................................................... 51 5.2.1 Tencent business model ..................................................................................... 51 2 5.2.1 Facebook business model .................................................................................. 61 5.2.2 Myspace business model .................................................................................... 70 5.2.3 Business models comparison............................................................................. 76 5.3 Performance Measurement ....................................................................................... 82 5.3.1 User activity and engagement metric ................................................................ 82 5.3.2 User geo-socio-demographic metric ................................................................. 83 5.3.3 Social media content metric ............................................................................... 85 5.3.4 Business metric .................................................................................................... 88 5.4 Business Models Innovation ...................................................................................... 90 5.4.1 Potential models assessment............................................................................. 90 5.4.2 Identification of risks ............................................................................................ 96 5.5 Summary of Empirical Study ..................................................................................... 98 6. Conclusion .......................................................................................................................... 99 6.1 Applicability of Modified Business Model Framework ......................................... 100 6.2 Key Findings .............................................................................................................. 100 6.3 Theoretical and Managerial Contributions ............................................................ 102 6.4 Limitations and Further Research .......................................................................... 104 REFERENCES....................................................................................................................