“Approximately once a decade, a radical new technology emerges that fundamentally changes the business landscape.  In every case, regardless of prior competitive dynamics, businesses that understand and appropriately adopt the technology win, while those that fail to do so lose.  In the 1970s, this was mainframe computing.  IN the 1980s, it was the PC. In the 1990s, it was the Internet.  And today it is the online social graph.” (Clara Shih in The Facebook Era)

The social graph is the world wide web of people.  It is the map of everyone on the Internet and how they are interconnected.  The social graph is for people what the Internet is for interconnected webpages.  Social networks like Facebook, LinkedIn and MySpace are helping to construct this social graph.

Each of these radical technology evolutions has been punctuated by a cycle of innovation, commercialization, emergence of new applications, and then large-scale impact on business.  The online social graph is following this cycle, and is facilitating a “new, more nimble, and more efficient class of businesses that outcompetes those using technology from the previous era.” (Clara Shih)

I started working with the Internet and online communities almost 13 years ago in 1996.  I created Adoption.com, which became the world’s largest adoption service of which I’m aware (measured by the number of people using its services each month).

As my first consulting project I created the initial vision and directed the creation of the first website for Law.com, which I have been told sold for about $20 million within approximately 2 years of launch (unfortunately, I didn’t get any equity in the project).  I also built the Families.com online community and sold it in 2007.

During the last two years I have been doing consulting work for next-generation digital media properties, such as a large iPhone application and the 4th largest Facebook application, with 54 million registered members.

I have also built niche social networks (such as GenealogyWise.com) to leverage the social graph within niche industries.  These niche social networks provide tools that enable members to connect and share content with others who share similar interests.  GenealogyWise is just a few months old, but it already has 13,000+ members, 3,000+ sub-groups on genealogy-related topics, 700+ blog entries, 350+ videos, etc.

How could a social network help your business to seize your opportunity within the social graph?  If you are an accountant or attorney who practices a specific type of law, you could build a social network for people interested in your areas of practice.  If you own an emergency preparedness company or a manufacturing company, you could build a niche social network of your potential clients.   If you are part of a membership organization or are planning an event, a niche social network can help you recruit and develop stronger relationships with members and attendees.  If you are a politician, the social graph is an essential element of your campaign. President Obama’s social media strategy was given a large portion of the credit for his election victories.  If you are interested in sewing or if your child has a health condition, you can build a social network of people who have similar interests.

Then, once you have developed a successful social network, you can generate revenue in a variety of ways, such as selling advertising, directory listings,virtual goods, classified ads, e-commerce and subscription sales.

I have expertise in creating niche social networks, developing social media strategies for businesses, and helping organizations to better monetize their digital media properties. If your business could benefit from qualified, seasoned consulting to better seize the opportunities within the social graph, I would love to help.

So, today I detailed for Paul some of the solutions available to solve this problem of micro-transactions. I am posting a modified version of this email to share with others, and to get your feedback about micro-transactional solutions.

At the end of this blog entry I also recommend a new online financial service called Revolution Money Exchange which allows members to register, add money, share money and withdraw money FREE. They are even providing a $25 sign up bonus for all new members. Revolution Money is backed by heavy hitters, and I believe it is superior to PayPal and has a legitimate chance to replace PayPal if it can achieve critical mass.

The biggest problem with micro-transactions historically is the financial intermediary, such as PayPal. PayPal has to pay for their costs, risks, and profits. So, they have to mark up the transaction costs. Merchants that develop relationships with the credit card companies directly can cut out this intermediary (middleman) and get far lower rates. Merchants who have large volumes of orders can negotiate those credit card company rates even lower. For example, many companies won’t accept PayPal for their clients because they have negotiated lower rates with the credit card companies directly.

There are several different options the online merchants could consider to better facilitate micro-transactions:

(1) Aggregation Billing – Online merchants can aggregate all of the purchases of an active user over a period of time, such as a week or a month. Then, the merchant would run all those smaller transactions together as one purchase, and only have to pay the flat transaction fee one time. This is the model followed by iTunes which runs credit cards once per week. The problems with this model are that the merchant still has high transaction costs for the customers who do not purchase more than a single item in the billing period, and the merchant has to invest in developing this technology.

(2) Microcurrency Providers - Online merchants could use a third-party micro-currency provider like Bee Payments, but they take 25% of the transaction, which is probably a worse situation for many merchants. This solution might work for content creators who make 100% profit selling their products, or for merchants who sell digital products for VERY small amounts, but it doesn’t work for merchants who have to pay royalties or other costs of goods sold. Microsoft Points might actually be a good solution at some point in the future, but right now its not available for non-Microsoft vendors.

(3) Prepaid Accounts - Online merchants could charge a “convenience charge” to all single orders to offset the credit card processing fees. Then, the merchant could provide a prepaid points system to allow customers to avoid the convenience charge. Customers could prepay funds to an account, with some minimum prepayment amount, such as $10. For each dollar spent the customer would earn 100 point in the system, and be able to spend those points purchasing products from the merchant. Many online vendors, such as eNom, have used this model effectively. I personally have spent a lot of money on the eNom pre-payment platform, and I love the convenience of this solution. In fact, I love it despite the fact that they charge me a convenience charge AND make me prepay.

The Spare Change application on eBay is another example of this model where users add amounts, with a $10 minimum, and then can transfer money with other Facebook users who use this application. On the down side, some people are not going to want to prepay $10 if they just want a $1 song right now. Merchants can solve that by allowing them to do the single transactions, but charging them a “convenience charge” if they don’t want to use the prepayment system.

One advantage of this system is that it is easier for people mentally to spend money that is already sitting in their account than it is to put in a new credit card number for each tiny transaction. The hassle of having to enter credit card information for each micro-transaction also adds a substantial additional cost to each transaction, in addition to the credit card processing fees, and can be eliminated with this pre-payment system. Also, in theory with pre-payment the merchant will be receiving more purchases from each customer and the customers are being required to purchase in bulk with the pre-payment system. The key question here is whether the bulk purchase requirement will more than compensate for the lost order of people who only want one product and are not willing to pre-pay for multiple products or pay a convenience charge for a single item.

Also, one best and most substantially overlooked elements of this model is that many people will prepay funds that they will forget about or never use, or that will stay in their account for a long period of time before use. The aggregation of these small balances can become a large sum of money over time, and then interest can be generated from the “float” (or unused funds sitting in the bank account of the merchant). That “float” is the reason American Express travelers checks and Western Union were so successful. Earning money on the “float” is the business model of financial intermediary sites like Kiva and a huge portion of PayPal’s income.

(4) Revolution Money – Another very fascinating possibility that I have been following recently is Revolution Money and the Revolution Money Exchange. Steve Case is the Chairman and CEO of Revolution and it has a lot of heavy hitters involved, such as former Charmen/CEOs of J.P. Morgan, Mastercard, AOL, Fannie Mae and Charles Schwab, along with a former Secretary of the Treasury and Former Harvard University President.

Revolution Money claims it will charge merchants transaction fees as low as 25% of the industry average, and allow those transactions to be carried out through many different methods, such as point of sale, online, social networking sites and instant messaging. Revolution Money claims that the average credit card company charges 1.9% and that the Revolution Money solution slashes fees to 0.5%. It also claims that through Revolution Money merchants can provide immediate rewards, such as cost savings and loyalty programs.

Revolution Money Exchange is free to register, free to add money from a bank account, free to send money, free to receive or request money and free to transfer money to a bank account. It does charge transaction fees check withdrawals, check stop payments, paper statements, ACH returns and overdrafts. They have already launched a Facebook Application, but most users will hopefully never need to pay those fees.

I believe that this Money Exchange business model is a “loss leader” and that Revolution Money is focused on generating money from interest paid on the “float” left in the client’s accounts, and by charging interest on balances from their clients’ Revolution Cards. If that is the case, I think that this is a brilliant strategy and could be a very serious competitor or replacement for PayPal.

Right now, Revolution Money is giving $25 free to motivate new clients to sign up, and they are paying websites $10 per new customer they refer to Revolution Money (I don’t know how long this will last.). So website owners could add Revolution Money as the preferred payment menthod. Then, they could advertise “get $25 of our products free”. Their clients would get the $25 of products by signing up with Revolution Money and then spending that money on those products. The clients of the online merchants would get $25 of free product and the merchant wouldn’t even have to pay the $25. The merchant would receive the benefit of a giveaway to get new client signups, without having to pay the givaway cost. Also, the merchant would get the new client referral fee of $10, which might be increased if the merchant can deliver sufficient volume of referrals. If the merchants sell products that are owned by someone else, this opportunity might be strong enough to motivate the owners of those products to share in the advertising costs.

I need to do further research and testing. However, based on my initial research I believe that Revolution Money provides a strong marketing and micro-transaction opportunity for website owners. It also provides a great opportunity for each of us to get $25 free just for signing up, as Revolution Money works to build their critical mass of users.

Last week Google launched yet another of these free tools, Google Ad Manager, which I will describe later in the blog. This application will radically alter how we do business, how much time and money it costs us to do business and the amount of revenue we can generate from doing business.

Here are a few of my favorite web-based applications for small businesses provided by Google (and a few other companies):

Google Custom Search allows website owners to add powerful site search capabilities for free. Our companies spent tens of thousands of dollars licensing and developing technologies, such as Nutch/Lucene and Atomz to power our site search engines, and the quality of search results was never adequate. Google provides its site search solution with advanced features such as misspelling suggestions, and synonym searches. Not only does Google offer site search for free, but it also incorporates keyword-targeted ads that allow website owners to generate revenue. Competitors, such as Yahoo offer similar products, but the quality of the Google site search appears to be superior.

Google Adsense allows website owners to make money from advertising from the first day their site launches. I remember in the early days of the Internet that new websites might go years without substantive advertising revenues, which were sold in-house, as the sites grew to be popular enough that customers wanted to advertise on them. Then I remember additional years where websites flushed thousands of dollars of unsold advertising inventory down the toilet each month. I remember being elated when Google began to provide the ability for website publishers to put targeted advertising on their sites, fill remnant inventory, and make money without a sales force. Many competitors exist in this space, such as Yahoo and MSN, but Google seems to deliver a higher return for publishers because it has more advertisers bidding competitively.

Google Adwords allows website owners to run effective, targeted advertising campaigns for inexpensive prices. Other than free advertising, Google may be the most effective large-scale advertising on the planet. I remember when Yahoo used to charge $50 or more for every 1000 ad impressions they would deliver for on search results for the keyword “adoption”. Website publishers can now get targeted advertising for their sites for a fraction of that cost. Further, those campaigns can be turned on or off at any time, can be targeted based on geography and other characteristics of the visitors, and provide statistics that allow for amazing analysis of return on investment. Yahoo, MSN and Ask also provide similar solutions which make sense for publishers to use in conjunction with Google Adwords.

GoogleTalk provides free communication tools for remote staff members, such as instant messaging and voice chat. We used to pay ridiculous amounts to call employees in other countries. Now, we know when remote employees arrive and are working by when we see them log in to GoogleTalk. When they are working, we can effectively communicate with them with the instant messenger, and essentially call them and talk to them for free with the voice chat. MSN messenger does provide video chat, but GoogleTalk seems to be more reliable for voice chat, which usually is very adequate. This tool does more than anything to facilitate remote teams to work together effectively.

Gmail and Google Apps proved the ability for site owners to get free email hosting and spam filtering for their domain. We spent tens of thousands of dollars combating SPAM over the years when we hosted our own email. Not only does Google do a dramatically superior job filtering spam, but our mail doesn’t have all the downtime issues we had previously, it has a world-class web-based interface, and it is free. I also love how easy it is to find archived messages with their search feature.

Google Analytics provides free website analytics or statistics for website for free. Although this Google service still needs some improvement, and needs to run faster, the free pricing is incredible, when some of its competitors want to charge sites like mine thousands of dollars a month. Quantcast and Compete.com offer solutions which we need to test.

Google Ad Manager was launched in beta last week. It provides a free web-based system that allows website publishers to manage and deliver advertising on their sites. It has advanced features, such as geographic targeting and support for graphical, video and text ads. Our companies may have spent $150,000 or more to ad features to our ad serving technology, which Google Ad Manager now offers for free.

Google offers many other valuable features which businesses can integrate, such as:

• Google Maps (ad mapping to your website or an interactive map for site visitors),
• Google Calendar (build and share calendars),
• Google News Alerts (receive the most recent news for your industry),
• Google Notebook (clip and share info as you surf the web) and
• Google Docs (shared documents and spreadsheets like Microsoft Office).

Even though these Google applications are revolutionary and invaluable to small businesses, many other companies provide valuable free or very inexpensive solutions which are phenomenal tools for small businesses. Some of my favorites are:

• CraigsList (free classifieds),
• Backpack (shared to do lists),
• eLance (freelance project marketplace),
• eBay (auctions to buy or sell almost anything),
• DomainTools (domain name research tools),
• RememberTheMilk (task management and reminders),
• Central Desktop (collaborate, communicate and share files),
• Wesabe (money management and tracking),
• LinkedIn (networking),
• HiRise (contact and client relationship manager),
• YouSendIt (send large files),
• FreshBooks (time tracking and invoices),
• Amazon.com aStore or WebStore (get paid to sell Amazon.com products and let them handle the fulfillment),
• WordPress or Blogger (add a free blog to your site) and
• eNom (many free features with domain registration, such as world-class DNS).

Over the last eleven years, our companies have spent hundreds of thousands of dollars developing and supporting applications which Google and others now offer for free. I expect that if the value of all these free services being used by businesses were valued, that Google would be the largest angel investor in small businesses.

Small businesses need to thoroughly explore all of the Google offerings to ensure they are maximizing the benefits that they can receive from these amazing, free or low-cost web applications. Because of all the free or inexpensive applications which are now available, this is an exciting time to start a small business online. eBusinesses can use these tools to launch more successful projects in a shorter period of time and with a smaller initial investment. Thank you Google.