Tuesday, March 25, 2008

The demise of social networking?

Nah, I don't really mean that. What I'm saying is that social networking sites really have to evolve innovative revenue models to keep on thriving. Right now, many of them, according to the Economist are not making money.

Consider the premise behind these social networking sites: it’s all about profits, about making big someday, by getting being purchased by the big shots like Rupert Murdoch. And the likes of Murdoch are buying these sites by the billions hoping that someday, they could earn more billions from online ads. But it seems the premise or the assumptions about the business potentials of social networking are not necessarily accurate. Says the Economist:

"The big internet and media companies have bid up the implicit valuations of MySpace, Facebook and others. But that does not mean there is a working revenue model. Sergey Brin, Google's co-founder, recently admitted that Google's “social networking inventory as a whole” was proving problematic and that the “monetisation work we were doing there didn't pan out as well as we had hoped.” Google has a contractual agreement with News Corp to place advertisements on its network, MySpace, and also owns its own network, Orkut. Clearly, Google is not making money from either."

Same with Facebook. Economist observes:

"Facebook, now allied to Microsoft, has fared worse. Its grand attempt to redefine the advertising industry by pioneering a new approach to social marketing, called Beacon, failed completely. Facebook's idea was to inform a user's friends whenever he bought something at certain online retailers, by running a small announcement inside the friends' “news feeds”. In theory, this was to become a new recommendation economy, an algorithmic form of word of mouth. In practice, users rebelled and privacy watchdogs cried foul. Mark Zuckerberg, Facebook's founder, admitted in December that “we simply did a bad job with this release” and apologised."

“So it is entirely conceivable that social networking, like web-mail, will never make oodles of money,” says the Economist. And if they couldn't make lots of money, what’s the incentive of maintaining them? Are we going to see consolidation, of one site being gobbled up by the other? Scary thought, isn’t it.

No comments: