Will Social Networks Ever Make Money?
Despite massive overnight popularity, Facebook, Twitter and the like have to contend with hard 21st-century attitudes: users resent intrusive ads, they expect a free service, and they are fickle. So what are the prospects for profitability? Andrew Saunders reports.
To some, they are the undisputed darlings of web 2.0, spearheading a virtual revolution that will replace the net as we know it with a connected world where status, street cred and even employability are determined not by the old credos of class, geography and education but by the number and quality of nodes on your personal global network. To others, social networks such as Facebook and Twitter are the last word in navel-gazing - online platforms for the swapping of trivial opinions by the terminally self-obsessed.
Whichever side of the fence you prefer to be on, if the grand vision promised by the boosters is to stand a chance of coming even halfway true, the big social networks will have to start doing something that they have so far singularly failed to do - making decent, sustainable profits. The question being asked with growing urgency out in the real world, where the wheels of commerce have yet to become frictionless and still need greasing with plenty of moolah, is: can they ever do so?
Some veterans of the dot.com bubble of the late '90s have their doubts Michael Wolff, American author of Burn Rate, the most compelling first-hand account of life in Silicon Valley in that frenzied period of boom and bust, is one. 'Social media is based on the internet model, and we are right to be alarmed by that model. It creates moments of intense enthusiasm, but they do not - cannot - last.'
Enthusiasm is the word. Facebook has signed up a mindboggling 300 million users in just three years. That's a fifth as many followers as the world's largest religion, Christianity, has accrued over two millennia, and it's still growing fast - five million new users a week.
Founder Mark Zuckerberg's ambition is also of biblical proportions. He wants to get to a billion users in a year or two, and - having turned down at least one billion-dollar offer, from Yahoo! - shows no inclination to sell out. Facebook has attracted a zealous following from the investment community - the purchase of a 5% stake by Microsoft in 2007 valued the company at dollars 15bn, although more recent share sales suggest dollars 5bn is closer.
And yet in its more established territories, Facebook is already old hat. How long can it find new markets where punters still think it is cool, to make up for those where it has passed into the ranks of the web establishment?
Blake Chandlee, commercial director EMEA for Facebook, is ex-Yahoo! and was Facebook's first international employee, way back in 2007. He is confident the firm has what it takes to stay at the top for a while yet 'How do you avoid being blindsided by the next big thing? I asked Mark (Zuckerberg) exactly the same question when I went for the job,' he says. 'He really wants to connect users, to make Facebook more of a utility than a content-driven thing, like some other social sites.
'Facebook is about nodes and edges - it enables you to keep in touch much more effectively with people at the edges of your network, people you might know only superficially, than you can in any other way. That has real global appeal, more so than content plays.'
At least Facebook has viable revenue streams - it makes money from advertising on the site, and is exploring other sources of income, such as stored credit, which users can spend on the site, and a new VOIP telephony service to compete with Google and Skype.
Last month, Zuckerberg announced that Facebook will be cashflow-positive this year, which means that it will earn more in revenues than it spends on capex - a vital turning-point for any start-up.
But it's very cagey on exact figures. Even mundane facts such as employee numbers are not 'officially' public (it's around 1,000 people, by the way) and revenues and expenditure details are closely guarded secrets. …