Monetizing Social Networking

There is frequent talk recently of “monetizing” social networking and so-called Web 2.0 technologies like Facebook, Twitter et al. Essentially, the term monetizing means extracting a profit from something. While companies like Facebook have a market capitalization larger than that of Ford Motor Company, they are unable to turn a profit. Talking about making a profit is apparently oh-so Web -1.0, and using a euphuism like “monetizing” makes it sound like these companies are not actually bleeding cash like a drunken pirate.

One can’t help but look at social networking and the massive investments that have been made, and wonder where the money is going to come from. Many of the social networking sites have had phenomenal success in terms of gathering a huge user base, but aside from limited advertising revenue, few have seen the cash windfalls that have long been predicted. Many of these predictions rely on the law of big numbers. Basically this law assumes that given a massive number of people using your service, if just a tiny percentage spends a few bucks with you, you’ve hit pay dirt. Recall many of the business plans of the late 1990s that started with an incomprehensively large number of internet users, followed by a statement like “If only 0.00001% of all internet users…” The fatal flaw of this law is that people are not random bumper cars, which float around the internet dropping a few bucks on whatever they happen to bump into. A product or service with no perceived value is not going to make money no matter how many people bump into it.

The best analogy I can draw is to the massive investment in internet infrastructure that occurred in the 90’s. The logic was that all this traffic (a really big number) had to go over someone’s wires, so if you invested in the folks that owned the wires, you would need an armored car to haul your investment returns around. The fatal flaw in this logic was that the value of the internet was not in the wires and boxes connecting everything together, rather it was in the content and services that were delivered over those wires. Consumers found value in the Googles and Yahoos, not in the MCIs or Verios that own the copper and fiber.

Similarly, the value in Facebook or Myspace does not lie in the portal itself, rather it’s the people using the service and the content they generate. While these companies may contend that they are now unstoppable due to their sheer number of users, one only has to look at eBay, whose frequent price increases have alienated its core users and driven them to replacement services. While there is money to be made in social networking, it’s likely not going to be in the “pipes,” rather it will be found by capitalizing on the content generated by the service’s users.

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