Will Social Media Businesses Make Money?

My thoughts recently have been about the business model for many if not most of the major Social Media infrastructure sites around today. The question I have been asking myself is, how will Social Networking sites make money?

This is a serious issue, and the current hype over Social Media sites, reminds me greatly of the situation in the middle of the Dot Com boom, when everyone was so carried away with the idea of Internet based business that they forgot the basics of business, that is there must be a way of making money out of the business otherwise it Will eventually fail.

Parallels are everywhere, Twitter the current doyen of social networking sites, not only does not make any income; but further there is no facility in its current business model to make any money. Twitter, according to recent comment raised nearly $100m on top of the $35m raised in February, yet it still has no way of generating any income. The question we ask is what happens to investor sentiment when its astronomical growth figures inevitably slow: recent reports, in the USA at least, suggest this may be happening now.

Similarly the default url shortener for Twitter has no method of generating income, neither has budurl or tiny. These are key infrastructure players in the social media landscape yet they have no workable business model. Further there is a host of apps for the likes of Twitter and Facebook which are free. I find it rather disconcerting to think that much of the infrastructure platforms that underpin Social Networking don’t have a viable business model. It’s also somewhat ironic to think that those same platforms are filled with users propounding the benefits of monetizing social networking and exhorting who ever will listen to do the same.

Once they hype cools and sentiment becomes more cautious, or realistic depending on your viewpoint, then investors will be looking for a quick return i.e. a trade sale, failing that, they’ll curtail and then stop further investment as the prospect of hoped for returns diminish. The worrying aspect to this is two fold firstly, who exactly will buy them: I cant see Facebook, the only Social Network business with the muscle to pay the prices that are likely to be demanded, going on a spending spree, it doesn’t need too. Google could of course, but currently seems to have its attentions elsewhere and its previous foray into Social Media with Orkut was a dismal failure. So where else are the buyers? The omens aren’t good; outside of the industry no purchase of a large scale social media business has been successful. One thinks of Fox’s purchase of MySpace and ITV’s purchase of Friends Reunited as classic examples.

Secondly, any difficulty in getting further funding could lead to radical shifts in service and costs for participation as survival takes precedent over funding. This could mean either a wall of advertising, or subscription; neither model is frankly appealing nor are they likely to deliver the revenue needed. You need a lot of advertising to payback about $150million and support the infrastructure and make ongoing profits. Subscription would stop growth dead, since buyers wouldn’t want to pay to talk to potential sellers, when everywhere else it’s free

The warning is therefore not to take “free Social Networking” as a given; and there is a real possibility that one of its key benefits “that it is free at the point of sale” may become a thing of the past.