Tuesday, June 24, 2008

Will Social Networks Ever Make Money?

This morning I came across a two-part article on Technology Review:


It's an interesting piece that focuses on the disparity between all the attention and venture capital focused on social networks, and the uncomfortable truth that (to date) no one has developed a business model to turn a profit on those networks. Definitely worth a read.

The crux of the problem is that advertising simply doesn't suit a social network audience. Google ads are profitable because people often search Google for a product they're interested in. They go there with the specific intention of learning more about Product X, so when ads pop up for Product X, they're more than happy to click on them. The situation is completely different for social networks, though. No one goes to Facebook to buy a television, and they're not on MySpace to do anything other than connect with friends and maybe cruise through a few random pages. Ads in that context are an intrusion, and marketers are only going to make it worse. Consider this ominous quote:

"The trouble," says Goldstein, "is we're putting ads up in front of users, where they can ignore them. We've got to get them between users."
Yes, good thinking -- put your ads between users, thereby effectively blocking the one activity that they come to social networks in order to pursue. I couldn't think of a better or faster way to shut a social network down than to force its members to click through an ad every time they want to make a social connection.

There may be no solution to this problem. Certain human activities are simply not connected closely enough with a purchasing decision for the activity to be monetized. This, of course, could pose a very serious problem for online communities that need to find some way to offset the cost of their bandwidth, servers, and company payroll. One possibility is to charge a subscription fee, but very few sites that throw up a pay wall will attract enough members to make their community experience worthwhile. Another possibility is to take a lesson from the music industry and try to think of ways that free content in one space can attract money somewhere else. Are you more likely to buy a used car from someone on a social network who's listed as a friend of a friend (of a friend)? If so, maybe a Craigslist tie-in is the way to go. Most fruitful are likely to be products or offerings that improve the social experience itself -- greeting cards, for instance, or gifts.

There are reasons for optimism. I don't read magazines or watch television because I'm looking for something to buy, but advertisers have long seen value in placing ads in those media. Perhaps social networks are simply too young, and the money will come later. Still, it's a tricky scenario that likely will not be solved anytime soon. When the next Internet bubble pops (in six months to a year, if the rumors I'm hearing turn out to be accurate), expect more than a few trendy social networks to be among the leading candidates to be this generation's Pets.com.