Categorized | happenings, social marketing

Pop goes Internet Bubble 2.0

MIT’s Technology Review hears the “pop” in the social networking bubble. or at least the “piffle”:

Dire market conditions have forced virtually all social-networking firms to scale back.

The current situation might seem gloomy, but the first signs of a coming shakeout appeared before the market took a turn for the worse. In August, for example, both the social-news site Thoof and the social music site Social.fm ceased operating. Also, long before the downturn began, investors started raising concerns about how social media firms might make money.

Hey, according to sources that know, the Web 2.0 bubble has been popping for over a year now — the slowest unwinding of irrational exuberance in economic history. But there are several reasons to believe that this time it’s for real.

I have always been extremely cautious about social media from a business strategy point-of-view; I have consulted with several firms wishing to add a “social networking” component to their Web site even though no-one in a decision-making chair knew anything about social networking other than the name.

Like the first Internet bubble, too many people are using numbers other than revenue and profit numbers as their strategic business goal. Precisely how a social networking site will generate bottom-line numbers is still relatively undefined; too often, the business plan is “build the user base.” “Generate money from the user base” somehow happens all by itself. “Build it and they will come” is not a viable business plan. “Build it and they will pay” is.

Even the biggest, baddest, and beefiest players on the field are not generating revenues commensurate with their numbers. Facebook, the 7th ranked site in the world in terms of visitors, gets around 150 million unique visits per month. 150 million. And they claim to have 130 million registered members.

Geez! That’s what super success looks like in the social networking space. But business has an inexorable logic of money coming in and money going out. Facebook is expected to generate revenues of $265 million according to Silicon Alley Insider. Do the math — each visit is worth slightly less than 55 cents. Three plug nickels. Each registered member is worth about two bucks per year.

Of that $265 million, about $180 million is ad revenue (most of the remainder are “virtual gifts”). So each visit is worth a dime to advertisers (and they may be overpaying) and each member is worth about a buck-forty. A Facebook ad can be had for as low as 13 cents per thousand impressions. MySpace charges a couple bucks per thousand impressions.

You’d be lucky to get garbage out of a garbage can that cheap.

An ad on Time or Newsweek would cost closer to two hundred bucks per thousand impressions.

There’s a reason the ad space is so cheap on Facebook. With click-through rates hovering around .04%, a rate of 13 cents per 1,000 impressions translates into

So, when you look at numbers like that for the biggest and the beefiest social networking businesses, the mega-bruisers that have the momentum, the muscle, and the mojo to get advertisers and other sources of revenue, what’s going to happen with the little guys? The social network sites for asthma sufferers? For funeral home operators? The borderline personality disorder social networks? Pennies per member doesn’t make any sense unless you can generate the numbers that Facebook, MySpace, and LinkedIn can generate.

Facebook and MySpace have an even bigger problem. Advertisers, by creating free pages on these social networking sites are making pretty good money (I should know). Ranging from home-based businesses to huge corporations (check out Ticketmaster’s friends list some day), these folks are using the service to generate anywhere from a trickle to a river of revenues. And Facebook and MySpace get none of that money.

Why pay for advertising when you can get so much of value just from the “free” services on the site? As the old saying goes, why pay for the milk when the cow is free?

The other problem is simply the consumer’s capacity: how many social networking sites can one poor sucker be plugged into? Just a cursory glance at the hogpile generated by clicking a “Share This” link on any blog gives you a sense of the enormous amount of work we expect our members and consumer to do.

Don’t get me wrong. The big guys are going to figure out how to make money off of this social networking stuff. They just haven’t hit the right spot on the dartboard yet and they have the resources to keep throwing darts for quite a long time. But until we fully understand all the possible revenue streams and their relative costs and benefits as well as figure out the product life cycle, all these outer rim social networks, particularly those built in desperation by non-networking businesses, such as entertainment companies, social networking really is a wind designed to blow money away.

Unless, that is, you can exploit the unbelievably free services offered by the social network services.

The final problem is what I call the “physics” or the “life cycle” of social networking. I’ll be discussing this in a later blog, but even with the most sophisticated statistical tools available, we don’t really understand how and why social networks form on the Web. We are still in the “build it and they will come” phase without a full understanding as to how the product lifecycle really works. Unlike any other product, no social networking service has calculated a “life cycle” for its services (early adopters, maturity, etc) and how each part of the cycle has to be marketed and monetized. It’s like they’re hatching an egg and whatever comes out, well, that’s what it is and we’ll figure out what to do then. Whatever it grows into, well, that’s what it is and we’ll figure out what to do then.

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