Social networking sites are doing wonders for third-party businesses, allowing them to market and interact with customers as never before. And many application developers are generating serious revenue through games hosted on sites such as Facebook. But the social networks themselves are not making nearly enough money from this activity.
That’s the message from a new report entitled “Follow the Money: An Analysis of Business Strategies and Dealmaking in Social Media”. Authored by Lauren Rich Fine, a former Merrill Lynch analyst who is now director of research for ContentNext Media, the report argues that social networking sites, and Facebook in particular, need to get much more aggressive about monetising their traffic.
The popularity of these services is not in doubt. Time spent on Facebook was up 566 per cent in 2008, according to Nielsen Online, and the site now has more than 200m members. Twitter traffic is spiking.
But in the post-Web 2.0 world, eyeballs alone are not enough to ensure success. Online advertising has proved an unreliable source of revenue, especially amidst the recession. And while social sites offer advertisers a compelling opportunity, users have consistently expressed their distaste for having their conversations interrupted by ads.
With these unfortunate realities in mind, Ms Rich Fine suggests that social networks begin “charging rent” to application developers. She reasons that if companies like Zynga, which is could make as much as $100m this year, are doing most of their business on sites like Facebook, there’s no reason Facebook shouldn’t get a piece of the action. “I believe this is an area of great upside, and I am perplexed as to why it hasn’t been tested,” she writes. Ms Rich Fine also suggested Facebook charge big businesses who use the site to communicate with their customers, a model often suggested for Twitter.
The need to boost revenue comes as Facebook’s finances are being scrutinised, and Twitter is under fire for lacking a business model. Reports put Facebook’s burn rate as high as $20m a month as it pays for its massive growth. Yet Facebook chief operating officer Sheryl Sandberg says the company is on track to be profitable in the first quarter of next year. Twitter has time, having recently secured $35m in new funding, but will soon have to prove it is a viable business and not just a fad.
Reached by phone, Ms Rich Fine characterised her report as a call to action, and said she wanted to see these sites succeed. But she warned that with escalating capital costs and underdeveloped revenue streams, Facebook in particular could risk ceding its dominant position.
“Their success is going to be their undoing if they don’t get revenue quickly,” she said. “They don’t really have buffers to prevent someone coming in from behind and taking their audience. A few years ago, we could have been having this conversation about MySpace.”
Of course, Facebook’s play is to be a platform provider. The company sees value in hosting the community, not taxing it. My colleague Joe Menn talked to one major Facebook investor this week who said he’s perfectly happy if a zillion developers make more money than Facebook does.
And as Joe observed, “If [Facebook] starts charging, everyone could go elsewhere, and THAT is what would make Facebook the next MySpace.”
