[News] Why Social Networks Are Bad Businesses
Facebook Takes a Dive: Why Social Networks Are Bad Businesses
By 24/7 WALL ST. Wednesday, Apr. 01, 2009
Dan Kitwood/Getty
The business of having online sites with content created by
amateurs to be viewed by other amateurs never had a reasonable
chance of making money. The fact that at one point Facebook had a
$15 billion valuation, that Rupert Murdoch's News Corp (NWS)
bought MySpace, and that Google (GOOG) bought YouTube only proves
the "greater fool" theory.
YouTube was started in 2005 and MySpace in 2003. Normally, having
a social network where people go to share profiles of themselves,
write blogs, and submit videos would not seem like much of a
business. But MySpace has well over 100 million users. People
viewed over five billion videos at YouTube last month. Investors
assumed that any medium with such a large number of users has to
become a huge business. Millions and millions of users must be
worth something. They can't be worth nothing. That couldn't be
possible. (See pictures of the meteoric rise of YouTube.)
Because Facebook and MySpace are so pervasive and such a
significant part of online culture, the press is endlessly
fascinated by what goes on at the companies. Word got out that
Facebook was raising money. Then it fired its chief financial
officer. Analysts started to speculate that the company was low on
cash. Facebook, of course, said that no such thing was true. (Read
"25 Things I Didn't Want to Know About You.")
What is true is that social network sites have had trouble making
money. MySpace was supposed to be a big part of the revenue growth
at News Corp. Wall St. thought Murdoch was a genius to buy it.
Last year, News Corp had to admit that MySpace would not hit its
revenue targets. That is usually not the hallmark of a property
that is going to take over the Internet. Analysts believe that
MySpace rival Facebook had revenue of $265 million last year. That
is astonishingly low for a company that had 57 million unique
visitors in the U.S. last month. And, Facebook also has a very
large international user base. (Read: "MySpace Launches a
Free-Music Revolution.")
The reason that social networks will never do well financially is
that they break from the successful model that has brought so many
marketers to the internet. Display advertising can be targeted by
subject. Financial advertisers run messages on AOL Finance (TWX)
and TheStreet.com (TSCM). They avoid sites for children's video
games. Search sites like Google refined the model by allowing
advertisers to buy search engine results pages. The Google
results' pages for the search "heart doctors in New York City" is
probably the best place in the world for heart doctors in New York
City to market themselves. (See pictures of Google Earth.)
Social networks are bogs filled with people who are there to
befriend one another, tell their stories, or voice their
complaints. For those who want others to know all about them or
who have unrevealed grievances about life, these are wonderful
online destinations. They are a good place to leave messages for
friends, propose marriage, and post the scores from the local high
school football team. They are not a place where an advertiser can
focus on a single group with a message aimed at those people,
because no one knows exactly who those people are. For a company
trying to sell products or services, Facebook is mayhem in a PC.
What the advertiser wants is traditional, orderly content.
With the exception of a certain number of perverts who sneak in,
there is nothing wrong with social networks, but marketers don't
want the perverts and they don't want a collection of people with
no common purpose other than to share with one another.
— Douglas A. McIntyre
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http://www.time.com/time/business/article/0,8599,1888796,00.html?cnn=yes
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