The Guardian recently ran Facebook now has 350M users – and there’s no point in advertising to them. The story serves as a nice reality check for those in the Social Media ‘business’.
There is no doubt that by the measure of registered users (fans, members), many of these services have been wildly successful within a very short period of time: Bebo, Twitter and LinkedIn have around 50M users. MySpace has something like 80M users and Facebook now claims over 350M registrants, a large number by any stretch, namely that it exceeds the population of the United States. This is all without even counting site visitations as tallied by a firm like comScore. Astounding numbers? Absolutely.
But here’s the big jolt: these services generate very little revenue or profit, command bubble-like valuations and have yet to prove that they are a viable advertising medium. Some examples cited by The Guardian underscore this point (numbers are approximate as some firms are private and/or in constant flux):
- Facebook is valued at about $10B on revenue of $500M est. for 2009
- Twitter has no tangible revenue, is valued at $1B; just raised $100M
- LinkedIn is generating revenue, how much is unclear; profit elusive
Then perhaps there’s a bit of buyer’s remorse:
- Time Warner’s 2008 purchase of Bebo for $850M w/multiple of 48.5 x earnings
- News Corporation’s purchase of MySpace for $580M in 2005; growth in a stall
Social Networks, as much as they have gained mainstream popularity, are still seeking to monetize their services. While companies such as LinkedIn have developed fee-based premium options to customers, most are still in the ‘freemium’ category. In the hope of attracting paying customers, free is the common denominator when it comes to the price charged for most social networking services — the digital version of “Field of Dreams” in a way. During their next growth stage, moving up the value chain will be a major challenge for many of these companies.
Investors no doubt, will become a bit edgy, as they are prone to be, when the cost of capital gets a little out of the comfort zone. A major question that might be heard in the boardrooms a bit more often over the next year just might be: “How are we going to get customers to pay?”
– Ted Morris 4ScreensMedia