Social Networks Are Not A Business

One of my favorite financial magazines; the Economist, published an article that convincingly argues that social networks are not a business.

This is probably not news to the management and investors of most social networks but should serve as additional fodder for those who see an end to the Social Networking/Web 2.0 valuation & funding gravy train.

The Economist article equates social networks to free email such as Hotmail or Google mail and predicts that social networks have quickly come to be an expected and free part of any internet portal.  In this context social networks such as LinkedIn and Facebook should not be a destination in themselves, but the components of the social networking sites should be part of a users everyday internet experience.

I agree in that in these trying economic times the advertising model that most if not all of these social networks are built upon is not a sustaining business model. Advertising revenue for established media companies is and has always been cyclical in nature and even with the lower cash burn rates that today’s Web 2.0 companies have compared to their Web 1.0 predecessors, wont provide enough recurring revenue to stay in business after the venture funds runs out.

Venture funding in itself is a bit faddish and indications are that Social Networks/Web 2.0 are no longer the VC flavor of the month as VC’s move to investing in Green/Clean Energy and Renewable Technologies.

Will be interesting to see if some of the venture funding that was wildly invested in Consumer Social Networks/Web 2.0 will now invest in Enterprise and Enterprise 2.0 Software firms. Most of these firms actually have a real revenue producing business model and are;  in the case of Enterprise 2.0 software firms, in the process of rearchitecting packaged solutions to Software as A Service.

1. Allen Taylor , March 21, 2008:

   Nice writing. You are on my RSS reader now so I can read more from you down the road.

   Allen Taylor

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2. Steven McMahon , March 23, 2008:

   The economist has a tendency to be a bit too conservative in its views and predictions at times. But there has been very little operating revenue created by social network startups and almost all of them rely on venture funding to stay solvent it appears.

   Time will tell who is correct.

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3. Ameed Taylor , March 23, 2008:

   Allen,

   Thanks for visiting.

   Steven,

   I think firms creating Enterprise 2.0 tools aimed towards the enterprise (such as wiki’s and RSS tools etc) have a great chance to generate revenue as their business model is not tied to advertising.

   The issue has been that most VC’s nowadays dont find software companies that sell real products or services (as opposed to advertising page clicks) attractive. Perhaps VC’s will change their tune and investment mindset.

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4. Jason Peck , March 30, 2008:

   I disagree (kind of). In some ways they aren’t a business yet in some ways they are. Someone will eventually figure out a way to create networks that are like country clubs that people will pay money to join/be a part of. I do think that sites that only focus on “connecting” people will die, because there are so many options available. But content-focused sites that have social networking elements have great potential to become businesses.

   Basically, I don’t think you can just say a social network is/isn’t a business without first understanding the niche it operates in and the purpose it serves.

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5. Ameed Taylor , March 31, 2008:

   Jason,

   I agree with you in that one should not generalize all social networks, but the Economist article was moreso focused on pure consumer social network sites such as Beebo or MySpace or the hundreds of smaller copycat sites.

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6. Ben earth4energy review , December 10, 2008:

   I guess you can’t argue with the experts, but you can’t take everything they say for granted either. At this point, the truth is somewhere in the middle, it all depends on the angle from which you can see the situations. Maybe in the future there will be a clearer line between social networks and businesses.

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