Last
year, News Corp. (NWS) drew
a lot of attention for paying $580 million to acquire Internet sensation MySpace
(see BW Online, 11/15/05, "Users
Crowd Into MySpace"). The price generated a fair amount of controversy.
Skeptics said the social-networking site, where mostly
teen and young adult users trade messages on home pages loaded with photos,
blogs, and music, was a risky bet. They argued that younger audiences are fickle
and that MySpace would be in trouble if the cool kids skipped off to the next
hot site. Others said the acquisition by a large corporate entity would ruin the
appeal of MySpace.
LOOKIN' GOOD. The
objections seemed reasonable enough. The only problem with the gloomy scenario
is that, so far, it hasn't come to pass.
MySpace -- which was said last
year to be making profits in the millions of dollars -- has become larger, and
according to News Corp., more profitable. And LinkedIn, a subscription-based
social-networking site for professionals, has turned cash-flow positive after
about three years of operation, co-founder Konstantin Guericke says (see BW
Online, 4/10/06, "How
LinkedIn Broke Through"). There may be a financial basis for social
networking, after all.
The dire ending for MySpace still could come to
pass -- But that scenario loses plausibility with each passing
month.
Other social-networking sites are growing at an astonishing rate,
too. Facebook, a site for students, is now the seventh-busiest spot on the Web.
(see BW Online, 03/28/06, "Facebook's
On The Block").
The site's owners, who started Facebook just two
years ago when they were sophomores at Harvard, would want as much as $2 billion
to sell the company, a senior media executive told BusinessWeek
Online.
TREND FOLLOWERS. Such success is
forcing traditional media companies and advertisers to consider the possibility
that social-networking sites are here to stay. If that's the case, they may have
to develop a strategy of their own, buying or building their way into the
market.
Media giant Viacom (VIA) has hired
social-networking experts of its own and has even been in talks about a possible
acquisition of or investment in Facebook.
That's not to say that the
sites don't present plenty of business challenges. User-created content on the
Web can be unpredictable, creating risks for companies that don't want their
brand associated with racy or edgy material. Parents, politicians, and police
have become concerned that criminals could be taking advantage of MySpace (see
BW Online, 03/06/06, "Making
MySpace Safe for Kids").
There are other challenges. The fact that a
Web site has lots of users doesn't necessarily mean that users pay attention to
ads, let alone respond to them. "User does not equal audience," says Troy Young,
executive vice-president of Organic, an online advertising and consulting
agency.
The companies have attracted major investors. LinkedIn has
received venture capital from Greylock and Sequoia Capital, which helped launch
companies like Google (GOOG), Yahoo!, Cisco (CSCO) and Apple Computer (AAPL). Facebook raised $12.7
million in venture money from Accel Partners, a backer of Internet music and
video player RealNetworks (RNWK).
Are the
business models viable over the long-term, though? Some experts say the answer
is yes. The Internet in general is becoming a more legitimate medium for
advertising. "Online rates continue to climb. The cost rose 20% last year," said
Jeff Lanctot, general manger of online advertising firm Avenue A/Razorfish.
FLOCK OF ADVERTISERS. Social-networking
sites are attracting a rising number of major advertisers. Most of them come
from the entertainment sector, although consumer products companies are active,
too (see BW Online, 6/13,05, "Hey,
Come To This Site Often?"). Target (TGT), NBC (GE), and Procter & Gamble
(PG ) have run ad campaigns
on MySpace. Interscope Geffen A&M Records (V ) has launched new albums from
Beck and other artists there.
Social-networking sites have some natural
advantages for advertisers, too. Even if the environment can be a bit wild, it
creates an opportunity to develop powerful affinity groups and to collect a
mother lode of demographic data about its members.
That can be used to
create carefully targeted promotions that go way beyond the common text and
display ads found on the Web. "It's a challenging environment to get your
message across, because there is a lot going on, like in a teenager's bedroom,"
says Organic's Young. "But there's an upside, because people reveal a lot about
themselves when they use social-networking sites. That can allow you to target
messages in pretty sophisticated ways."
Procter & Gamble used MySpace
to launch Secret Sparkle, a deodorant for 16-to-24-year-old girls and women. It
linked the product to the home pages of musicians that used MySpace and appealed
to the same demographic.
When users listened to new songs by The Donnas
and Bonnie McKey, they were exposed to ads for Secret Sparkle and offered a
chance to participate in a Secret Sparkle sweepstakes (see BW Online, 04/04/05,
"Broadband
Ads' Speedy Progress").
HIGHER END.
Advertising isn't the only approach to making money in social-networking. Some
sites are having some luck with getting users to pay.
That's a difficult
thing to do on the Web, where information tends to be free. But LinkedIn uses a
combination of free access and tiered levels of service that range from $60 to
$2,000 a year.
The higher-end plans allow professionals like headhunters
to search for job candidates. A headhunter can make $30,000 or more by placing
one job candidate, so an investment in a high-end LinkedIn plan can easily be
justified, LinkedIn's Guericke says.
Other sites are hoping to maintain
their viability by focusing on niche markets. That's true to some extent at
MySpace, which caters to hundreds of thousands of musicians and millions of
their fans. PEERtrainer.com is a social-networking site that creates a buddy
system for people who want to lose weight.
Mobile social-networking holds
a lot of promise, too. AirG is geared toward cell phone users. That makes good
business sense, according to co-founder Frederick Ghahramani.
While
content on the Web tends to be free, that's rarely the case with mobile data.
Cell phone operations charge a range of prices for AirG service, Ghahramani
says. The privately held company is making millions of dollars in profit, he
says.
The business models for the social-networking market are still
evolving. No doubt, plenty of them will fail, providing fodder for jokes that
compare them to Pets.com or Friendster, a social-networking pioneer that lost
its lead.
But the current leaders already have much greater scale than
such flameouts. In fact, it would be unusual for a site the size of Facebook or
MySpace to fold. When Internet giants like AOL (TWX) run into trouble, they
tend to get fixed (see BW Online, 06/16/05, "Parsons
to AOL: 'You've Got Cash'").
The rise of social networking has
created plenty of comparisons to the Internet bubble of the '90s. For sure, that
era had more than its share of losers.
But it also created Yahoo, Google,
eBay (EBAY), and Amazon
(AMZN). It could well be
that a few of the next major Internet companies will come from the ranks of
social networking.
Rosenbush is a senior writer
for BusinessWeek Online, based in New York
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