Posted February 5, 2008 5:14 pm by with 25 comments

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Someone, somewhere is supposed to be raking it in from social media—but we never have figured out who that person is (unless it’s Mark Zuckerberg). We see the CEOs with their millions, and everyone wants in on the wave of the future, either in an IPO or working for the company behind the social network, or establishing their own.

But is there really any money to be had? Last week, social networking darling Facebook, still a privately-held and VC-funded enterprise, allegedly leaked its financial projections for the year. The outlook isn’t exactly what you’re hoping for in a company that is supposedly worth $15B:

2007 Revenues: $150 million

2008 Revenues: $300 to $350 million (projected)

2007 Headcount: 450

2008 Headcount: 1,000 (projected)

2008 Capital Expenditures: $200 million (i.e., servers)

2008 EBITDA: $50 million

2008 Cash Flow (EBITDA – CapEx): negative 150 million.

Doubling your revenue is great—but more than doubling your bottom line effectively makes the effort moot. Facebook has tried creative ways to make money from advertising while providing value to their users, but nothing really seems to have taken.

Today there are a few stories floating around about why advertising, which seems like the natural and possibly only way for social networks to make money, isn’t working out so well. Techdirt and BusinessWeek both cover advertising on popular social networks, and reasons why users just aren’t jumping to click those ads.

Techdirt reminds us of long-standing deals that make social networks into ad publishers for search engines (namely Microsoft/Facebook and Google/MySpace). While the “‘upfront’ monetization” from these deals is definitely a good thing for the social networks, Techdirt explains:

However, all the details suggested that on the backend things were pretty ugly. It’s not hard to figure out why. Ads work on Google because people are looking for information. They do a search, and if the advertisement shows information that helps with the query, that makes everyone happy. However, when it comes to a social network, usage is quite different. People aren’t looking for information about products — they’re looking to communicate with friends. In that environment, ads are seen as an intrusion — which is the exact opposite of ads in a search world.

BusinessWeek is also focusing on the failure of ads on MySpace. BW looks at a company that had initial success with a 1% CTR in 2006, but whose CTR fell to 0.1% in 2007. “Users became more or less desensitized to the advertising,” cautioned the company’s former CEO, Mark Seremet. “You won’t make money on it.”

BW points out that MySpace’s division saw an 87% surge in Q4 2007, but taken with Techdirt’s points, this may only prove that the only people profiting from social network advertising are the networks themselves. Google CFO George Reyes reported in the Q4 2007 earnings call that Google has “found that social-networking inventory is not monetizing as well as expected.” Google paid out more than a quarter of MySpace’s parent company’s revenue; this is part of where Google’s own earnings fell short.

Frankly, increasing ad blindness is going to hurt social networks’ ability to get clicks, and eventually revenue. While it may be too soon to judge, it still looks as though the formula for success in social networking will continue to be: step one: set up a social network. Step two: some magic happens. Step three: profit.

  • jimmy2times

    yes, but they are using web 1.0 advertising models. social networking is going to the be the most lucrative media platform going forward, but it will take one or two major innovations and there’s nothing out there right now that comes close.

    someone will figure it out.

  • They’re missing the point. First, we steal all the underpants….

  • Don’t be scared to show people a lot of ads and you will earn some money.

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  • Thats a scary profit prediction for such a popular / large internet presence.

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  • “While it may be too soon to judge, it still looks as though the formula for success in social networking will continue to be: step one: set up a social network. Step two: some magic happens. Step three: profit.”

    I used much the same analogy back in Nov. when a MediaPost started up their social networking site.

    There still seems to be a magical aura around the idea of starting a social network. Unfortunately, just as it takes work for the users to get involved in them, it takes more work for the provider to make use of the data.

  • Maybe they’ll need to start tracking each user’s interests some how and then display ads specific to each user.

    If someone always writes about and searches for UFC (for example) and associates with others that do the same the social websites might do some good by putting UFC or MMA orientated ads in their account page and on sidebars during their Internet experience. This would probably bring up tons of privacy issues but if these companies don’t make money, they won’t exist and I’m sure users will make the sacrifice.

  • Eduardo

    I still think putting labeling Facebook as being worth $15 Billion is not just a small joke, but a laughable all day joke.

    $450 million in 2 years? That is NOTHING

  • Where they will make money is games, 17% of their revenue came from 24 million $1 gifts that people sent to eachother. I outlined on my blog how the value in the social web is games.

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  • It’s hard to think with the size of the audiences some social networking sites have that there won’t be some way for them to earn more revenue. No one seems to have found that way yet.

    Advertising seems like an obvious approach, though it hasn’t been working as well as the sites would like.

    Still with the amount of users the sites have you’d think that sooner or later someone will figure it out.

  • @Steven
    Games, it’s all about games. Be it sending someone a $1 gift and comparing your gifts to someone else’s or playing Scrabble it all boils down to games.

    Nobody cares about Johnny’s tweet that he just went to a concert, and you cant monetize someones musings at the bottom of the pyramid of followers. So that leaves you with “what do you actually DO with your friends on a social network”…that DOING is Playing Games!

  • Makes a lot of common sense. I am a regular user of facebook. While I do notice the ads in the left column, I have never ever been inclined to click on them. I always wondered how these social media sites made money. What is the income model of for instance?

  • Leo

    Good point Nicole. The same thought has crossed my mind. It is fine for branding. I would not use it to be perfectly frank. Word and mouth is still the most powerful marketing too.

  • Social networks is a soap bubble, which quickly will burst. Therefore I would not believe such optimistical forecasts…

  • I agree with Paul. Has high potential to be short-lived.

  • I can’t agree with Paul, Social Networks is a real way to communicate people. And Communication is always relevant.

    I can say, that Web 2.0 model is a soap bubble, but not social networks.

  • social networking is good idea but i dont know how much revenue google will give…..its better to go for nice topic like health or finance really good payout i am making $50 a day with this topic….

  • @Seomotion
    Exactly, the communication will always be there, but, the major social networks do a whole lot more. Simply communicating wont bring in the revenues, the users have to be able to interact with each other in terms of culture and or entertainment. There is a reason these sites have API’s. It wont be long before you see social networks doing buyouts of applications.

  • I think the future is in social networking and social marketing. Personalization of the net is the next big trend.

  • Anal Shah

    I have a doubt on how this community sites makes money likewise google’s orkut has not advertisements directly in such cases what is the benifit to run this venture??

    Can anybody please elaborate something on this…?

    What do they get out of all the scraps made and images uploaded?

  • I own a FaceBook marketing tool that is a desktop application that nets me $4000 per month. I could only imagine what a social network could earn. Rupert Murdock said that MySpace makes him 20 million a month on advertising. I’ll be happy with 10% of that. I think games, API’s and targeted ads are the key in making money on social networks.

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  • $450 million in 2 years????…Facebook????…what a joke!