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.