These are indeed surreal times as the popularity of social networking explodes while Internet advertising revenues enter free fall. In the virtual battle for hearts and minds MySpace and Facebook have outperformed Bebo, Friendster & Hi5, although many new niche market players have since emerged to meet their challenge. Both the two leading social networks have shown remarkable plasticity in their drive for market domination and profitability, although paradoxically Internet market share and margin do not always go hand in hand on the Internet. Herein lie the horns of the dilemma, as the widespread corporate strategy of whetting the public appetite by offering advanced Internet platforms without charge and then attempting to monetise an essentially free service has spectacularly backfired. Even those who might consider themselves devotees of social networking would be reticent to pay for a service that does not specifically cater to their own personal tastes. To their credit Facebook and MySpace have responded intelligently to their predicament. MySpace has since established itself as the leading social network for musicians and models, a service that is now characterized by its musical diversity, readily customized profiles, and liberal attitude toward the number of friends and nature of images that may be accrued by a user. Facebook on the other hand have actively avoided customized profiles and rigidly capped the number of friends each user may amass, but have since liberalized their policy on 'sexually attractive content'. This 'flexibility' has encouraged models, actresses and musicians to use the service, a move that has naturally proven popular with their more business-orientated client base. Facebook have also intelligently integrated their advertising and online gift services, meaning that their vast virtual client base is at last generating some real revenues. The battle for market dominationAs far as the commercial world of social networking is concerned there are lies, damned lies and Internet statistics. Although the generic social networks claim to host hundreds of millions of active profiles to their advertisers, investors and the media, a great proportion of these are actually dormant, duplicate or fake. However, in a corporate world obsessed with 'metrics' and market share, it is such astronomical numbers that ultimately dictate advertising revenues and network valuations. The most recent data available would suggest that Facebook is the Internet's 3rd most visited website, with MySpace and Twitter following close behind in 11th and 15th positions respectively. If the Internet were merely a popularity contest, then these heavyweights would win hands down. From a financial perspective though, in which any investment must eventually be returned at a premium, generic social networks can at best be seen as spectacular failures, especially if their long-standing promise to turn their market shares into margins fails to materialize. |
Facebook eventually supplanted MySpace as the most popular social networking site in the spring of 2008, and retains this title despite Twitter's rampant debut. Combining mobile compatibility with 'idiot proof' simplicity, Twitter has stormed the market by keeping those who wish to be kept informed of a particular individual's activities 'in the know'. Twitter has fast become the new market tiger, even if their fledgling servers have recently struggled to cope with surging demand, resulting in the odd crash or two. Aside from giving us a new verb and noun, Twitter has become the general population's answer to Reuters and every journalist and gossip columnist's dream, as our favourite people keep us up-to-the-minute with their personal developments.
In July 2005 MySpace was snapped up by Rupert Murdoch's media empire News Corp for $580m at the peak of market optimism. Fox Interactive Media (FIM) have since however struggled to return a healthy profit from his flagship acquisition. Last year FIM declared $856m in total revenues to June, of which MySpace contributed an estimated 70%. MySpace's contribution to FIM's total revenues through September 2008 was some $450m, with only a further $160 million predicted for the 4th quarter of 2008. When these numbers are considered together with the expiration of MySpace's lucrative $900m deal with Google in 2010, the future profitability of the company remains in doubt despite their clever addition of E-commerce revenues from MySpace music downloads. Although FIM did return a paper profit of $10m to June 2008, MySpace remains quite some stretch away from recouping the $580m Mr. Murdoch paid for it.
In May Rupert Murdoch revealed that FIM had in fact made a smaller contribution to News Corp's turnover, precipitating the replacement of MySpace's management team as the corporation struggles towards its goal of profitability. In June FIM forecast a further $100m+ decline in annual revenues due to Facebook's continuing market domination in terms of users, traffic and time spent online. According to independent observers, the Facebook network is still expanding by a staggering 700,000 users a day. MySpace meanwhile has even failed to deliver on its minimum traffic guarantees under the terms of its Google search deal, further slashing its revenue stream. MySpace may soon have to shed as many as 800 jobs to pare back costs, as its parent company FIM lowers its financial forecasts to $59m from a turnover of $835m in 2010, predicting a loss of $75m from $725m in 2011. To some insiders even these figures seem somewhat optimistic.
There is a bright light at the end of the tunnel for MySpace, as it quickly evolves from a generic social network into a niche entertainment network focusing upon its MyMusic brand and the provision of other audiovisual media. Under the guidance of its new team of Jon Miller, Owen Van Natta & Jason Hirschhorn, look for MySpace to become the dominant online network for the entertainment industry, serving the model, music and movie sectors with a colorful blend of videos, music and imagery, returning to profitability in 2012.
Mark Zuckerberg, Facebook's CEO & founder, has assured his patient investors that he expects his company to become profitable in 2009, forecasting $550m in revenues from advertising and merchandising this year. Facebook expects around a third of its revenues to flow from an advertising deal with Microsoft, while the remainder will be derived from sales of Facebook's proprietary advertising and virtual gift services. To promise a profit in the midst of a deep recession is nothing if not bold, and Mr. Zuckerberg will certainly have to be a magician to pull a healthy rabbit from the dark abyss of his top hat.
Being a privately owned company Facebook is naturally not as forthcoming with its financial performance as MySpace, although revenues for 2007 & 2008 were reputed to be in the region of $150m & $265m respectively (far south of the widely rumoured $350m mark for 2008). Some $180m of Facebook's revenues for 2008 were believed to derive from advertising, and a further $50-60m from the sale of virtual gifts. To buck the current market trend in Internet advertising and raise his game to more than double Facebook's revenues this year would make Mr. Zuckerberg little short of a virtual messiah. Facebook's search for profitability is further challenged by its rising costs, both from a staff retinue that increased to around 1,000 this year and also from vast capital expenditures, including some $200m in server costs for 2008. Such outgoings contributed to an estimated net loss for 2008 of some $150m.
Aside from the frustration of his existing investors, any intended IPO of Facebook to a stock market which is growing ever more skeptical of social networking models, will demand the credibility of profitability. After all the fat has been chewed, Facebook is now left with a $4bn market valuation, some way south of the $15bn valuation that Microsoft, Li Ka-Shing and a consortium of German investors gave the company when they bought into Mr. Zuckerberg's vision. As their preferred stock 'takes precedence' over 'common' shares in Facebook, Microsoft stands to recover its $250m investment before any holder of common stock receives a dime, not that Microsoft's board are holding their breath...
Although Facebook forecast some $550m in revenues for 2009 it should be considered that this figure flies in the face of an anticipated 5-15% fall in Internet advertising revenues this year, not to mention the prevailing credit crisis. Facebook's forecasts will likely be further hit if Microsoft seeks to renegotiate its advertising and search agreement, a deal that some insiders feel that Microsoft initially paid over the odds for. Our own crystal ball suggests that Facebook revenues will be less than $350m for 2009. Unless Facebook can find ways to further monetise its market share and cut its costs, the prevailing economic tide will leave the company with an annual loss in excess of $120m for 2009. As MySpace lays off workers by the dozen, Facebook's staff inventory is set to top 1,000 this year, including some 150 people employed exclusively to police violations of its code on adult content and sexual behavior.
Ever the innovator, Facebook is introducing more impressive services such as Facebook Connect (which allows users to feed directly into their other social networks), branded virtual gifts & video ads on which users can leave comments. Although Facebook have resoundingly won the ratings battle, they have clearly lost the war to prove that open social networks are inherently profitable. Meanwhile, the key 16-25 youth market are reported to be deserting Facebook in their droves after news reports of family members, colleges & employers invading their privacy. After previous revelations of 'faux pas' concerning individual privacy and data, either through user ignorance or because of Facebook's inexplicable decision to stream all online activities to network contacts as a default, no matter how 'distant' the friendship, many now feel that their private profiles are anything but... While those who employ their Facebook profiles for PR purposes may welcome such free exposure, more retiring individuals have been red-faced by feeds containing briefs of their dalliances, party antics and private affairs. Other FaceBook users are also unhappy. Despite employing some 150 individuals to regulate the 'adult' use of their service, Facebook is now littered with advertisements for escort services, offending some sensibilities. On the other side of the coin, professional models routinely report their profiles being deleted for posting private images that were perceived to have crossed the fuzzy gray line of public decency. Such inconsistency in policy tends to create enemies rather than friends, as many individuals whose profiles were deleted had put hundreds of precious hours into building up their personal networks. On balance Facebook looks set to lose a greater proportion of its market share than MySpace to the emerging wave of niche social networks and new online applications.
It is difficult to put a finger on Facebook's precise strategy. While continued growth is clearly a goal, exactly how Mr. Zuckerberg plans to turn his market domination into dollars remains more of a mystery. In just one week in August Facebook bought Internet start-up FriendFeed for $50m, announced a new ‘social news' site, and launched its new ‘lite' iPhone and real-time search applications. Whether FriendFeed was acquired for its software engineers or with a eye towards Twitter in the rear view mirror is somewhat of a misty issue. However, what is transparent from Facebook's growing pains and server overheads is that it is moving towards a ‘lite-r' service to translate its popularity to the expanding iPhone market and because its bandwidth costs have clearly given both its accountants and server banks a headache. Facebook is clearly changing course from complex codes towards a faster, slimmed down version of its leading service.
Aware that its surging demand may soon overwhelm its server supply, Facebook appears anxious to avoid becoming a victim of its own 'success'. Behind the bold and brash boardroom declarations, Facebook may actually have found itself in the midst of a cash flow crisis. Earlier this year the company borrowed $100m from a Californian financing group to build new server farms, a debt to which they have recently added a further loan of $300m from Russian company Digital Sky Technologies. Although the charismatic Mr. Zuckerberg has apparently charmed shrewd minds with his vision, Facebook will have to service their creditors before paying their shareholders any dividends, if indeed Facebook ever achieve profitability. Look for Facebook to continue to increase its market share before a mass exodus to niche providers leads to financial meltdown by 2012.
In the meantime investors are eyeing Twitter nervously, seeking evidence that the latest network phenomenon can actually turn base clicks into gold. Last winter, as Twitter stockpiled users and shot up the traffic rankings, CEO Evan Williams was quick to fend off suggestions that his company had been slow to attach revenue-generating engines to the network. While remaining somewhat vague on detail, he did however hint strongly at a sales-related feed. Twitter remains lean and hungry, growing at a spectacular rate despite employing only 25 people. For the foreseeable future Twitter intends to focus upon product-based revenues and on making money from sales tweets. Ingeniously simple and expansive, look for microblogging pioneer Twitter to generate substantial advertising revenues in 2010 in conjunction with associated tools such as tweetdeck.com. Tweeting should become a profitable pastime by 2011.
The next few years will see several innovators throw their hats into the social networking ring. In doing so they will prove that niche networks are not only ultimately scalable, they are inherently profitable as they can draw revenues from both the sale of merchandise and through subscriptions. While generic social networks such as Facebook and MySpace are still making substantial losses after five years of operation, many niche networks which focus upon like minds have proven profitable.
In 2010 look out for Bainzy, a business and social network for young entrepreneurs which will be more than just a fusion of Ebay and Twitter. Ning is a free platform that currently hosts over 260,000 niche networks. By the end of next year, Ning.com will host millions of niche networks and command serious advertising revenues. Also watch out for the Society for Cell Science, the first scientific society to combine a journal subscription and a professional niche network.
The coming economic cycle will be dominated by niche networks. Imeem.com, a music and media based social networking site, already attracts an estimated 25 million unique visitors per month. Xing.com, a business contact list and e-commerce marketplace, doubled its revenues in 2007 to $30m through premium subscriptions. Closetcouture.com offers chic social networking for the fashion conscious, allowing users to upload images of their personal wardrobes and to browse the styles and fashions of their contemporaries. Fashionable members may choose to peruse the online shop or the stylist marketplace where those who know their D&G from their Armani offer to help those who don't - for a modest fee... Where there is a niche there will almost certainly be a niche social network that caters for it, including blackplanet.com for people of color, bodybuilding.com for its eponymous supermen and women, and boat-network.com for the nautically inclined. While sites such as boat-network don't even rank on the list of the 10,000 most popular websites, therein lies their exclusive charm and profitability. Whatever the future may hold for your own personal interest, you can bet your bottom dollar that there will be a niche network that will encourage you to part with it...