Social networks three years on: has anything really changed?

Three years ago I wrote in this column about how US marketers and top media executives were concerned that the fast-growing social media platforms were going to come and literally eat their lunch. MySpace, which had been bought by Rupert Murdoch’s News Corp for $580m, and Facebook, the new kid on the block with tens of thousands of new users joining every day, looked set to transform marketing and media as we know it. So what’s happened since then?Well, a lot has happened. But, in many ways, little has changed. MySpace continued to grow at mind-boggling rates and signed a hugely profitable $900m advertising deal with Google. Since then, executives have spent their time trying to build a more broad-based brand advertising platform. One example of MySpace’s drive to win big-name brands was its MySpace Music spin-off – a joint venture with the major music companies. It’s also tried to branch out into the personal and small business classified sector with MySpace Ads.

Facebook was valued at $15bn in an advertising deal with Microsoft, which paid about $240m for a sliver of a stake in the social network. It now has nearly 200 million active users globally and broadly describes itself as an advertising business. It has been successfully experimenting with a range of ad engagement tools after an earlier debacle with its failed Beacon advertising project.

Then there’s YouTube, the world’s most popular video-sharing website. Three years ago it appeared ready to take on the world and transform video advertising when it was bought by Google for $1.65bn. Founders Chad Hurley and Steve Chen are working hard with executives at Google to turn the site into a profitable business. The company is beginning to feel the pressures of trying to be both the web video platform of choice, open for users to upload pretty much anything except porn, as well as being a key advertising media with professionally made video content.

So, in summary, despite the promise of social media where users of a wide range of ages spend huge chunks of their media time, this still hasn’t quite translated into the complete upheaval of marketing in the US or indeed elsewhere.

We were reminded of the undelivered promise of social media as the new marketing platform in the excitement around the latest phenom: Twitter.

Twitter is the super-fast growing short message service, which is again attracting attention from marketers and media specialists alike. Like others before it, it’s the subject of acquisition speculation from the likes of Google, Facebook and even an “old” media company.

There’s another thing it has in common with those big names at this stage in their development: it has plenty of users but no obvious business model. It’s free to use and share with users what you’re doing in 140 characters or less (“tweeting”). But there’s no advertising or subscription fee.

Here’s how Twitter describes itself in its “about us” section: “Twitter has many appealing opportunities for generating revenue but we are holding off on implementation for now because we don’t want to distract ourselves from the more important work at hand, which is to create a compelling service and great user experience for millions of people around the world.”

Does this sound familiar? Yes it does. It’s from the build-it-and-they-will-come philosophy of Silicon Valley venture capital investment strategy. Once we have the huge numbers of users we can concern ourselves with making money and potential lawsuits from other established businesses later.

To be fair to Twitter, it is open and frank about its status: “While our business model is in research phase, we spend more money than we make.”

Social to business

Wall Street analyst Jeffery Lindsay of Bernstein Research wrote a great piece last month on the challenges of social media making the transition to serious businesses. He likes Twitter but predicts: “The problem is that Twitter falls into the broad category of new internet businesses that are almost un-monetisable. Whoever buys it will likely have to operate it at a loss in perpetuity, or until the next cool Web 2.0 social networking concept comes along and Twitter tweets no more.”

Yet none of us should rush to judgment when it comes to internet businesses uncovering business models. Google was not really profitable until it stumbled upon copying the search advertising business and then improved it. Google has swooped up a huge amount of dollars by becoming indispensable for some marketers.

This could easily happen with any of the big social media names (and other up-and-coming sites) once they find their niche. For instance, Twitter is seen as a tool to identify news trends, canvas public opinion and aggregate information based on keywords from user’s tweets. A smart marketer or forward-thinking ad agency will soon figure out ways to make or save money using the service. Twitter is expected to launch a premium service for businesses soon.

YouTube, once just a place to watch grainy videos of skateboarding dogs, is ramping up the service with a series of partnership deals with many of the companies that once threatened to sue it out of existence. In the last few weeks it has announced deals with Universal Music Group on a stand-alone premium site called Vevo; partnered with Disney to offer some of its TV programmes online; and is reported to be in talks with Sony Pictures. The strategy is to get quality content up on the site to attract the big name brands.

As stated earlier, MySpace is attracting brands though it is less clear whether the deals will be long-term and generate the same kinds of returns as deals with the likes of, say, Yahoo!. The social network also has to be concerned that its three-year deal with Google expires next year. It’s widely believed the deal has not been as profitable from Google’s perspective as it might have hoped so it is unlikely that, even if it renews, the terms will be quite as lucrative.

Being a private company, Facebook has never had to formally reveal its financials. But, perhaps tiring of a growing perception that it will soon run out of venture capital money due to its rapid expansion, the company last week spent time talking to the New York-based media about the fact that it is one of the few advertising-based businesses which is growing revenue thanks to its focus on “demand generation” rather than pure display advertising or search deals.

Facebook chief operating officer Sheryl Sandberg, a former Google executive, speaking at an event in Manhattan last week sponsored by Business Week magazine, said: “We enable people to connect with users and provide advertising in such a way that it’s not obtrusive at all, but it’s part of the advertising experience and part of the user experience. And so we’re doing really well financially.”

Sandberg said Facebook revenue will grow by 70% this year – a pretty impressive outlook, though it could also imply that it is starting from a low base. She also said the company has been profitable on a fairly conservative measure for five consecutive quarters.

Industry estimates have Facebook generating about $1 to $2 in revenue for each of its users, or $300m in total. To put that in some sort of context, it would mean that the $15bn valuation is 50 times its revenue – a pretty staggering valuation even during the dotcom boom days.