Technology Review
I was catching up on outstanding messages in Facebook and LinkedIn yesterday and wondered why I was bothering. Unlike Peter Evans, I don’t like and am not very good at networking. That may also explain why I have no friends and thus tend to ignore Facebook. (I tried Twitter as well but decided that I didn’t need one more intrusion in my life of quiet contemplation.) It got me wondering about how these social networking sites are making any money. I’m sure their user stats contain lots of anti-social types such as me. On the other hand, these sites also contain addicts that use them all the time.

Fortunately, I blundered onto an article in MIT’s Technology Review (July/August 2008) on “The Next Bubble: The Future of Web 2.0.” The article, which deals with social networking as a business, pretty well concludes that social networks don’t have a business future. Much like the vanished portals of yesterday, these shining stars of today are fated to a life of irrelevance as they can’t figure out how to monetize their eyeballs and even those eyeballs will go away when something more cool emerges.

This got me thinking back to the days when Synamics, a company I co-founded was developing voice portals and trying to monetize telephony-based information before the Internet caught on. One thing we learned was that people would pay money for only four things: products, sex, gambling, and entertainment. (I don’t have to get specific here do I?) The phone, the Internet and TV are really pipes that deliver entertainment. Please note that people don’t pay extra for email and it was the very first social networking application to hit the net. Despite many tries, no one has really figured out how to monetize email.

Social networking sites are trying to convince advertisers that highly targeted and contextually specific ads will work but I think they are doomed to failure. People are on these sites to connect and communicate. Can you imagine sitting around in a bar andm when your friend mentions Big Brother 10 in conversation, some random guy from the next table asks you if you want to buy a new TV. Imagine too being on the phone discussing your latest sexual conquest and another guy comes on the line to talk about condoms. It just doesn’t work. Advertising works in Google because when people type “TV” into a search engine there is a remote chance that they may be looking for information on purchasing one.

That pretty well leaves a subscription based revenue model for social networking sites. The opt-in rate will be sub two per cent if my experience in telephony is any indication. Facebook with its $0.15 CPM will soon fade from the picture as its $150 million annual losses can’t be funded without more millions from Microsoft.

Next, I have to figure out “digital media.” If anyone can explain to me what it really is and why people think it’s technology, I’ll try and figure out how it can make money. At least it has in its favor a human predilection to spend money on entertainment.

Charles Plant

Charles Plant has been the CEO or CFO of several successful software companies. He’s also been a management consultant, an investment banker, an auditor and an advisor at MaRS. See more…