Are Social Networks Sustainable?

19 Jun 2012 by Gordon
2 Comments
Social media graveyard

R.I.P. Bebo. You never stood a chance.

Social networks are curious beasts. Used by hundreds of millions of people worldwide, everyone from teenagers to grandparents, from casual posters to incessant updaters (you know who you are) they have become a natural and significant part of our daily lives. It’s also in this massive popularity that we’ve come to place monetary value, the basic assumption that high usage equals money and, as such, you would think that these businesses would be incredibly sustainable, a gold mine of endless cash. Not so. In fact, if the past few years have shown us anything, it’s that social networks are inherently unstable businesses.

Indeed, in the last couple of years we’ve seen social networks plagued with financial horror stories, enough that they should be making the hair on the back of the neck of even the most reckless Wall Street cowboy stand up. Bebo was sold by AOL in 2010 for $10 million, a paltry sum compared to the $850 million they paid for it in 2008. Even the ancient grandaddy of them all, MySpace, hugely popular in it’s time, fared no better, being sold for a mere $35 million last year, pocket change compared to the $580 million News Corp. bought it for in 2005. Although kudos to Justin Timberlake, at least. Just like him, I’ve always wanted to own my very own social network.

“But it’s all because Facebook is so damn popular!”, I hear you cry. And yes, no doubt the rise of Facebook has had much to do with the decline of its competition yet still, when even the most popular social network on the face of the Earth ends up with the second worse IPO of all time and a share price that has plummeted by a third since it’s opening, something seems deeply amiss. Looking solely at these set of events, I think most people would be forgiven for thinking that social networks are a pretty bad business model.

Of course, it’s not so much that they can’t generate cash, they can – the Goliath Facebook, for instance, racked in a whopping $1 billion in profit last year. However, as much as that is, when compared with it’s valuation of $104 billion, an unprecedented 24 times revenue, things start to look a little fragile. Is the company really worth that much? It seems almost a tad preposterous that we value social media so more than other companies that produce tangible goods and services. To give you a little perspective, the almighty Google was only valued at five times revenue when it went public back in 2004.

“Our mission isn’t to be a public company. Our mission is to make the world more open and connected.”

Mark Zuckerberg

So the pressure is really on now to prove that social networks can generate the revenues to meet our, perhaps slightly ridiculous, expectations and profitably sustain themselves long-term. I can’t say things are off to great start though as even on the eve of Facebook’s IPO, General Motors yanked away their $10 million paid advertising account, citing that the ads just don’t have a big impact on consumers. Others agree, claiming that social networking ads only work half as half as well as regular banner ads.

Can you hear that? That’s the sound of Google rubbing their hands together.

Anyway, all of this leaves the conundrum of how exactly a free social network is meant to generate massive amounts of profit when the single most potent tool it has – advertising – doesn’t actually seem to be very effective. Subscription fees? Premium accounts, perhaps? More invasive marketing? I don’t know about you but I wouldn’t pay to use social media nor do I exactly relish the idea of my uploaded holiday photos being used in a tourism campaign without my knowledge. I take my privacy (and my vacation snaps) very seriously.

To be fair, I don’t think social media is going away anytime soon but I am concerned with the gigantic valuations and expectations we’re placing on the industry, particularly as its track record is ropey at best. And whilst all of these events unfold and as companies are either sold for fractions of their once price or valued at over a hundred times their profit, it really makes you wonder: are social networks actually sustainable?

Image credit: wallyg

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Author: Gordon McLachlan

Gordon is uncomfortably good looking.

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  1. Steven McG 22 Jun 2012 at 2:11 pm

    The biggest problem current social networks have is that users think they are the customers when they are actually the products. By trying to extract more money from the real customers (advertisers et al) the business annoys the products who then leave en masse for a new network and the cycle repeats.

    While they don’t yet have a huge amount of traction, I’d imagine something like Diaspora (or a similar open network protocol) is the way things will go in the future. Social networking will become more like e-mail; you will have a choice of providers (paid or ad supported) or you could run your own server if you want total control. A decentralised approach is the only way to avoid the boom and bust of social networking sites up to this point.

    • Gordon 23 Jun 2012 at 12:15 pm

      “users think they are the customers when they are actually the products”

      Perfectly put, I couldn’t agree more.

      And yeah, I also agree about the email analogy. Right now we live in a world with gated social networks and the reality is that we need some kind of situation we’re not all hooked into a single large network that has an entire monopoly.

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