Since I work in the Social Networking space it has always worried me that Facebook/Twitter seem to make very little money for their relative size. Jason Calacanis once said that Google had a giant money machine in the back (search ads) that just printed money day and night, and that machine allowed Google to wander around and try out new things, as well as be a huge public company.
This seems to be the case with all huge public companies. AOL has its dialup subscribers (a money printing machine still printing in the billions, though it's starting to show its age). Microsoft has Office and Windows. Amazon has physical item sales. Indeed, it's like there was a moment at each of these companies where something clicked and they were able to build their money printing machine.
Facebook, on the other hand, hasn't built one of those machines yet. Sure, they announced they were profitable-ish, but they're fighting tooth and nail for that money, it's not the easy printed money mahine money that is usually running full steam by the sixth year of most companies, and that's a problem for the long term viability of Facebook.
That's why I found the article so interesting, because it talks about the economics of social networks and why they might never have a money machine (though I don't believe that, I just believe it hasn't been found yet). Below are my favorite parts of the article.
On IPOs for social networks:
It is no coincidence that there is not one public social networking company.
On advertising as a money printing machine for a social network:
I spent five years trying to sell advertising on Tripod. Almost twenty years later and as the eight largest social network on the Web, Tripod does $350,000 per month of advertising revenue, about as much advertising revenue as Google generates in an afternoon.
On whether social networks are media companies:
I raised $14MM of venture capital for Tripod based on millions of random people creating lots of content for free, and tens of millions of people looking at that content. But when random people create content for free and other people look at it is that a media business?
On trying to find the next money printing machine:
Media companies and the venture capital community have been chasing the next “search engine” business model for over ten years; this elusive creature that creates highly valuable advertising inventory without the costs associated with actually creating content, and has the financial and cultural profile befitting a public company. The chase first lead to email (Hotmail, 411, Mail.com); and then on to instant messaging (PowWow, ICQ, Ubique), personal homepages (Geocities, Tripod, Anglefire), blogging (Weblogs, Blogger, WordPress), video blogging (YouTube, Grouper, Blip.tv), social networking (MySpace, Facebook, Bebo), and is now focused on micro-blogging (Twitter, Tumblr, Pownce). Indeed, some media companies have paid a lot of money for businesses that provide these tools for free with the eventual promise of advertising support; and some venture capitalists (and entrepreneurs) have made a lot of money on those transactions. But in all cases profitable revenue never materialized.
On the idea that social networks might be like public works:
I could be wrong about all of this of course. But what if I’m right and social networks are like the streets, roads and highways of the virtual world: lots of users but no profitable business model?
That's a mistake media companies, which invested heavily and with high hopes in social networking, are only just starting to understand. News Corp. is struggling to make sense of the $580 million it paid for MySpace, Time Warner has publicly regretted the $850 million it spent on Bebo, and Yahoo recently shuttered Geocities, for which it paid some $3 billion back in the late 1990s.
Both articles are worth a read, and even if you think he is full of crap, you can't help but take a moment and wonder if he might be right. And after taking that moment, get back to work trying to find that money printing machine.