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Social Networks Aren't Good Businesses

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By Bo Peabody
Friday, September 25, 2009; 5:16 PM

A visit from the pope may attract a large audience, but it's not a great place to make money. Likewise, social networks can successfully bring people together, but don't expect them to turn a profit.

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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. Despite these troubling signs, Facebook has raised more than $300 million from private investors who value the company at over $10 billion, and on Friday Twitter announced that it has completed a new round of funding, reportly raising $100 million at a price that values the young social network near $1 billion. What are the chances that these are good investments? Facebook mentions that it may have some profits, and Twitter talks about generating revenue soon, but because these companies are private, the real data are secret.

Here is my experience: I launched the social networking site Tripod in 1995. By 1998, it was the eighth-largest site on the Web. But Tripod was never a successful business. Social networks aren't great places to advertise. You can't charge users for their services. And they never gain enough momentum to survive in the stock market. Indeed, no social network has ever made it as a public company.

The standard social networking business model relies heavily on advertising. As millions of members poured into Tripod, my investors and I thought the advertisers would follow. They never did. Advertisers need to be sure that they are reaching the right audience with their message. They have more assurance of this on search engines such as Google or content sites such as WebMD, where information is controlled and organized, and to whose profits investors have flocked. But on social networks, users can post anything they want. In one meeting with a top advertiser, I was asked to pull up a random Tripod member page. What I got was a picture of someone's condom collection.

Almost 15 years later and as one of the Web's largest social networks, Tripod generates the same advertising revenue in a year that Google does in an afternoon. The bottom line is that advertising does not work on social networks because social networks are not media businesses. Rather, they are communications businesses. So, how about charging users for social networks, like telephone companies do? We tried charging users at Tripod, and many others have tried it since. It doesn't work. There will always be another service that will do it for free, and even if there is a fee charged, the amount of competition forces that fee to be so low that it never amounts to much revenue.

Instead of expecting profits that won't materialize, the entrepreneurial community should instead operate social networks as not-for-profit organizations. Wikipedia has grown phenomenally with a not-for-profit business model, and while Wikipedia has its problems, its fate is in the collective hands of its users rather than in the hands of media companies or the stock market. Facebook and Twitter should enjoy the same comfort.

We need to learn from the first dot-com bust, when services that benefited society disappeared just because they didn't make money. Imagine a world without social networks, in which I could not use Facebook to share hundreds of pictures of my infant son with his grandparents and the citizens of Iran could not use Twitter to challenge their political system. If we focus simply on a profit-and-loss equation, there is a real chance we will eventually lose these invaluable services.

The writer is the founder of Tripod, one of the first social networks, and author of, "Lucky or Smart? Secrets to an Entrepreneurial Life." He is currently the managing general partner of Village Ventures, a venture capital firm based in New York.


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