Naked Social Networking Strikes a Nerve

I went out on a limb on Friday, suggesting that Social Networking is the technological emperor with no clothes since I haven't seen a single business model out there that actually generates any money. And it's certainly not for a lack of trying, along with some brilliant minds, who've had plenty of time to come up with something real.

Alas, venture capitalists continue to funnel enormous amounts of investment to these upstarts, and they all continue to generate enormous amounts of press coverage. They are a part of our culture; they serve a neat and compelling purpose; names like Facebook and Twitter and Ning and hundreds of others have become addicting sidelines to the main events of our lives. But they don't make money. Can't seem to make money. And run the risk of becoming an financial mine field for those retail investors looking for the next big thing.


And it would seem many of you who have written in agree: Julian writes in with the subject line, "Twitter Tweedle Dumb," writing "this is the first such article that dares to expose social networking for what it is, and for exposing the difficulty to monetize this tech-driven phenomenon. As a marketing professional for the last 30 years, I have watched the young, slick MBA-types shift strategies toward social networking – without doing the basic marketing stuff – like understanding the consumer, defining a brand position & building awareness, desire & a real value proposition. I think the only ones making money are the Googles of the world & all those Gurus…" Such a good point. And just to reiterate, I think many of these social networking sites do carry some value. Just not the financial kind.

Erik Qualman, an author, agrees that some sites are "vastly over-hyped," but he also says they represent a huge shift in the way we live and do business. "At a minimum the majority of search dollars will flow to a social media model because people care most about what there peers think and the technology is there for that information to be quickly shared on products and services. That's why Google launched their Search Wiki and is scared to death of Twitter and Facebook...not Bing. Facebook and Twitter have a social graph - Google doesn't."

Another good point, and I don't argue with it. But when will these new upstarts start generating real profits? (He's got a book he's peddling, too, by the way, called "Socialnomics." Haven't read it yet, though.)

Says Drew, "I just read Jim Goldman's article…and may I just say, thank you. I've been waiting for somebody to say that for a while! Social Networking matters, in the sense that you get a lot of views, but who cares if you can't make money... even enough to keep the lights on at the business? These popular websites are money pits. Youtube is slowly but surely bankrupting Google . The whole thing reeks of a large-scale popularity contest." Not sure Google's going bankrupt any time soon, but over $1 billion for the world's most popular video sharing site, and Google still can't come up with a real way to make money from it? You gotta think if it can't happen there, or with Facebook and its hundreds of millions of users, it just can't happen.

Joel has a simple response to my take: "Amen!"

And Robert writes in a very good point, in response to my comparison of this manic euphoria to the first dot com boom, then bust: "Yes the notional valuations are silly but unlike the dot-com
boom and bust, none of these companies are public.

Only MySpace (takeover) and Facebook have attracted serious cash and both Microsoft and Digital Sky can write off their investments as can Rupert without any effect whatsoever on the rest of us. So there's no price to be paid by the investing public - unless of course KKR and Goldman Sachs can start bringing these non-companies to the market." And that's the key: because you know they will be coming public at some point. Investors don't bring these companies along without an exit strategy, and we learned last week that acquisition — at least in the case of Twitter — isn't an option, at least from News Corp, Apple , Time-Warner , Microsoft, Yahoo .

When it comes to social networking, there's a huge difference between "value" and "valuation." Some may have the former; very few if any can justify the latter. And between both value and valuation, I just don't think social networking is ready for primetime, at least so far as investors are concerned. Something to consider the next time you hear of incredibly high price tags for the social networking star du jour, and something to ponder if a big company you've got your nest egg in decides to pony up that kind of cash for one of these start-ups.

Questions? Comments?