Friday, March 27, 2009

The Future of Social Networks

Social networks are still in their infancy. So far they have focused entirely on growth but not at all on profitability. They are paying their bills with venture capital which will eventually run dry. Now they must focus on finding ways to monetize the service and start generating profits.

For example, LinkedIn was built from the beginning with a subscription model for revenue. I have no idea how many people are paying members of Linkedin but at least the revenue possibility is there. On the other hand, Twitter has no path to profitability that I can foresee. All their plans for targetted advertising will likely fail to generate enough revenue to sustain their business. In part, this failure is caused by their open API and their incredibly limited feature set, both of which spur others to innovate on the Twitter service. The vast number of offshoot web services based on Twitter is staggering.

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However, hard fiscal reality will eventually set in. Unless these social networks find a road to profits, they will eventually die out. That is why I foresee vast consolidation within the social networking space in the next few years. Those who can show even the smallest profits will benefit from additional rounds of venture capital financing which they will use to acquire other social networks. This will grow their existing base of users and allow them to integrate other technology and functionality. Those social networks that offer neither a large, untapped user base, new technical innovations or a robust infrastructure will simply vanish.

The real benefit of social networks comes from increased interconnectedness. Two examples:
Social networks are enabling a truly global community that allows us to work together and share wisdom across geographic distance. In short, social networks have helped to make the world a smaller place.

Fifteen years ago, we could never have enjoyed this exchange! The proof is in the use of the technology.

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