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Summary:

I blame David Hasselhoff. Everything was going fine for the web — the financial world had been unwinding its overleveraged excesses for nearly a year without nary a ripple into Silicon Valley — until the launch of HoffSpace, a social network revolving around the oogachaka-ing, burger-wagging […]

I blame David Hasselhoff.

Everything was going fine for the web — the financial world had been unwinding its overleveraged excesses for nearly a year without nary a ripple into Silicon Valley — until the launch of HoffSpace, a social network revolving around the oogachaka-ing, burger-wagging actor.

Some bloggers called it a bizarre nightmare. Others decried it as the end of social networks. They were probably joking. But they were right.

Hoffspace showed once and for all what the web sector had fought so hard to admit: These social networks had finally expanded a niche too far. No longer was it possible to argue that one day social networking sites would be anywhere near as good at making money as they were at expanding, fractal-like, into a grey goo of trivial matter.

Social networks spent too much time trying to build audiences without building a solid business model. The thinking was, let thousands of startups innovate in thousands of ways and one of them will stumble onto something big. The way eBay did with online auctions, or Google did with a better search engine.

But even the site voted most likely to succeed is still punting when it comes to financial success. Facebook CEO Mark Zuckerberg told a German paper this week that the site won’t have a business model for three years. “Growth is primary, revenue is secondary,” he said. On the face of it, that statement isn’t absurd. But coming last week, it sounded blindly out of touch. Facebook will surely survive, but smaller sites looking to it as a role model probably won’t.

This was the week when the Internet sector realized that not only are the good times over, but that much of the room we had for innovation is also gone. The time to experiment around with big, audacious ideas is passing. The invoice for that luxury is now due, and companies will have to either pay up or be so well-funded, like Facebook, that they can still afford tinker a bit. Money is what everyone is expecting from startups, simply because there is suddenly so much less of it around.

Of course, one thing that would help the sector would be if a major social networking company were to give enough of a peek into its books to show it has healthy cash flows, even a robust operating or net profit. But sites like Facebook and MySpace have been suspiciously shy about their financials so far, so that’s not likely to happen.

Many of these sites — focused on social networks or widgets or other mere embellishments to the web that emerged over the past few years — aren’t going to make it. Some with a smart focus, like LinkedIn, will muddle through. A few will be bought out cheap; others will live on as labors of love.

This is the destructive part of that celebrated and magical creative-destruction formula. A lot of areas in tech are probably going to find ways to keep growing, if more slowly: mobile advertising, perhaps, or cheaper, more efficient on-demand software.

Skeptics have been arguing for the past few years that social networking wasn’t a standalone business model, but a feature to enhance larger businesses with established business models. It seems that fate is finally happening. It just took a luminary like David Hasselhoff to make it real.

  1. I’ve always thought that the best social network around was Amazon.com. You’re absolutely right. These networks must work to enhance established models to be truly successful.

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  2. I’ve always been baffled by why social networks don’t directly capitalize on the audience they attract. Instead of relying on an advertising-based business model why not just sell products to the audience they attract. Even “social commerce” sites are really just aggregators and make their money via affiliate fees. At HairFlix.com, what we are doing is combining a niche community, quality content and ecommerce to generate revenues. We use the UGM from the community to help us provide quality content which in turn establishes us as an authority in the beauty space and helps lower our cost-per-acquisition for our ecommerce site where we sell professional beauty brands. Check us out!

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  3. I believe you’re looking for the phrase “jumped the shark”.

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  4. I’m not an experienced insider of IT-Sector, but rather an enterpreneur. Not on reason of that, but I think online-digital innovation has a broader potential that can survive a crisis which is in the end not his own. Financers’ crisis-induced reservation or withdrawal is expected be transient, and although presenting them with business models other than advertising would sound more essential these days, I don’t suppose that declaration of a general loss of confidence would do any good to a load of innovations that are yet to come.
    As a financial expert mentioned, the more diversified and increased the crisis-related comments are, the likelier it is the most-feared to happen, and that wouldn’t help anyone. Mostly because, everyone is in panic and ready to take the scenarios and commentaries for granted.
    For a sector like Internet which still glitters it would be a pity to have the doors closed, that would be a overreaction. And many enterpreneurs-innovators don’t need a crisis to be aware of that not all of it is gold :-)

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  5. I see your Amazon.com as the best social network, Chris, and I raise you eBay. Correct me if I’m mistaken, but eBay popularized the notion of rating and reviewing transactional parties. Amazon provides a transaction, but doesn’t require ratings or reviews.

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  6. A great article, but I believe techcrunch would disagree. In one of their articles it said that startups shouldn’t stop but continue to go on and they’ll find their way if they seem to be a great idea.

    And I disagree with LinkedIn surviving. The business that Linkedin is getting in this downturn is temporarily due to the layoffs at Wall Street and because some folks are thinking they could be next. And Facebook which has a very high burn rate and that the profit margin is not so great can mean that in a short time they’ll be out of money but again, a great company = to anyone wanting to dip in to invest.

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  7. MySpace has repeatedly stated that it has been profitable since before it was acquired by News Corp, and a lot of analysts (e.g. Rich Greenfield from Pali Capital, to whom I assume News Corp is giving a peek) estimate MySpace is making margins north of 25%. Of course, we will never really know until they open the Kimono, but my guess is that MySpace is ahead of the pack when it comes to monetization.

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  8. Kevin,

    Thank you. But I think the real issue with Facebook is not the social aspect of it still. Its the privacy. While I do not adhere to it, for my daughters they only use facebook for communication amongst their friends.

    Its the strength that nothing else has to my knowledge. That said its direct lessons not to be repeated are with AOL.

    Kind Regards,

    Carl

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  9. Creating a social network for the sake of having or owning a social network is neither a strategy or anything close to a business model.

    If that’s indeed the principle idea behind these “fractal” like social networks, then they, like almost everything else in every other industry, is subject to the tides and flows of fashion, finance and future trends.

    The only good thing about crap ideas is that they’re self-regulating — anything that’s really bad will fall by the way side one way or another.

    So for social networks propped up by a faddy desire to mock / idolize has-been actors have a (thankfully) very short shelf life.

    Facebook might not have a business model, but it does have the advantage of being built atop an exceptionally strong cluster of ideas. Timing also played a crucial role, too.

    I really don’t see a problem with social networks for every taste. Unless you go looking for them, you’re hardly going to be troubled by them, or have them stealing audience eye balls and advertising revenue from your niche social network…

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  10. [...] The Bell Now Tolls for Social Networks – GigaOM Social networks spent too much time trying to build audiences without building a solid business model. The thinking was, let thousands of startups innovate in thousands of ways and one of them will stumble onto something big. The way eBay did with online auctions, or Google did with a better search engine. (tags: internet) [...]

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