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The Bell Now Tolls for Social Networks

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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.

37 Responses to “The Bell Now Tolls for Social Networks”

  1. Interesting Article. As the bubble is bursting, strategies for survival are paramount. Freemium is not a strategy but a hope and a prayer. That is not to say it doesn’t work for fast growing, sticky social sites. The industry just needs to be more creative, more disruptive, and offer more value, with more of a business model than a hope and a prayer.

    @ Carl concerned about Privacy & Sven, here are 2 interesting links, worth a look:

  2. Hello. I’m the managing director of Iconduit, the company that created and manages Hoffspace for David. To give some factual background to the dialogue here: Iconduit is a New Media strategy and management company, created at the crossroads of New Media and the Entertainment Industry. We work with celebrity brands like David’s to consolidate their traditional and New Media traffic, contain that traffic (consumers) and then capitalize on this. On Hoffspace, yes, we revel in increasing traffic numbers, as we see these a highly motivated and captive niche specific consumers, but our business model for Hoffspace is not built on traffic as our deity. The model for revenue creation is multi-pronged, first, direct product sales, then third party product sales, then sponsorship and advertising and finally, incubation of concepts both brand and user created and the further development of this content in traditional and new media. Hoffspace is seeing developments and actual dollar yields in all of these areas. Since the sites active promotion in late June, we will see the site go into the black and start yielding a profit by year’s end.

    Thanks for the interest and the commentary. Some of the points here have definitely informed strategy evolution for us.

    Happy Columbus Day.

  3. Amidst all the speculation surrounding the financial models which may be applicable and sustainable for general online social spaces like Facebook, I think the impact of social tools used on those sites gets overlooked…

    …The more people using the big ‘Social Networks,’ the more rapidly familiar those people are becoming with using the web for social interaction and what I find fascinating about all this is how social tools like semi-public activity monitors like FB’s Wall can be used on sites which have purpose asides from building huge populations to one day profit from.

    In the realms of politics, activism and so on, for example, social networking tools provided through Open Source software/CMS’ like Drupal seem to be becoming increasingly implemented and successful…

  4. Pete Steege

    “Growth is primary, revenue is secondary,” he said.

    Even in these crazy times, this isn’t absurd for Facebook – although it is for any newcomers. It’s consolidation time. The biggest 2 or 3 social networks will live and thrive (after a while).

  5. An interesting article – thank you.

    The future (and money) lies very much within niche social networks, which ultimately will have far greater appeal for people within specific jobs or professions. Such niche networks are allowing people to interact and engage with each other at a much more meaningful level. What’s more, suppliers to specific professions can use niche networks to target their communications and product propositions very much more accurately.

    Financial services is a good example of niche online social networks in action. IFA Life for example is a financial social network where financial planners and wealth managers can network with each other, share best practice and debate industry issues etc online. Consumers also use IFA Life to find a financial planner in their area.


    Thanks again.

    Philip Calvert
    Sales and Online Communication Skills Speaker

  6. As a new start with little funding this article could potentially frighten us rigid, but it doesn’t.

    I think in the context of today’s financial woes the comments raised here are spot on and suggest that the social network bubble is about to get very bloated and possibly burst.

    These are issues that the online community has faced before, witness Amazon, but the difference here is that a tangible business model always sat behind Amazon’s expansion program with solid financial planning.

    The niche market model of a highly targeted and motivated user base is possibly the way forwards and certainly one we at VoloMed prescribe too.

    Also, those companies that are less exposed to the financial markets woes and therefore able to ride out the storm without shareholder pressure may also see their way through this period.

    Social networking is maturing and will be all the better for it in the long run.

  7. Kevin Kelleher

    @King Khan: That’s not bad advice, but it’s just unlikely all the startups have a good enough idea. You may be right about LinkedIn, but they found an sensible niche early on and backed it up with non-ad revenue.

    @Ingrud: Like Facebook, MySpace has good odds to survive. It was profitable pre-News Corp. and probably is now. But as Om noted recently, the company will make $750 million in the year through June. So after five years in business, its revenue will be about 10 percent of what an ailing Yahoo made last year.

  8. 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…

  9. 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,


  10. 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.

  11. King Khan

    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.

  12. I see your 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.

  13. 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 :-)

  14. 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, 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!

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