From The Economist
Published: July 28, 2009
WHENEVER the founders of Twitter, a social-networking service, have been asked about how much revenue they expect to generate from their creation, they have politely deflected the question. So when a hacker recently leaked documents after gaining access to the private e-mail accounts of a Twitter employee and the wife of one of its founders, the blogosphere was abuzz. The haul included a spreadsheet showing revenues reaching $140m by the end of 2010, up from $4.4m this year. Twitter dismissed the document as out of date, but it showed the firm's owners believe it has the potential to mint serious money.
Their confidence is not surprising: Twitter is now thought to have around 23m users. Other social networks have also been piling on members. Facebook, one of the biggest networks along with News Corporation's MySpace, has seen membership leap from 100m in August 2008 to some 250m today. With the number of people online worldwide expected to go from 1.5 billion today to 2.2 billion by 2013, according to Forrester Research, many of these networks will grow like Topsy.
They will also have a profound influence on consumer behaviour, prompting firms to shift a hefty chunk of their marketing budgets in their direction. That prospect has investors salivating. Marc Andreessen, a well-known Silicon Valley figure with stakes in both Twitter and Facebook, believes Facebook's revenues will amount to billions of dollars in five years' time, up from about $500m this year. A recent investment in Facebook by a Russian firm valued it at $6.5 billion. Other venture capitalists have been ladling cash into start-ups developing software applications for these online communities.
Yet some experts point out that although social networks have captured the popular imagination, the managers running them face a delicate balancing act. They need to reconcile a desire to drive up membership as fast as possible—which increases the value of a network to both existing and potential members—with the need to experiment with ways of raising money to fund long-term growth. If they push too hard for revenue in the short term, they might drive away users, undermining a network. Leave it too late to monetise and the business could collapse.
MySpace, which was bought by News Corp in 2005, offers a cautionary tale. It grew rapidly from its origins as a site focused on members' musical interests into a more eclectic network. But as it expanded, it spent too much time chasing revenue and too little improving its online offerings. Now it is bleeding users and advertising: eMarketer, a research firm, estimates that MySpace will bring in $495m of ad revenue from America this year, 15% less than in 2008. In June Owen Van Natta, the site's new boss, announced plans to cut hundreds of jobs at the bloated operation. He is widely expected to return MySpace to its roots in entertainment.
Executives at other networks stress that their priority is keeping users happy. But they acknowledge that the recession has sharpened interest in generating revenue. Some
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