Social Networking; Bubble or Bankable?

According to popular lore, Joe Kennedy got out of the stock market just before the crash of 1929 when his shoeshine boy started giving him stock tips. Kennedy figured if shoeshine boys were in the game, then there must be a bubble. Today it seems like everybody including the proverbial shoeshine boy is jumping on the social networking bandwagon. Bebo, Classmates, MySpace, LifeKnot, Facebook, Twitter, Ecademy, Konnects, Friendster, Ning, the list goes on and on. Even FastCompany.com is a social network. But do people really know how to convert these companies into profitable business models, or is LinkedIn’s recent billion dollar valuation just more evidence that we are seeing Bubble 2.0 in the social networking game?

For all the talk about the power of social networking, how many "next big things" have crashed like the 2000 dot-com bubble? Today it’s Facebook that has the buzz, but I remember when Friendster was the next big thing and now I can’t even remember my Friendster username. LinkedIn claims 23 million users, but how many of those users are active? Better yet, how many people on all the various social networks just joined because somebody told them to and they really have no idea what they’re doing there? When people are lining up and joining just because everyone else is doing it, that’s a sure sign that mob mentality has taken over and a pretty good indicator that we may be in a bubble. Furthermore, many companies admit that they don’t know how to convert users into money. Twitter is getting more buzz these days than even Facebook but they still don’t seem to have a profitable business model. I’m sure somebody will step up and buy them, but even the deep pocketed buyers and investors of these companies admit that the social nature of the network makes effective advertising difficult. Even if the user numbers keep growing, will it matter if nobody can convert them into buyers and dollars?

For social networking to be a legitimate business model, somebody out there had to know the secrets of reaching these users and making money. And since Fast Company Buzz is all about finding out whose doing what and what’s working, I talked with the CEOs of two companies that are riding the bubble all the way to the bank. Michael Berkley CEO of SplashCast Media, a company that distributes branded content channels in social networks, explained how his company creates effective and profitable advertising on Web 2.0 platforms like Facebook. Mike said, "If you want to advertise to the social media crowd you need to make sure you do a couple of things:

1. Unobtrusively integrate brands into entertainment channels. For example, Red Bull sponsored a Ryan Sheckler skateboarding channel with a co-branded skin around the player and virtual product placement. They had clickable Red Bull cans in the video that brought up Red Bull product info

2. Give consumers a compelling reason to share the resulting branded content with all their friends. This typically means wrapping social games around the content, such as friend-vs-friend trivia contests about a particular actor or band, etc.

Tony Zito of MediaFORGE, a company that distributes widgets from traditional banner ads, added, "Advertisers need to make a true commitment to engaging the end user in a conversation. And once they learn what’s compelling to proponents within social networks, advertisers need to keep it simple and not try so hard."

While SplashCast and MediaFORGE are making money from the social networking craze, it’s interesting to note that they aren’t technically in the social networking business. Instead, they’re building their companies by servicing the networks, much like Levi’s made a lot more money selling jeans to the gold miners than most of the miners ever did digging for gold.

So what’s the bottom line buzz? Is social networking bankable or just another bubble?

Fast Company Buzz is featured on the Fast Company home page every Wednesday. If you have a buzzworthy scoop, I can be reached at www.TheKillerPitch.com

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4 Comments

  • Vince Dell

    Interesting Article. To answer your question - Bankable.
    It is very likely that in a few years some of the social networks that you mentioned in your article might go under, but they will easily be replaced by new ones. The barriers to entry is minimal in this market. The key is for these companies to build loyalty and offer the customers a reason to come back. They need to offer their customers an actual product that is worth buying. Making money by selling banner ads and other stuff is great in the short term but does nothing to keep your customers coming back to your website for the long term.

  • Daniel Ghinn

    Social networking has been around since the start of time. The difference today is that thanks to technology and the worldwide growth of the Internet, we can all connect and interact much more quickly. This makes for rapid growth in popular phenomena such as Facebook, which is simply tapping into the way people like to interact.

    It's also true of course that the way we interact is shaped by the technology available to us. Consider for example how the telephone first changed the opportunities for instant communication. Only today my daughter came home from school and asked me if she could telephone her best friend - who she had just spent the day with at school.

    So is social networking a bubble? No way! But the way we choose to network changes all the time. We always have been - and always will be - influenced by our peers. That's the power of today's online 'social networking' applications, that they tap into our fascination for telling the world what we are up to.

    Is social networking bankable? I think yes, more than ever before. For thousands of years, social networking has allowed people to tap into their network of friends and associates (their social network), learn from them, exchange ideas and maybe do business with them.

    Today this still happens as we share ideas with a potentially much wider network of people, many of whom we only know online, possibly not by their true identity, and whom we often judge based on others' 'ratings' (as we might do when evaluating a buyer on ebay).

    The real potential winners, though, are the brands and organizations who facilitate today's online social networks. They know us better than anybody. Even as I write this comment, Fast Company learns more about me and the things I get excited about. Later today it will serve me targeted advertising based on its growing knowledge of me.

    That's surely good for everybody: good for me, because I see less irrelevant advertising; good for Fast Company's advertisers, because they get to target more effectively; and good for Fast Company because it gets to sell a highly targeted media channel to its advertisers.

    Media owners and websites will come and go, for sure, but people were created to interact.

    Before the first ever human interaction took place, Somebody said:

    "It is not good for man to be alone" Genesis 2:18.

  • Philip Etienne

    Great Article, all these sites will gain more gravitas if they expand their verticals!!! Each one is too myopic!!! I hope this becomes a regular FastCompany feature space...

  • Stephanie Lodge

    I totally agree with you Francisco...social networking is over saturated at this point. Nice to see you talking about what's truly FAST and not just hovering in slow motion or being regurgitated.