Stephen Ellis | June 10, 2008
IS the social networking boom of the past three years falling apart before the real fun has even begun? It's early days, but there have been several hints that the internet's next big thing may not be turning out to be as big as its backers hoped.
Social networks -- services such as MySpace, Bebo, Orkut and Facebook, which provide online platforms for individuals to connect and interact with each other and create communities of interest -- have been the hottest players in Web 2.0, a vague term for a broad set of internet trends.
By making it easy to participate in these social or interest-based relationships and communities, and adding a layer of applications, tools and games mostly built by third parties, these firms quickly attracted millions of frequent users -- most young, and many affluent and well-educated.
The lure of this affluent group triggered the usual Silicon Valley stampede of capital and talent into the space, especially after News Corp acquired MySpace in late 2005 for $US580 million and Google and Yahoo both focused on the space. Since then there has been no pause in the flood of money and the buzz.
Just as social networking (and for that matter Web 2.0) are amorphous terms, so are the recent indicators hinting at a less stellar future than anticipated by investors in the sector.
But it seems pretty clear that in the US, at least, consumer oriented networking and community sites are no longer adding new users nearly as quickly as previously, suggesting the market is not so far off being saturated.
The slowdown has even shown up at Facebook, until recently the sector's poster child thanks to a sustained period of sizzling audience growth and a purported $US15 billion valuation achieved when Microsoft bought a sliver of the firm last year.
Monthly internet traffic figures are often volatile, but, according to Nielson Online, in May the number of unique US visitors to Facebook fell 10 per cent from the month before, to 22.5 million.
Year-on-year user growth for Facebook as a whole fell from 98 per cent to 56 per cent -- still fast, and enough to bring it level with MySpace, but probably a sign of further deceleration to come as the law of large numbers kicks in and its popularity goes off the boil.
MySpace US traffic also dipped slightly in May to 58.7 million unique users, roughly level with its level of a year earlier, while another five of the top eight US social networking sites have experienced flat or negative growth over the past year.
Many of these firms are doing better in offshore markets than in North America, and by no means is it clear that they won't find ways to grow fast even in maturing markets such as the US.
A notable exception to the recent lull is the career-oriented site LinkedIn, which is currently exploding in popularity, with its audience increasing from 2 million to 8 million unique users in the past year.
A second issue for the social networking sector as a whole, and for Facebook in particular, is the increasing difficulty firms appear to be having locking in users.
It is in their interest -- although usually against the interests of their users -- for each site to try to become the single repository of an individual's information, and to wall off this data from the internet. Users seem to be aware of the downside in this, and resistance is being encouraged by Facebook's competitors.
Google -- nervous at the emergence of rival platforms for gathering and tailoring data on users -- has pushed a set of open standards for third-party access to user data. Only Facebook is resisting, since it arguably has the most to lose.
It's too early to say whether open standards and portability or the old-school AOL walled-garden approach will win out, but the odds are increasingly favouring the former. That, in turn, will benefit users and probably enlarge the eventual market, but make it harder for the social networks to hold on to members or monetise the time they spend on the site.
Monetise today mostly means to advertise -- but here also the signs are mixed. Facebook's intrusive Beacon advertising service, which made public the purchasing information of its users, provoked a backlash that underlined the limits to user tolerance for invasion of their privacy.
Since much of the user data that social networks have insight into is private -- as it reflects their personal interests and communication with friends -- these networks will have to be very cautious in how they exploit it.
They may end up with little or no edge over anyone else in efficiently linking advertisers to their target viewers -- a far cry from the promise of targeting that would yield even better results than Google's Adwords. User tolerance for ad volume on social networking web pages, anecdotally, is lower than for, say, search results.
Combined with the relative immaturity of the segment, these influences mean that social networking sites so far have been very bad at generating revenue per user. Their audiences are large, but the amount they make from each user is minuscule.
This presents problems across the whole social networking food chain -- as illuminated recently when Slide, one of the top developers of games and applications to run on top of Facebook and MySpace, said it was halting the creation of new apps while it worked on ways to make more money from the users.
None of this is terminal, by any means, and the creativity of the technology and internet industries often finds ways around seemingly formidable challenges. To say the bubble has burst is to claim the popularity of these sites won't rise -- both likely will.
But by the lofty expectations and exacting measures of the Darwinian web economy, it looks like social networking will be a moderate success, not a home run generating multiple initial public offerings and Google-like wealth.