Can you really make money from social media?
Jinfo Blog

By Tim Buckley Owen

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Considering the reach and influence of social media, it may seem absurd to question whether such services are sustainable long term. But recent developments may suggest that the revenue model for commercial services that depend on online social interaction for their business is more fragile than might at first appear.

Take Groupon. It’s just launched its long anticipated initial public offering, with shares priced at $20, and saw their value rise by over 30% by the close of the first day. But plenty of commentators have warned that Groupon’s business model is too easy to copy (here’s yet another new entrant – DailyDeals.com), and depends heavily on constantly bringing in new suppliers (LiveWire comment here).

More uncertainty about social media-based commerce was voiced recently by eBay’s President John Donahoe. Speaking at the Open Mobile Summit, he suggested that use of mobile devices was disrupting prevailing notions of how consumers shopped and paid, that new consumer-led, technology-enabled shopping habits would create winners and losers, and – by implication – that it would all be based increasingly on price and less and less on consumer loyalty.

Or look at LinkedIn. It has just posted a third quarter net loss of $1.6 million, compared to net income of $4 million the previous quarter (albeit on a more than 100% increase in revenue compared with 12 months previously) and it’s now going cap in hand to investors for another $100 million of working capital. The dip into loss may not threaten it – but it’s not too long ago that two separate reports found, perhaps counter-intuitively, that it was Facebook rather than the business-orientated LinkedIn that employers turned to when screening job candidates (LiveWire comment here).

To monetise the activity on their sites, large scale social media players need to deliver their members to advertisers and, as we’ve seen, this can risk compromising those members’ privacy (see recent LiveWire comment about Facebook, LinkedIn and, last year, Facebook again). So it only takes a new player that doesn’t rely on advertisers to disrupt the market – potentially seriously.

Such a one might be Diaspora. Privately launched about a year ago, it’s a community of social networks running on different machines throughout the web, managed by volunteers. It’s funded not by advertising but by member donations, so it can offer cast iron guarantees about protecting privacy and minimising the information users are required to share (see blog posting for 24 October).

It’s had a bit of a wobble with PayPal briefly refusing to process its donations and, with its perhaps precarious funding, it may always remain a niche player. But if initiatives like this do take off, they could turn the existing social media edifice into a house of cards.

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