For Discussion: Social Networks and their Lack of a Good Revenue Model

Looking at Facebook and Twitter, some of us can only assume that they are making a huge profit. This assumption is taken by looking at the amount of people that use Facebook or Twitter, the number of businesses that have taken an interest in these social networks. However it is a major surprise when we discover that the hottest Web 2.0 startups are in fact unprofitable however it becomes not much of a surprise when you discover that they lack viable revenue models for them to be profitable.

Twitter for example has managed to capture the web 2.0 community but however it has failed to make any real profit due to the lack of a revenue model. Social networks such as Twitter all share a common trait which is that none of them has developed a self-sustaining business whose financial future seems assured.

AdSense has been the main source of revenue for many of the Web 2.0 companies. AdSense is a program by Google which pays web 2.0 companies in order to advertise on their sites. However this does not necessarily mean that the amount made from AdSense will be great to account to the company’s profit. If every new social network company formed relies on AdSense as a source of its revenue, is there enough money to feed all of them? Definitely not, these web 2.0 companies need to find other sources of revenue other than AdSense.

Popular Web 2.0 companies such as Facebook and Twitter have not been cheap to operate or to grow which is why they need a solid revenue model in order to survive in the Web 2.0 market. With a revenue model they will be able to sustain their revenue source.

According to Green (2006), the biggest problem with web 2.0 companies it they put too much weight on the free and not enough on the premium side of the business. They cannot make a profit by pay too much attention on the free side of the business. However free products or services will definitely attract more traffic to your site however there is still the matter at hand, which is, your company needs to make a capital for itself. Therefore by charging for some things, this will give it the capital it needs. Green (2006) says that the trick is o launch a low free level to start with, that has unique applications and that are also addictive to the audience, then the premium side of the business should have room to support the free side.

According to Drama 2.0 (2009 web 2.0′s biggest stars in the past had opted to put revenue models on the back burner. Instead, they raised large amounts of capital for the purpose of growth and achieving critical mass. However things have changed, as they have seen that revenue is required for them to survive and that they cannot just simply rely on their investors when they themselves are not making any money. Twitter was established in 2006 according to Strickland (2010) and it is only now, four years later that they have decided to come up with a revenue model.

Now according to Miller (2010), Twitter has come up with a revenue model which will make use of advertising. Miller (2010) states that twitter will sale keywords to advertisers which they will them to their ads and they will show up when the twitter user searches for these keywords. Twitter will call this program “Promoted Tweets”.
Miller (2010) says in he next phase of Twitter’s revenue plan, it will show promoted posts in a user’s Twitter stream, even if a user did not perform a search and does not follow the advertiser.

According to Miller (2010), several companies including Best Buy, Virgin America, Starbucks and Bravo will run their ads on Twitter. Therefore Twitter will be making a profit from both brick and mortar as well as click companies.
In addition to this revenue, Miller (2010) states that Twitter already has some revenue from deals to license its stream of posts to Google, Microsoft and Yahoo.

References:

Drama 2.0, 2009, Web 2.0, Revenue Models and Profitability: A Web 1.0 Comparisonhttp, viewed on 29 September 2010, //www.centernetworks.com/web-2-revenue-models

Green, H, 2006, Web 2.0 Companies Making Money? viewed on 28th September 2010,
http://www.businessweek.com/the_thread/blogspotting/archives/2006/04/web_20_companie.html

Miller, C, C, 2010, Twitter Unveils Plans to Draw Money From Ads, viewed on 27th September 2010, http://www.nytimes.com/2010/04/13/technology/internet/13twitter.html

Strickland, J, 2010, How Twitter Works, viewed on 29th September 2010, http://computer.howstuffworks.com/internet/social-networking/networks/twitter.htm