Point of view
Listen for the pop of social media
By Paul Benjou
Jun 26, 2009 - 1:04:14 AM

How foolish can we be? Plenty, it appears, even after we said we learned our lesson after the dot.com meltdown eight years ago.

We have billions being invested in what's called social media, from Facebook to MySpace to Twitter, and billions more to come, and yet no one has yet to figure out how to monetize them--make money.

The land grab for social networks launched with the purchase of MySpace by Rupert Murdoch’s News Corp for $580 million four years ago. That was a 77 percent premium over the $327 million the property was said to be worth. Four years later, the site continues to lose money, and in a recent restructuring top executives and 700 workers worldwide were laid off, which suggests that Murdoch's investment has shrunk in value considerably.

In February 2004, Mark Zuckerberg launched Facebook, and five years later the site has a user base of 200 million and a valuation of as much as $5 billion, depending on which venture capital outfit is doing the numbers. Yet Facebook still has no business model that offers even a hint of promise for making money, and Zuckerberg has said, hey, no hurry, in three years we set about figuring that out. More growth is the near-term focus.

In just three years, Twitter had lept to become the third-most-popular social network, and it too has no business model offering even a hint of return for investors. Twitter founder Jack Dorsey turns to a dictionary definition of the word twitter to define his site: "a short burst of inconsequential information.” Adman George Parker suggests another: "Staccato bursts of bullshit," and for investors at least that may be the more apt definition.

Twitter is just the latest pretty, helium-filled balloon that everyone wants to hold until the novelty wears thin or the gas escapes.

The fact is, it's a good bet these social networking sites will never figure out a workable business model because there may not be one. On the internet, it's accepted faith that if you build traffic, revenue will follow, typically from advertising.

But it simply may not apply to social networking sites such as MySpace, Twitter and Facebook.

That's for a reason that makes perfect sense on the face of it. Social networking sites are about people communicating with one another and sharing information. It's not a format that's suited for ad messages. In that environment, advertising becomes social interference, in some ways akin to eavesdropping, and it has the potential to backfire.

Why should we know this already? Because of the telephone.

Telephones have been around for more than 100 years, and yet despite numerous attempts, Americans have resisted attempts to put advertising on phones, even when the phone service was offered for free. Note too the rising public protest over telephone marketing, which eventually led to the federal do-not-call program several years ago.

One might argue that over time internet users will give in and accept advertising on their social networking sites. One might also reason that over time hell will indeed freeze over and Canada will indeed run dry. But it is the sort of bet anyone in their right mind would place billions on? No.

There are several lessons to be drawn from this.

One is that where big money in involved--call it greed--our inability to remember lessons of the past can be mind-numbing.

Another is that after all these years, we still don't fully appreciate how different and unique a medium the internet really is. We assume that because advertising works in some environments, it works in all. And it doesn't.

Yet another is how unlike traditional media the internet is when it comes to investment. In old media, if you were a Murdoch, you could throw billions at something, newspapers or magazines or television, and gain market share.

On the internet, you can throw billions at something and watch those billions disappear into a netherworld, never to be seen again. What matters on the internet is not bucks but imagination.

That lesson is so important nowadays as so many traditional media companies try to reboot themselves by buying their way into the internet space.