Internet-based social networking tools are the hottest thing to hit Silicon Valley in the last 12 months. But they face a shaky future.
Despite strong initial interest from Internet users in services such as Ryze, Linked-In, Spokeand Friendster, they are yet to prove themselves to be more than just a fad. Likewise, there is little evidence these companies will generate sufficient revenue from users to be profitable. The sudden proliferation of services is diluting their ability to attract and monetise users. None of this has prevented US-based venture investors from pouring millions of dollars into them.
Social networking tools assist people in either managing their existing set of friends or business contacts, or in using referrals to find new ones. Dozens of companies have sprung from nothing in the last 18 months to provide these services. The largest consumer service, Friendster, plans to grow its 7 million users to create a community of people who are appealing to a broad range of advertisers. Business tools such as Linked-In have an ambition to transition users to paid services, by introducing charges for currently free services, or introducing enhanced services for paying members. To date only one company, Ryze has announced profitability.
If social networking is another bubble, it is one that will most likely float right over Australia. A poll of Australian investors found none were aware of any social networking services having started up here, and most were sceptical of the model as demonstrated in the US.
According to the principal at Technology Venture Partners, Mike Zimmerman, this may have to do with the Australian population lacking the necessary scale to support such a venture. The most popular commercial tool, Linked-In, boasts 700,000 users globally, but at the start of June had only 8124 in Australia.
Zimmerman also questions the value of connections made using these tools, in comparison to traditional mechanisms of introduction, and doubts that people with strong networks will be willing to expose them through these services.
"You end up with groups of people in two categories - those that really need introductions and need the service, and those that already have their own networks and don't need the service. I'm not sure if the two meet".
While these tools have some value in terms of organising contacts, professional finding examples of people who have profited from them is difficult. However, the founder and principal of the consulting company Digital Investor, Walter Adamson, says that on two occasions now a social networking tool has led him to a profitable business opportunity. Adamson says he made a conscious decision to use social networking as part of a business marketing program, alongside a Web site and blog.
"For me it's been a valuable part of the marketing process," Adamson says. "I've seen it as a way to leverage previous contacts, and a marketing tool and which is aligned with the kind of business directions that I want to take myself in. If you're just using it as a general contact tool I don't think you'd get tremendous value from it".
The manager of commercialisation and intellectual property at the research organisation National ICT Australia, Randal Leeb-du Toit, is sceptical about these service's abilities to attract sufficient revenue to be viable. But he questions whether it is fair to judge these companies on their current activities. Leeb-du Toit suspects that these companies may become acquisition targets for larger organisations such as Microsoft or IBM, who could merge them in to existing products, or use them as the foundation for new ones.
"So there may be some method in their madness, as I don't think there is a potentially scalable business model in social networking per se".