Are social networking sites profitable?

19 04 2009

Everyone of us, atleast in the IT industry, will be part of a social networking site. YouTube, Flickr, Facebook, Orkut, something or the other. Google acquired Youtube and Orkut, Yahoo acquired Flickr, and Microsoft acquired Facebook in the hope of generating money and adding numbers to the bottom line of the company. The business model was to generate revenue through advertisements. The content was user generated.

Credit Sussie estimates that 375 million people would watch 3 billion videos in Youtube this year. But is it adding money to Google? Last year Eric Schmidt was not very positive about Youtube generating revenue for google. Rather it is  bleeding Google’s money.

http://www.slate.com/id/2216162/?GT1=38001

Few numbers from that discussion (thanks to Tren Griffin)

“According a recent report by analysts at the financial-services company Credit Suisse, Google will lose $470 million on the video-sharing site this year alone.”

Google can post ad only on few videos due to legal restrictions (this pose a problem to monetize from free parking.). Youtube adopts ‘Pay Per Click’ or ‘Pay per Thousand Impressions’ (PCM) model for advertisements.

Infrastructure Maintenance            –     $ 450 million (Servers and Bandwidth to support videos)

Licenses to acquire few videos      –      $ 250 million

The expenses total to $700 million while advertisements generate $250 million dollars. This is loss. Other social networking sites face the same problems. Even flickr was not able to add much to the bottomline of Yahoo.

Few alternatives

1)    Making it a subscription based model.  But studies show that 70% of users would discontinue even if a 2$ subscription is levied. So it may not work out great.

2)  Few online gaming sites generate revenues by providing the actual games for free. But they monetize by selling gadgets, avatars, etc. Similarly can try selling applications, etc. But the concept of selling things in a gaming environment may work out.How will it work out in youtube or Facebook or Orkut?

This will be an interesting challenge for these companies. We need to wait and see whether social networking is there to stay , at the least for free!!


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2 responses

15 12 2009
Saravanan S,

Hi Sundar, It was an interesting read.. This reminded me of twitter which took 3 years to come up with a business model and am not sure if they still have it on track. Well I guess time alone will tell how these social companies will engage.

15 12 2009
clicksuku

Hi Saravanan,
Thanks for reading through the post.
Few companies are successful in monetizing their growing user base. Few companies sell props and items online and successfully earned profits.

Thanks and Regards
Sundar.

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