Entrepreneurs in Silicon Valley, only half-jokingly, call it the URL strategy. The three
This pretty much describes the strategy of most big online social networks, which over the past few years have concentrated on piling on users rather than worrying about profits. That has allowed them to build huge followings, but it has also raised a big question-mark over their ability to make money from the audiences they have put together.
And the issue is whether the social-networking industry can come up with a wildly successful form. of advertising in the same way that Google has been able to make billions of dollars from the targeted ads that run alongside the search results it serves up.
Without such a formula, runs the argument, social networks such as Facebook will never amount to much. Doubters claim that the networks face two big handicaps. The first is that people logged into social-networking sites are there to hang out with their friends, so they will pay no attention to ads. The second is that because the sites let users generate their own content, they will find it hard to attract advertisers because brands will not want to take the risk of appearing alongside examples of profanity, obscenity or nudity—or all three at once.
The broader outlook for networking sites is more encouraging. One reason is that advertisers are being drawn to the leading sites by their sheer scale. Facebook&39;s audience is bigger than any TV network that has ever existed on the face of the earth. Another thing that has attracted companies is the networks&39; ability to target ads with laser-like precision, thanks to the data they hold on their users&39; ages, gender, interests and so forth. Although there are still lingering concerns about brands appearing next to racy content, firms seem more willing to run this risk now that the networks&39; advertising proposition has become more compelling.
In addition to advertising-driven business model, networks are already making healthy profits from sales of games and virtual goods. The beauty of this business for social networks is that the cost of producing and storing virtual inventory is minimal. Moreover, because these are closed markets, networks can fix prices at levels that generate fat margins. To some, the notion that big money can be made from selling make-believe items may seem bizarre. But the practice replicates the physical presents that people give to one another to cement relationships in the real world.