Facebook proves you can’t make (that much) money out of social networks

I was interviewed about Facebook today on RN Drive by Waleed Aly (you can listen to it here). When the producer asked if I would do the interview, I suggested that a business expert may be more appropriate to comment on the Facebook IPO and the class action suit that has resulted. But we agreed that we would discuss the issue from the perspective of how Facebook hoped to make enough money from its nearly billion users to justify the high share price (even at the current $32).

Although I have covered my thoughts on this before in the Conversation, the interview prompted me to really question whether this was going to be a “tipping point” in our understanding of the limitations to social networks as money-making vehicles.

There is a generally held belief that if something is immensely popular, it follows that you can’t fail to make money out of it. We are deeply enamoured by social networks and all of the possibilities they bring. If they can mediate changes of government, surely they can bring vast fortunes to those that control them?

It hasn’t just been Facebook trying to cash in on this belief. Google has “bet the farm” on underpinning all they do with social networking. Almost every other tech company is looking at ways of making their products integrate with the phenomenon that is our network-mediated lives.

This is what made the recent Facebook IPO and the fallout from the falling share price so ironic. This one episode may have been the pivotal moment that people started conceding that the new socially networked emperor may indeed have not been wearing that many clothes.

This was despite articles suggesting that nearly 50% of Facebook users are now accessing the site via mobile devices “where the company doesn’t generate any meaningful revenue”. Or stories of large customers such as General Motors pulling out of $10 million worth of advertising on Facebook citing that it wasn’t working.

Of course, the reasons given for GM’s retreat range from the fact that GM was “doing it wrong” to conspiracies involving Google offering GM the service for free.

It is also ironic that the “new media” companies are struggling with the same issues that the older, main stream media have faced up to, namely that:

the opening of access through the Internet generally acts to lower the cost of all resources.

We have seen this with newspapers, music, film, books and many other markets.

Like main stream media’s approach to dwindling revenues, none of the suggested solutions to Facebook’s (and others) income problems have even remotely sounded plausible. These have ranged from paid subscriptions (aka “paywall”) through to delivering movies and music (aka “mediating content”).

It has been suggested that if Facebook was priced like Google in terms of its revenue, the stock price would be around $7.

So if people are unhappy about Facebook’s share price now, just imagine what the future holds…

Support evidence-based journalism with a tax-deductible donation today.