Need a job? How about a date?
Special to CNET News.com
May 15, 2004, 6:00 AM PDT
Friendster, Orkut, Tribe, Ryze and LinkedIn--along with nearly two dozen other online communities that have cropped up recently--are furiously recruiting members who, in turn, recruit their friends, relatives, co-workers and just about anyone seeking an introduction to or a reference from.
Some networks count up to 100,000 people as members, while others are claiming between 500,000 and 1 million.These services, also known as social networks, aren?t just attracting members. They are raking in money offered by venture capitalists from San Francisco to Boston. Sequoia Capital has invested $4.7 million in LinkedIn. Kleiner, Perkins, Caufield & Byers have put $13 million into Friendster. Venture capital firm Mayfield and media giants Knight-Ridder and Washington Post Co. have invested $6.3 million in Tribe.
To some e-business experts, the explosion of social networking businesses is all too reminiscent of the dot-com boom-and-bust phenomenon: An interesting idea pops up on the horizon; companies with vague business models are formed to exploit it; and venture capitalists see profits in the businesses, even though revenue has yet to make an appearance.
"We've created this little bubble again with high prices and high expectations," Andrew Anker, a partner with August Capital, told the Boston Globe late last year.
Still, some observers say, networking services trying to turn themselves into successful e-businesses shouldn?t be compared to the likes of Pets.com, the poster child for the burst Internet bubble. Many of the dot-coms that went belly-up failed because they had to carry heavy inventories of real goods and maintain brick-and-mortar facilities in the non-virtual world. The only inventory that network services have to carry is a long list of names. And they don?t stock any products.
Konstantin Guericke, a co-founder of LinkedIn, is the vice president for marketing yet has "no budget and no staff."
"But of our 500,000 users," Guericke said, "we can track the 95 percent who responded to invitations from other users."
Almost all these networks are still in their early stages, which means that they are, for the most part, concentrating more on hooking participants than worrying about profits. Some, if not most, have yet to make hard and fast decisions on how they will pull in dollars. However, at least one network, Ryze, has publicly said that it is turning a profit, although it has not cited dollars and cents.
When a student recently asked him to give her a reference to a person whose name he did not immediately recognize, Fader turned to LinkedIn. Within seconds he had found the person, remembered who he was, made the requested recommendation--and arranged to have dinner with him. "That sort of thing is happening every day," Fader says. "These new platforms are being used to fulfill the genuine needs of users."
Those platforms--and more specifically, the business models driving them--vary substantially. Some networking services are looking to advertising, subscription fees or a combination of the two to generate revenue in the future. Others, perhaps concerned that up-front subscription fees will turn off members, are likely to allow entry to all comers, but they will charge if a participant wants to contact a member who is, say, three or more degrees away.
Some hope to make money on ancillary services such as organizing teleconferences or trade shows for network members who share business interests. Ryze has found revenue in organizing networking events in the non-virtual world.
But the beauty of networking services is not that they will be asking customers to spend new money, says David Flaschen, a managing partner at Flagship Ventures. Rather, their appeal is that they could substantially lower the cost of finding executive talent by helping cut out recruiters who now charge tens of thousands of dollars--and do so while expanding the pool of people from which to hire. Says Flaschen: "Monster.com can help you find people who are looking for a job, or people who are out of a job. But social networks can help you find people who are not looking for a job, but are a perfect match for what you have available. Social networking moves you beyond the obvious connections.?
While business models such as those based on subscriptions and advertising may well prove to be viable, even more imaginative approaches are likely to be tried, says David Croson, a Wharton operations and information management professor and currently a visiting professor of management science at MIT. A networking service, he says, could work out a deal under which a cellular phone company, in exchange for a fee, gets access to some of the network's members. The networkers, in turn, would get preferential phone rates.
Networking services have posted privacy policies attesting to their determination to protect the privacy of those who participate. Still, technology experts like Esther Dyson worry about the potential invasions that joining networks may encourage.
"There's a real danger that the whole field and its potential for supporting human connections could be irretrievably tarnished by privacy issues--either as a result of policies that leave people feeling exposed by the aggregation of data, or by security breakdowns, resulting in some kind of informational oil spill," Dyson wrote in The New York Times last fall. (Editor's note: Dyson has since become an editor at large for CNET, the publisher of News.com.)
"For now, no one online social network has enough heft to matter. But these issues will inevitably arise when the services approach critical mass," Dyson wrote.
Very highly targeted merchandising could also generate profits, Croson asserts. In a networking service, for example, there might be a subgroup of 3,500 Alpine skiing enthusiasts. A manufacturer of skiing equipment could "effectively, fully and openly hit those skiers with detailed information" about available products, Croson points out.
The network services, however, will be able to offer a time-trusted approach to love and labor: A set of people willing to vouch that someone is compatible with you and worth taking to dinner or putting on the payroll. Says Mayfield: "If I go out on a date and do something inappropriate, that information will go back into the network, so any action I take will risk my social capital," Mayfield notes. That informal but effective rule creates the sort of trust that a Match.com or Monster.com cannot duplicate.
Potential profits may await networking entrepreneurs--whether they are selling a full-fledged service or only the software for creating a network--in some highly specialized and potentially lucrative niches. Both Fader and Croson point out that social networking can be of immense value to universities, for example, not to mention specialized institutions such as business schools which, as Croson says, "have not been effective at making alumni connections." He adds, "Using (networking software) to spice up an existing group could be powerful."
Network services, Fader adds, could help tie together different groups such as faculty, admissions and career management. Among other benefits, this powerful networking component could help attract top MBA candidates to your campus.
Using social networking software to bind all those people and their contacts into a corporate network would yield immense results, says Stowe Boyd, an information technology expert. A salesman vying for a major contract from a business in Washington, D.C., could access the network and find that someone in Ohio has a connection there. "At the very least he could go to (his colleague) in Ohio and find out how to better get in, or get an introduction." That sort of networking "adds up to real money," Boyd notes.
Corporate networking services could even change hiring and firing decisions, Boyd adds. "If you decide to let Joe Jones go, it may not look like a big deal on the surface. But, whoops, if you look at it from a social networking point of view, you may find that he is an incredibly connected guy who was a powerful influence and has been responsible for closing 25 deals."
Boyd calls corporate networking a "killer app," and venture capitalists seem to agree. In addition to the deals mentioned earlier, Visible Path, a vendor of corporate networking service software, has received $3.7 million from Kleiner, Perkins, Caufield & Byers. Spoke Software, another entrant in the field, has pulled in $20 million in venture capital from investors including US Venture Partners, Sierra Ventures, Partech International and DCM--Doll Capital Management.
Subverting the system
The broader social networks may find that there are only so many people interested in networking, that many of those interested in joining social networks won?t pay fees of any sort, and that, as the novelty of networking fades, members will drift away, especially if networks seem to deliver less than they promise.
As a result, some social networks will disappear. Others, the betting goes, will be subsumed by bigger fish interested in using them to provide ancillary benefits to existing customers. Zero Degrees, a Los Angeles-based social networking service, has already been devoured by Barry Diller's InterActiveCorp. Conversely, experts also expect that existing Web-based businesses will add social networking to their services, thus ratcheting up further the pressure on the start-ups. Monster.com--which might expect to see its business cannibalized by social networking aimed at helping people connect for jobs--recently added networking to its offerings, telling subscribers that it will help "introduce you to the right people."
All in all, the betting is that only a handful will be left standing after another 18 to 24 months have passed. "I can?t imagine that there is room for more than one dominant social network, one dominant business network and one network for special interests," Croson says.
All materials copyright © 2004 of the Wharton School of the University of Pennsylvania.
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