Saturday, March 29, 2008

Monetization is hard

Web 2.0 wasn't proclaimed a bubble for any of the criteria that define a speculative bubble. Valuations aren't particularly crazy (few startups have sold or had an IPO), there isn't any "flipping" or speculation, and there aren't many people outside of the industry involved. People saw what was going on and recognized the South Park gnome business plan that dominated the 90s. Startups were sporting spiffy UIs, large userbases, but now, found a way to make money: ads.

Only it wasn't that easy. Take Facebook. In a Motley Fool piece, one fool had this to say:
Since some of the finest marketing minds in the world have tried and largely failed to monetize social networking already, I see many years of losses and negative cash flows ahead for Facebook.
Google was able to monetize search because of the nature of search. If you're looking for information on digital cameras, there's a decent chance you're in the market for a digital camera, so an appropriate ad is shown. Social networks, on the other hand, despite having detailed information about you, aren't complementing their service with ads, but their service is instead competing with ads.

Or take an anonymous startup that's essentially many niche forums. They know what their users are interested in, but there isn't an advertising platform that has relevant, niche products, and a lot of advertisers are only interested in US pageviews. When they turned to adsense as a last resort, they were making $500 a day, but for 50 million page views.

Simply gathering pageviews, even by the millions, isn't enough to turn a reasonable profit. What's worse, what value these startups have isn't in their technology, but in their use. These startups are more apt to see new competitors than an acquisition--becoming devalued is more likely than growing.

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