Facebook and Twitter hunt for revenue

NEW YORK Fri May 22, 2009 4:02pm EDT

Mark Zuckerberg, founder and CEO of Facebook, delivers a keynote address at the company's annual conference in San Francisco, California July 23, 2008. REUTERS/Kimberly White

Mark Zuckerberg, founder and CEO of Facebook, delivers a keynote address at the company's annual conference in San Francisco, California July 23, 2008.

Credit: Reuters/Kimberly White

NEW YORK (Reuters) - Facebook and Twitter have helped make social networking a household word. Now they need to make money.

Efforts to monetize the popular Internet services are increasingly a priority within the two companies, with Facebook Chief Executive Mark Zuckerberg and Twitter Co-founder Biz Stone outlining several initiatives at the Reuters Global Technology Summit in New York this week.

And analysts and investors, in search of the next Google-like hit, are paying close attention to the breakneck speed at which Facebook and Twitter are adding new users.

While the popularity of the two social media firms has yet to translate into the kind of revenue-generating machine that Google Inc developed with its search advertising business, some say Facebook and Twitter have become so central to the Internet experience that they are inherently valuable.

"Both are new ways of communicating. And when you have a new way of communicating ... you benefit people enough so that there is going to be value there," said Tim Draper, managing director of venture capital firm Draper Fisher Jurvetson, noting that he regretted not having invested in either firm.

In April, Twitter's website attracted 17 million unique visitors in the United States, up sharply from 9.3 million the month before. Facebook grew to 200 million active users in April, less than a year after hitting 100 million users.

DIVERGENT STRATEGIES

Facebook sees advertising as its primary money-making strategy, said Zuckerberg, noting that the company could eventually offer ads not just on its own website, but on other sites that interact with Facebook.

Stone said Twitter was less interested in generating revenue through advertising than it was in offering premium features for commercial users of Twitter.

The divergent strategies underscore the novelty of social networking and the lack of an established business model.

Pacific Crest Securities analyst Steve Weinstein said advertising is probably the quickest way for social services to make money in the short term, but a purely ad-supported model does not take full advantage of the business opportunities created by social media.

"The amount of real-time information being created by Twitter is unparalleled," he said. Creating a better way to filter that information has great business potential, he said.

Because the value of social media sites improves as they become larger, Weinstein said the important thing now is for Facebook and Twitter to grow their networks and tread carefully with any monetization efforts that might inhibit that growth.

"The last thing you want to do is rush monetization and kill the golden goose," said Weinstein.

ADDITIONAL FEATURES

Some analysts are skeptical that advertising will catch on in a meaningful way on social networks, arguing that companies are reluctant to place their brands next to unpredictable, and potentially offensive, user-generated content.

A search advertising deal between Google and News Corp's MySpace social network has not lived up to expectations, they say.

But Cowen and Co analyst Jim Friedland believes there is plenty of opportunity to make money in social media.

"Because there have been some big missteps in the space, there's a misconception that social networking can't be monetized," said Friedland.

He cited media reports that Facebook is on track to generate about $500 million in revenue this year, which would be about a third of the $1.6 billion he estimates Yahoo Inc will make in display sales this year.

"Even though Yahoo is still bigger, Facebook is a pretty substantial asset for a company that was just founded in 2005," said Friedland.

Users of the social networks tend to spend a lot of time on the sites, providing an attractive platform for advertisers to promote their brands. The average Facebook user visits the site twice a day, and spends the equivalent of nearly three hours a month on the site, according to comScore.

The average Twitter user visits the site 1.4 times a day and spends 18 minutes a month, although many Twitter users access the service through cellphone text messages and third-party websites.

Facebook and Twitter could also get revenue from features and services. Facebook has already introduced so-called credits that users pay for to buy virtual goods on its store, and the company is experimenting with other types of payment products.

Some analysts believe Facebook could eventually create a payment system that lets users buy online applications from software developers, and enjoy a cut of that revenue.

That kind of business may still be a ways off, but social media companies are still young.

(Reporting by Alexei Oreskovic; Editing by Tiffany Wu, Richard Chang)

FILED UNDER: