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As Internet evolves, profit still missing factor

SAN FRANCISCO (Reuters) - If the global recession has made companies focus on business plans with solid financial returns, the Internet remains its own autonomous trade zone, free from the reach of the standard rules.

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

Executives from the world’s top technology and media companies convened near San Diego last week to discuss the future of their businesses and to tout new products that make the Internet more social and more mobile.

But from Hulu.com to Twitter to Microsoft Corp, the heady talk of new Web technology and innovation was matched by the continuing inability by many of the industry’s leaders to make money from their creations, no matter how popular.

“The consumer is deciding where they’re going to spend their time, now we’ve got to figure out what the model is,” said Raj Kapoor, a managing director at the Mayfield Fund venture capital firm, who attended the All Things Digital conference.

Kapoor, who co-founded Snapfish, a photo sharing site acquired by Hewlett-Packard Co in 2005, said it makes sense for start-up companies building new types of services on the Internet to concentrate on acquiring users and engaging them.

“If you don’t have any users, who cares if you’ve figured out monetization,” he said.

For larger companies, whose businesses are being transformed by the Internet, the lack of a business model is of increasing concern.

Social networking services such as Twitter and Facebook have evolved from avant-garde Web services into media phenomena in their own right, competing with long-established players for consumer attention. Apple Inc’s iPhone and the mobile software applications that run on the device have extended the reach of the Internet into consumers’ lives.

Facebook has more than 200 million active users, double the amount it had in August, while traffic to the Twitter website surged roughly 83 percent from the month before to 17 million unique visitors in April, according to comScore.

NBC Universal President Jeff Zucker told the audience at the conference his company was committed to distributing its television content through popular online channels, even potentially a social networking site such as Facebook.

But he said that for the Web to match the television as a viable medium for professional video content, Internet business models need to evolve to cover the cost structure necessary to produce such programing.

“These programs will be watched on television, online and many different platforms. But the question is how do we get paid for it,” said Zucker.

Whatever Zucker’s misgivings, NBC is not risking being left behind and continues to put resources into the Internet.

Hulu.com, the fast-growing video website co-owned by NBC, News Corp and Walt Disney Co, introduced Hulu Labs last week, which offers users new tools to enhance the online video experience, including a recommendation engine and a desktop PC video viewing application.

When asked at the conference when Hulu.com would be profitable, Zucker replied “soon.”

The champion of the new breed of Internet companies, Twitter, got top billing at the event. Co-founders Biz Stone and Evan Williams described various new product features and money-making initiatives under development, but acknowledged that the key revenue source for the company in a couple of years remains unknown.

“We have to bake into our plans the fact that we don’t know,” said Stone.

As it is, Twitter and Facebook are considered so integral to the modern Internet landscape that other companies are increasingly incorporating social media into their own product plans.

Palm Inc’s forthcoming Pre smartphone will feature a built-in “universal search” feature that allows consumers to dig through Twitter messages directly from the handset. Yahoo Inc plans to rejuvenate its family of online products and services with new social features.

Yahoo executives at the conference also pointed to the importance of free, custom-built software applications for the iPhone and other smartphones, while Nokia CEO Olli- Pekka Kallasvuo showcased Ovi, his company’s answer to the Apple iPhone App Store.

And Microsoft CEO Steve Ballmer vowed to unleash a large marketing budget -- pegged at $80 million to $100 million by Advertising Age -- to promote the company’s new search engine, even as the software firm’s online business continues to lose money.

Georges Nahon, the CEO of Orange Labs, a division of France Telecom SA, said most of the products on display at the conference were examples of companies adapting their businesses to existing trends, rather than true innovations.

Nahon forecast that the real technological breakthroughs would come 12 to 18 months from now, from college kids who are not even on the radar of the established corporations.

For businesses trying to crack the code to a profitable online model, that could mean another trip back to the drawing board.

Reporting by Alexei Oreskovic; Editing by Andre Grenon

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