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March 14, 2006

Social Networking Connects for Businesses

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Since 2002, social networking companies have been generating buzz, but not much income. Or if they do, they don't want to talk about it.

Despite 24 million members and 9 million unique visitors a month, Friendster's answer to the question "Are you profitable?" is "We're privately held and don't share any financial info."

Orkut, Google's social networking service, was launched in January 2002, but has yet to take off. Or if it has, Google doesn't want to talk about it.

"We don't disclose the exact number of users, but it's safe to say there are millions of users worldwide," Google spokesperson Sonya Boralv writes in an E-mail. "To date we have been focused on improving the service and user experience and have not monetized the product."

The value provided by social networking sites can be vague--helping members stay connected with friends or participate in an online community--or specific--helping members conduct investment research or find a job or a sales lead.

Despite their evident ability to find friends, social networking companies have had a hard time connecting with cash. Google, like Yahoo and its Yahoo 360 service, can afford to build its user base before making it pay off, but cash-strapped startups need a real business model. A few appear to have found one.

After three years, LinkedIn, a social networking site that caters to business people with both free and fee-based options, has 5 million subscribers. Konstantin Guericke, VP of marketing for the company, believes that number will reach 8 to 10 million by the end of the year.

"We're expecting to reach profitability this month," says Guericke. "We already have had some days where we've taken in more money than we spent."

That may not sound like much, but Guericke says it's a welcome validation for Web companies that advertising support isn't the only viable business model. "The question is, do people pay for subscription-based services on the Internet?" he says. "Especially in the business arena, if you provide enough value, the answer is yes."

Reached via LinkedIn for this article, Karl Jacob, former CEO of anti-spam company Cloudmark, says he loves LinkedIn and finds the ability to share contact networks within an organization particularly useful.

For his current company, a startup he describes as being in stealth mode, Jacob hired three people through LinkedIn. "We found people who weren't looking for a job, but were interested in hearing about new opportunities," he explains via E-mail. "Even better, they are the kind of people who might not have returned a call from a recruiter, but when they see an intro from a management-level person who I usually have in my network, they respond."

Adrian Scott, CEO and founder of business social networking site, claims his site, with its six employees and 400,000 users, has been profitable for several years. He says Ryze helps people build business relationships that "can lead to significant business."

It's harder to say that about social networking sites that peddle personal rather than commercial connections. Scott remains skeptical about the prospects of MySpace despite its supposed 50 million users. "I don’t think it's really clear that MySpace has shown a business model that works," he says.

Even so, MySpace, the fifth most popular site on the Internet at the moment after Yahoo, Microsoft, Google, and eBay, appears to be in a good position following News Corporation's purchase of its parent company last year for $580 million. A company spokesperson wasn't immediately available for comment.

While some may doubt whether millions of users necessarily translate into income, Jeff Roberto, public relations marketing manager for Friendster, believes consumer-oriented social networking is thriving. "We're doing very well," he says. "We're growing."

He insists that social networking is still an area of growth and investor interest, but he also observes that companies like Friendster have to develop services that go beyond connecting friends and cater to interests like media sharing and community-relevant applications.

Friendster is doing just that, having recently introduced a personalized radio service and personal media sharing. But the fact that these services are built on technology from other Internet startups--Pandora and Grouper, respectively--suggests that, in the consumer space at least, a viable online business requires more than just connecting.

Efforts to provide enterprise business value have been paying off for LinkedIn in part because users are no longer thinking about it as a social networking site; they see it as a search engine. "More and more people are going to LinkedIn to be found," Guericke says.

Social networking company Visible Path, which calls itself a "relationship capital management company," is also improving its search capabilities. Earlier in March, it announced a deal with business information broker Hoover's to help salespeople using Visible Path's software find and contact executives listed in the Hoover's database.

Contrast the $60 to $2,000 fee LinkedIn users pay to be found with the sense of violation that often accompanies being googled. That's a sentiment presumably evident in Google's short-lived decision to cease communicating with online news organization CNET last year when one of the site's reporters googled Google CEO Eric Schmidt and wrote about her findings.

The difference is that users opt in to social networking sites, whereas search engines index online information until site owners opt out. And commercial data brokers collect information regardless of whether those in their databases object.

Later this month, LinkedIn plans to extend the ability to search its site to nonusers, furthering its ambitions as a search engine for business people.

Beyond recruiting and sales lead generation, Guericke says LinkedIn has become a powerful research tool. He explains, "A typical thing that someone in a hedge fund might do is work their network for people who recently left that company to see what they can glean from that."

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