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March 27, 2006

Social Networking Connects For Business

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Social networking companies such as Friendster, MySpace, and Google's Orkut have been generating a lot of buzz lately about helping users connect with friends. But it's not clear if these sites are generating much income. 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 have found one by focusing on businesspeople and their need to make connections, whether it's companies seeking new employees or customers, workers looking for new jobs, or startups looking for financial backers.

After three years, LinkedIn, a social networking site that caters to businesspeople and has both free and fee-based options, has 5 million subscribers. That number will reach 8 million to 10 million by year's end, says Konstantin Guericke, marketing VP for the company. "We're expecting to reach profitability this month," he says. "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." Some LinkedIn users pay fees ranging from $20 to as much as $200 a month for accounts that allow paid introductions to contacts outside one's network.

Adrian Scott, CEO and founder of business social networking site, says that with its six employees and 400,000 users, it has been profitable for several years. Ryze members can create a networking home page, send messages to other members, and join special networks related to their industry, interests, or location. Those services are free, while Ryze also offers for-fee services such as advanced searches. Ryze helps people build business relationships that "can lead to significant business," Scott says.

Social Vs. Business use
It's harder to say that about social networking sites that peddle personal rather than commercial connections. Scott is even skeptical about the prospects of MySpace, despite its being the fifth most popular Internet site with its supposed 50 million users. "I don't think it's really clear that MySpace has shown a business model that works," he says.

Consumer-focused sites beg to differ. "We're doing very well. We're growing," says a spokesman for privately held Friendster, while not disclosing the company's financial results. The company has 24 million members and 9 million unique visitors a month. But companies like Friendster have to develop services that go beyond connecting friends and cater to interests such as media sharing and community-relevant applications. Friendster is doing just that, having recently launched a personalized radio service and personal media sharing.

LinkedIn user Karl Jacob, former CEO of anti-spam company Cloudmark, says he finds the ability to share contact networks within an organization particularly useful.

For his current company, a startup that he says is 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."

Efforts to provide 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," marketing VP Guericke says.

Social networking company Visible Path, which calls itself a "relationship capital management company," also is improving its search capabilities. Earlier this month, it unveiled 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.

The difference between search and social-networking sites 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 nonregistered users, furthering its ambitions as a search engine for businesspeople. Beyond recruiting and sales lead generation, LinkedIn has become a powerful research tool, Guericke says. A hedge fund manager, he notes, might use the service to contact current or former employees of a company to assess the state of the company's business.

Illustration by Felix Sockwell

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