The Future of Online Social Networking

Online social networking has been the buzz word for the last 5 years with the birth of MySpace and Facebook which were later followed by LinkedIn and Twitter. The Trinity as I call it, Facebook, LinkedIn, and Twitter have ascended to the forefront of talks regarding the future of this business.

Rumors have surfaced over the past month that Twitter was being eyed by the likes of Google (GOOG) and Apple (AAPL). I believe that it is time that I now offer my perspective on the issue as these companies continue to mature at a rapid pace and permeate the lives of people worldwide.

The Trinity has several choices for their business development. The two that have been on the minds of investment bankers and venture capitalists is becoming a public stand alone company or a buyout target for larger, more well established tech companies. All that being said, no one mentions that these companies could not stay private and remain successful, something Mark Zuckerberg at Facebook has been preaching since the 2005 purchase of MySpace by Rupert Murdoch at News Corp (NWS). Now the dilemma for many boards across the social networking spectrum could grow to be; should I IPO my company, or sell it to a well established name?

How about an IPO?

Going down the IPO path could be a very dangerous thing for a company in the long run. The equity markets can be extremely brutal, oftentimes driving down the value of companies in a matter of months after an IPO. When analyzing the viability of a stand alone entity, we need to ask ourselves how can these companies monetize further? After all, this is what will drive strong earnings and cash flow generation. Companies need to be able to grow at a rate investors will be happy with year over year, and maintain its financial health simultaneously. In my opinion, it will be extremely hard for any of these companies to compete against the heavy hitters of online business and withstand the stresses of equity markets.

IT products generally are used to improve business and personal life, however the impact of The Trinity is muted as a catalyst in improved productivity in business or an upgrade from the current consumer technology offerings out there. The tools are great free utilities for meeting with people or getting back in touch with old acquaintances, and they should not be seen as the future of information transfer.

Notice I stress free because it will be a challenge to charge for services users are accustomed to using for free. LinkedIn has monetized the best and is potentially in the best position as a standalone public company with its free and paid professional networking services. LinkedIn’s CEO, Reid Hoffman, even said that the company could go public, but has opted against doing so due to depressed IPO activity. On the other hand, Facebook is generating its revenue primarily from ads while Twitter has yet to monetize.

Ad based revenues are relatively easy to get and almost a standard for any website looking to establish itself. It is evident that introducing paid offerings is quite the challenge especially when online networking utilities are just a complement to everyday e-mail and phone usage. The key to unlock the value of these firms is to meld their products and services with online search and corporate information systems.

Buyout Targets

It is much better to view the Trinity as buyout targets for the likes of Google, Apple, and Microsoft (MSFT) among others. Potential suitors could even be HR outsourcing names like ADP (ADP) or even enterprise software names such as IBM (IBM) or Oracle (ORCL). These companies have existing offerings that would meld well with the trendy networking services which LinkedIn and Facebook offer. Twitter on the other hand would probably be best utilized in an online search manner with its real time functionality. The real question is who should be taking these internet stars and churning a profit with combined offerings?

The first up is Facebook, and I think this Harvard-born name will end up with Microsoft who snapped up a 1.6% share in the company and is attempting to gain traction in online search and media. I think this would turn the MSN name into a highly visited internet hub, competing with Google once again. Such traffic would also boost advertising revenues that Microsoft has long been working to expand. Microsoft could easily integrate such online networking services to their corporate intranet systems as well as their XBox platform to help consumers stay in touch and meet fellow gamers. This would greatly help Microsoft’s presence online and recharge the faded MSN name with a highly used and popular service that is continuing to grow and become an outlet for businesses to market its offerings to younger audiences. This could be a great opportunity for Microsoft if Zuckerberg allows Facebook to fall in the hands of a large public corporation.

LinkedIn, the best monetized of the three social networking powers, has both advertising fees as well as premium services for corporate users. I think LinkedIn would be a great addition to Google or Microsoft, but I think it would best serve as a great complement to IBM’s ERP systems. IBM is said to have developed an in-house networking utility for businesses to use. I think this would be a great way to use LinkedIn’s technology to enhance IBM’s current offerings. The acquisition can help IBM add a perk to its business offerings and also benefit from an online presence that has created much hype and is in the best position relative to its peers. LinkedIn is by far the best company to pick up with an already monetized business model that could be cross functional with sophisticated business systems.

Lastly Twitter, the newest of the social networking names, has gained a lot of traction over the last few months. It has even been rumored that Google and Apple have attempted to snap up this real time information provider for about $700 million. I think that Google or Apple would be the best served by acquiring this business. I feel that Twitter has the weakest business model with minimal potential for premium offerings. Twitter could advertise, but has very flimsy ideas for future revenue generation. I have heard about a Twitter phone which could jive with the Google Android or Apple iPhone, but still am unsold that consumers would snap up such a device. I feel that if this name does not burn out and end up as a forgotten tool, Google or Apple will eventually snap them. Google could become an all in one spot for socializing and productivity with such an offering (which could really help them take a lead as an online internet service name) while Apple really has minimal uses for Twitter besides combining ideas to enhance the iPhone.

I am an avid user of all these networks, but believe that they have little future as public entities. They serve little purpose for many of the names listed above and have little use if any for the costs associated with their purchase and integration. The Trinity can best serve its stakeholders by remaining private and seeking to improve their businesses that way. Who knows, maybe one of the them will find a way to improve its cash flow and operating health with new offerings that could make it legitimate in the IT realm? Stay abreast of the news to see how the future of online networking ends up. Continue to link up, facebook, and twit about the latest happenings in your world and ride the trend.

- Santosh Sankar

Disclosure: The Fund the author is associated with is long IBM, GOOG, and ADP. The author is an active user on Twitter and Facebook.

Comments

[Ian Hendry:]

An interesting piece.

It's very interesting that you should consider LinkedIn the bext monetized of the three. Litlle doubt it is, but it still isn't doing a great job: only a fraction of its 40m members are premium networkers, and those are mainly in recruitment (and benefitting from access to 40m resumes). This is a poor result when you consider that it's European competitotr XING has 8% of its total base paying for the service. And XING is already public.

People may have a perception that social networks are free, but theyll pay when they are getting value. This means either getting something they can't get elsewhere that helps them with their task; or providing a better and more cost effective way of doing something that already costs them money. Forrester recently suggested that CRM is a worthwhile add on to social networks: build you contacts through the network, manage them through integrated CRM. People will happily pay for CRM today, so there's a revenue opportunity straight away.

It's one we plan to add to our UK-based social network for business next month.

Ian Hendry
CEO, WeCanDo.BIZ
www.wecando.biz

May 08 05:38 AM

[Twiz:]

I've discovered a social networking site that is geared towards investors: The Trader Profile. It seems to have launched in 2009 and has a very clean, intuitive interface. The information fields available on each profile are specifically tailored - examples include Type of Investor, Investment Products, Methodology, Strategy, Charts and Indicators, Best/Worst Market Period, Outside Hobbies, and Favorite Investment Sites.

I'm not qualified to evaluate a site, and I'm wondering if anyone has taken a look. Just monitoring the StockTalk feeds on Seeking Alpha proves that there is a needed social avenue to bridge the gap between the new generation of Wall Street, often novices, and the professional business strata. This could also be one of those things to watch as a "Next Big Thing" in social networking.

Jun 15 06:27 PM