Bad news, would-be social networking startups.
George Colony, chief executive of analyst firm Forrester Research, speaking today at the LeWeb conference here has concluded:
"Social is running out of hours. Social is also running out of people."
What he means: People don't have any extra time for social networking, and it's a saturated market.
The company bases its findings on consumer research. For example, regarding saturation, Forrester found that 86 percent of people have adopted social networking services. In Canada, it's 88 percent, and in Poland, 95 percent. Urban areas of China are at 97 percent.
And in terms of time spent, social networking consumes more time than going to church; communicating by phone, e-mail, and snail mail; and exercising. Colony said.
"It's just a little less than shopping and child care."
Today's status quo won't last, he predicted.
"We are in a bubble for social startups. When it bursts, this is going to sweep away some of the nonsense, like FourSquare. We are going to move to a post-social world that's a little like the Web in the year 2000. A lot of companies launched, but they did not survive."
"The next wave of social services will be more efficient and more time-saving."
COMMENTARY: Forrester's George Colony is dead right about there being too many social networks, and not enough time to use them all, and there exists a huge potential for a social media bubble, but there are other forces at work.
He should've read my blog post dated March 20, 2011, my treatise titled, "Facebook's Ad-Supported Revenue Model Reaches A Critical Inflection Point, As The Number of Users and Revenues Slow."
This blog post placed me out on the fringe, and I was attacked by so-called social media guru's who mistakenly believe that Facebook is the Holy Grail, and that the number of users and revenues would continue to grow exponentially. In an article dated January 12, 2011, Business Insider said.
"Last night, we heard from two industry sources close to top Facebook execs that these days, when the company hires you, you're told the goal is to turn Facebook into the world's first TRILLION dollar company."
Have you ever heard anything so ridiculous in your life? Trillion dollar company, my ass.
What we are seeing is an infatuation with bigness. Facebook hit 500 million users in mid-2010, and Facebook insiders claimed they had surpassed 600 million users at the beginning of 2011. This prompted Goldman Sachs to convince its clients to invest $1.5 billion into Facebook, and raising its valuation to $50 billion. In July, Facebook claimed it had 800 million users. Wow, I almost shit in my pants too, but....
That's "bubble talk," if you ask me, even though many VC's have claimed "there is no bubble." Some have jokingly said there "some fizz."
Unfortunately, this is was all driven by investor exhuberance, a lot of hype, a whole lot of future potential, plus the belief that Facebook could be valued at $100 billion in an IPO (now scheduled for Q2 2012). It now seems that dozens of small social startups believe they can become the next Facebook, and VC's have been very accomodating by providing funding, something that I have come to call the "Facebook Halo Effect."
However, Facebook and other social media startups, dependant on an ad-supported revenue model, may find it challenging to grow ad revenues, for several key reasons:
- No More Exponential Growth - The number of Facebook users is no longer growing exponentially.
- Critical Inflection Point As Been Reached - Facebook reached a critical inflection point sometime towards the end of 2010, and growth in the number of users will begin to slowdown and eventually peak.
- Flawed Revenue Model - The ad-supported revenue model is flawed. The ad revenue model adopted by Facebook was nothing more than a "quick and dirty" way to generate revenues that was adapted from Friendster.com, the forerunner of social networks.
- Finite Amount of Ad Revenues and Number of Users - The total amount of advertising revenues and number of active users are both finite. In the advertising business, advertisers pay for eyeballs or number of impressions. A finite number of active users places a limit on the number of ad revenues.
There are other dynamics at play which limits the ability of social networks like Facebook and Twitter to grow advertising revenues:
- Revenues-Per-User - According to Silicon Alley Insider, Facebook has one of the smallest revenues-per-user when compared to other technology leaders:
Facebook had reported ad revenues of $1.860 for the year 2010. If you do the math, Facebook's revenue-per-user is $3.10 ($1.860 divided by 600 million users). Twitter ended the year 2010 with revenues of $45 million. Twitter's revenue per user was an abysmal $0.2368 (45 million divided by 190 million users). If you assume that Facebook and Twitter will grow to 850 million and 250 million respectively (a growth rate of 59% and 76% respectively) by the end of 2011, then their average revenues per user will be $4.74 and $0.60 respectively. Facebook's revenues-per-user for 2011 will only increase by 27.4%. What this says is that the growth in ad revenues per user does not grow exponentially with the increase in the number Facebook's users.
- Growth In Advertising Revenues Diminishes Over Time. - The inability of social networks to grow ad revenues exponentially as they increase their number of active users means that grow in advertising revenues is NOT linear (straight line), but are in the shape of an elongated S-shaped curve, sloping upwards initially to form a concave curve, but eventually slopping downwards to form a convex curve over time--the classic case of diminishing returns.
- Facebook Reaches The Advertising Revenue Inflection Point - According to eMarketer (see graph below),
Facebook's U.S. advertising revenues have reached the inflection point, and growth will begin to decline, and will eventually peak. As a consequence, Facebook will become more dependant on foreign advertising to generate continued ad revenue growth. Foreign advertising revenues began to grow exponentially beginning in 2010, and this trend will continue through 2012 and a few more years beyond, but will eventually reach an inflection point, and begin to slowdown and convex.
To my knowledge, several social media experts have mentioned a social media inflection point, but nobody has ever made an attempt to visually graph the inflection point or explain how it works. In order to accomplish this, I played a series of "what ifs" and had to make several assumptions and series of calculateed guesses about Facebook's future user counts beginning with the year 2011, and the affect this will have on future advertising revenue growth. This is what Facebook's Inflection Point curve might look like:
In the above graph, the inflection point is the point in time when the Gap between the Ad Revenues Curve (upper curve) and No of Users Curve (lower curve) is at its widest. I refer to this as the "Ad Revenue-to-User Gap" or The Inflection Point. According to my calculations, The Gap was at its widest sometime in mid-to-late 2o10, and the Ad Revenues and No of User lines gradually transform from convex curves to a concave curves. Over time, The Gap gradually narrows until growth in users and advertising revenues finally peak.
Forrester's George Colony is very smart and he sees the same thing that I have been preaching for nearly nine months now, but I am not too sure he understands the underlying dynamics and sees the inflection point like I have.
For social networks like Facebook and Twitter to justify their outrageous market valuations of $80 billion and $8.7 billion respectively, they must generate other sources of revenues. Facebook's second key source of revenues is from Facebook Credits, the virtual currency Facebook users use to purchase virtual goods like those sold through social games by Zynga and other social gamemakers running on the Facebook platform. For 2011, Zynga is on track to reach $1 billion in revenues. Facebook's cut is 30%, which works out to $300 million. Easy-peezy. However, Zynga recently announced that it was building its own game site, signalling that it plans to eventually breakaway from Facebook and keep that 30%. There are other reasons: Zynga's earnings are also feeling the pinch of that $300 million, and it wants a way out. Losing Zynga would be devastating for Facebook.
Having said all of the above, Facebook will have to become more aggressive in attracting more advertisers, and there is evidence that it is doing this by attempting to convince large television advertisers to shift some of their $60 billion ad dollars spent on TV ads over to social, but it is meeting with some resistance, because many advertisers do not see an ROI from making such a move. Many potential, but uncommitted Facebook corporate advertisers prefer to use Facebook to engage with their audience, since it costs them nothing.
If Facebook is successful in attracting more advertisers, this may eventually mean a boost in ad revenues, but it also means that Facebook will be taking ad revenues away from other social networks, including Twitter, foursquare, to name a few. Many social startups have not reached sufficient scale to compete with a goliath like Facebook. This includes foursquare, loopt, Gowalla (acquired by Facebook) and SCVNGR. This ultimately means that many social startups will be left out in the cold, unable to grow ad revenues, and this will result in an inevitable social media bubble.
Because Facebook has already reached its critical inflection point, I have postulated that it may be forced to charge its users, something it has sworn never to do. However, business is business, and it must find other ways to growth revenues, since advertising revenues under inflection point theory are finite. Facebook may lose Zynga and those $300 million in revenues, and it also has an IPO scheduled for sometime in Q2 2012, and in order to justify its projected $100 billion market valuation, it will have to find "creative" ways to generate more revenues besides advertising. Folks, the freemium social network is about to end.
In a blog article dated September 30, 2011 I provided "eleven good reasons" why Facebook would be charging you to access your account. In a blog article dated November 27, 2011, I gave "several good reasons why it will have no choice" but to charge its users. I don't expect this to happen within the next year or so, but it will happen, so be ready to pay for your Wall posts, and maybe even your Tweets.
Courtesy of an article dated December 8, 2011 appearing in C/NET