SMB - Social networking to taper off in five years

Market tracker predicts revenues to pass US$2 billion by 2012, but warns the bubble may burst.

Membership growth in social networking sites such as MySpace and Facebook in all regions is expected to peak in 2009 and level off by 2012.

According to market tracker Datamonitor, global active memberships in social networking sites will reach 230 million at the end of 2007. The firm expects revenues from social networking services to reach US$965 million this year, growing to US$2.4 billion by 2012.

By year-end 2007, Asia Pacific will account for 35 percent of the world's social networking memberships. Europe, the Middle East and Africa will hold 28 percent, North America 25 percent and the Caribbean and Latin America region will account for 12 percent, Datamonitor says.

But the firm cautions social networking companies and investors not to get giddy with the growth and popularity of the services. Although players would like to be in on the next Google or Yahoo, exuberance must be tempered with memories of the Internet bubble bursting at the beginning of this decade.

"Investors remember how few Internet start-ups survived the market downturn, and are repelled by what they see as overconfidence," the firm states. "The bulk of social networking sites are wise to postpone any consideration of an IPO."

Also, in the United States, few consumers are willing to pay a monthly fee to use social networking sites, according to market research firm Parks Associates.

In an online survey of Internet users, the firm found that 72 percent of social networking users would stop using a site if required to pay a US$2 monthly fee. Likewise, nearly 40 percent would stop if a site contains too many advertisements.

These findings present a challenge to the companies competing in the social networking space, Parks asserts. Eighty percent of broadband users ages 18-25 use these sites on a monthly basis; however, monetizing these users is proving to be difficult, with even category leaders such as MySpace struggling to turn big profits, Parks found.

To succeed, social networking sites must consistently deliver to advertisers a desirable consumer demographic, preferably when they are about to make a purchase decision, Parks says. A site devoted to car buyers presents obvious advertising opportunities while sites with broad appeal are too watered down to command a premium, according to the firm.

But social networking platforms offer value, especially as companies create the "look and feel" of social networking sites for a broad range of clientele, according to Datamonitor. This value is becoming apparent to media companies, search firms and other companies looking to tap into the widening constellation of audiences presented by social networking firms, which will lead to consolidation, the firm notes.

"As the market becomes more crowded, it will become harder for social networking sites to remain independent," Datamonitor states. "Acquisition can solve scalability issues, improve content and search capabilities, and extend visibility and reach."

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