Friday, March 6, 2009

Business Model Please!

These days predicting a downward business trend is about as clairvoyant as predicting that the North Pole will be cold! However, there is one trend that appears to surfacing that will likely have an significant impact on the Webosphere. The firms that provide the lifeblood for many web 2.0 companies are beginning to succumb to the pressures of a weak economy. The financial vehicles such as IPO's and Mergers & Acquisitions often used to "prop up" social networking companies that typically have no business models, have been significantly hampered by the declining equity markets. Two companies that come to mind are Facebook and Twitter. Both of these companies are immensely popular and growing exponentially but are lacking one thing; a business model. This fact was very well verbalized by the co-founder and CEO of Twitter, Evan Williams, during his interview with Charlie Rose last week. Below is a clip of the interview:

In 2007, Microsoft invested $240 million into Facebook which at the time was estimated by Microsoft to be a 1.6% stake. This valuation infamously placed Facebook worth $15 billion. In July 2008, Facebook valued itself at $3.75 billion. That means that Microsoft's $240 million investment is worth less than $60 million today. Twitter was valued at $250 million in January 2009. It was also reported that Facebook wanted to acquire Twitter in November 2008, for $500 million. Fortunately, for Evan Williams, he was able to profit before the meltdown by creating the blog application that this blog belongs to,

Despite advertising revenues that Facebook introduced in 2007, it was leaked on the Internet that Facebook had 2007 revenues of $150 million and was $150 million cash flow negative. Twitter on the other hand has absolutely no revenue model. At some point, investors are going to push for a return on their investment which will pressure both companies to move toward an acquisition. With social networking ad revenues expecting to decline in 2009, the prospects do not look good for ad revenues to be the salvation for these companies. The other obvious possibility is to charge a fee for membership. It is unclear what effect a fee would have on the number of users. The outraged over the Facebook policy-change blunder proved that Facebook members can be very fickle.

Both Facebook and Twitter could have been acquired for tons of money before the economy tanked, but if they are unable to create sustainable business models, they might be wishing they had agreed to be acquired when the bidding was high.