Can Social-Networking Sites Make Money?

June 24, 2008 — -- KickApps is an 80-person social-networking startup with its head office in a loftlike space just off Fifth Avenue in New York. In less than two years it has created the underlying structure for more than 20,000 social-networking sites--"mini-Facebooks" with an aggregate of 300 million page views per month. You've probably never heard of it.

KickApps gets a fraction of the press coverage of a giant like Facebook, but its growth has been sufficiently impressive that venture firms like Spark Capital and Prism VentureWorks have backed it with $18 million in startup financing, hoping for the payoff of a monster IPO. Its software allows companies to quickly roll out social networks with many of the features of Facebook or MySpace. Its clients--which include local radio stations and newspapers, national networks like NPR and ABC, and brands like AutoByTel, Harley-Davidson, and Kraft--want to offer fans a place to gather and share their love of a team, a product, or anything else.

KickApps' CEO is Alex Blum, formerly of JumpTV, an online television service specializing in sports. "We have 35 programmers working in this office," says Blum, leading a reporter through a sea of desks and flat-screen monitors, "and we only have two marketing people. We don't really have to sell our product."

Like most of the social-networking sites enjoying huge growth, KickApps is giving its product away, expecting that the communities built around it will generate ad revenues. It's a model that stirs memories of the first Internet bubble: build the user base and hope the money comes--from an IPO, a buyout, or ads. At this point, KickApps does not reveal revenue figures, or even what kind of a cut it is taking from the ads. That, too, brings back memories: staying mum about revenue was always a sign that there wasn't much to talk about.

Social networking is the fastest-growing activity on Web 2.0--the shorthand term for the new user-centered Internet, where everyone publicly modifies everyone else's work, whether it's an encyclopedia entry or a photo album. The growth of social networking is astonishing, and it has spread to sites of all sizes, which are increasingly intertwined as platforms open (see "Who Owns Your Friends?"). Even small players are soaring.

Ning, for example, is similar to KickApps but caters to individuals. Founded in 2004 by Netscape's Marc Andreessen and former Goldman Sachs analyst Gina Bianchini, it has been backed with $104 million in venture capital by a variety of firms, including Legg Mason. "We've got 267,787 sites," boasted Bianchini in May. "And we're adding 1,500 to 2,000 a day." ComScore, a firm that measures Internet usage, reports that the Ning domain, on which all the sites reside, sees three million unique visitors a month.

Meanwhile, Bebo, a social-networking site more popular abroad than in the United States, sees more than 22 million visitors a month. (AOL bought it for $850 million in March.) Club Penguin, a network for kids, sees five million. LinkedIn, a ­business-­networking site, gets nearly five million unique visits.

But that's just the smaller players. Facebook, according to ComScore's latest research, saw 33.9 million unique U.S. visitors in January 2008, nearly double the number from the previous January (but down by about 2 percent from December 2007). MySpace doubled Facebook's numbers again, with nearly 72 million unique visitors in the same month.

Nevertheless, the sites seem largely incapable of generating revenues commensurate with their popularity.

Last year, Microsoft bought a 1.6 percent stake in Facebook for $240 million, giving the company a dubious valuation of $15 billion. But Facebook is likely to lose $150 million this year, according to a January conference call heard by Kara Swisher of All Things Digital, a Wall Street Journal-affiliated site devoted to "news, analysis, and opinion about the digital revolution." That's based on projected earnings--before interest, taxes, depreciation, and amortization--of $50 million and an expected $200 million in capital expenses, including new servers.