Social-networking sites work to turn users into profits

SAN FRANCISCO -- It is the burning question in tech circles, and Mike Murphy answers it before it is completed.

"I hear it every time I'm on a (tech) panel," Murphy, Facebook's vice president of media sales, says with a wry smile.

He's referring to the inevitable question on when Facebook and other social-networking sites will turn their steep market valuations into mounds of currency. (Invariably, Murphy answers that Facebook has a long list of major advertisers.)

Facebook, MySpace and other social-networking sites have been the rage of the tech industry for more than a year. Following investments by Microsoft and News Corp., the companies are valued in the billions of dollars and are considered blueprints for how to build a website. Yet a deeper question lingers: How are they going to consistently produce profits to match their soaring valuations?

It is a parlor game that has Silicon Valley buzzing. With online ad spending booming into a nearly $50 billion market this year, there is plenty of money to be had. Big-name advertisers are drooling over millions of young, affluent consumers who are spending more time on their online profiles than in front of TV and movie screens. They are particularly smitten with the prospect of tailoring ads to people's specific interests.

But Google commands a sizable chunk of the market — especially in the USA — leaving dozens of social-networking sites to scramble for a piece of the advertising pie. Plus, there is the ticklish task of sites and advertisers pitching products without trampling the privacy of consumers.

Short of striking it rich with online ads or creating a new revenue stream, how can so many sites leverage their vast audiences? In many respects, it is the same query that dogged portal companies in the mid-1990s and search engines in the early '90s. Some were sold. Some went public. Some went belly up.

The ongoing challenge is to concoct a potion — be it through banner ads, premium subscriptions or licensing agreements — that no one has perfected. Facebook, crown jewel of the field, is valued at $15 billion but barely turns a profit.

"You can't have a $15 billion market valuation based on advertising alone," says Bill Eager, co-founder of bSocial Networks, a maker of software that helps social-networking users market to each other. "It's the single most-asked question in this field."

Forrester Research analyst Charlene Li has pondered the next stage for social networks. She envisions the ubiquitous sites will, in five to 10 years, "be like air: They will be anywhere and everywhere we need and want them to be."

Eager estimates there will be as many as 250,000 sites that call themselves social networks within a year, compared with about 850 today. "Everyone will reposition their site to take advantage of this phenomenon. It happened before with portals."

To get there, though, there is that little matter of making money. "Facebook's real problem isn't privacy, it's monetization," says Dave McClure, a start-up adviser and angel investor in Silicon Valley. "It's not too early to worry about how Facebook makes money."

Murphy and other Facebook executives are well aware of that concern. "Advertisers follow people," says Sheryl Sandberg, a former Google executive who recently was named Facebook's chief operating officer. "We have 70 million active members. Once you have engaged users, the revenue will follow in that order."