Revenue and Social Networking websites...

 Social Networking Websites and $$$$...

I have always wondered about how social networking websites make their money.  I am planning to be an entrepreneur myself with an online presence. So, I thought I might do some research and figure out how do facebook, orkut , Myspace or linkedin generate millions of dollars.

The social networking sites have the following primary sources of income:

i.                     Investments from Venture Capitalists

ii.                   Acquisition by well established players in the market

iii.                  Advertising

iv.                 Fees for Premium accounts

In the beginning, when an entrepreneur with an innovative idea decides to transform his innovation to a venture, s/he approaches several venture capitalists. S/he tries to convince them about the idea and the project. If a venture capitalist picks up the idea and decides to invest on the project then the entrepreneur can start implementing the project right away. In most of the cases the seed capital is a combination of several sources like individual savings, money pooled in from friends, families and venture capital.

Now, as the business starts growing and the operational costs increase the entrepreneur has to think of other smarter ways to fund the project. S/he can choose to approach other investors again. But that is not a long term scalable approach. In some cases if the business has already created a large number of users the owner can decide to sell to other big players in the market.  Take the example of Youtube. Google acquired Youtube for 1.65 billion$ back in 2006.

But for entrepreneurs (like Facebook) who decide not to sell, they use advertising as one of their main sources of revenue. Web advertising is still an emerging market. Web advertising is broadly classified under 2 categories:

i.                     Cost per click (cpc): Pay whenever the advertisement is clicked by an user

ii.                   Cost per view  (cpv) or Pay per view (cpv) : Pay whenever the advertisement is viewed by an unique viewer

Although the television industry currently earns the maximum chunk from advertising, the fate of online advertising will see a radical change in future. A lot of research is currently being done to figure out the best way to advertise online without annoying the users.

Another way of generating revenue is to make users sign up for premium accounts. Businesses who sign up with the website can get premium facilities to market their products.

The popularity of social networking websites is growing exponentially. Now, with additional gadgets like IPhone and Blackberry’s they have an additional advantage to generate more traffic and more money.

Sources: 

http://computer.howstuffworks.com/internet/social-networking/information/how-social-networking-sites-make-money1.htm

http://techcrunch.com/2006/11/13/google-closes-youtube-acquisition/

http://en.wikipedia.org/wiki/Online_advertising