Pitfalls Ahead for Social Networks?

MONTEREY, Calif.– Social networks and other Web-based forms of personal expression are connecting people on the Internet like never before. No surprise there. Whether it’s with MySpace profiles or expanding your personal network of contacts via sites like LinkedIn and Facebook, people are reaching out like never before.

But at what point is it overkill, and which companies have the power and resources to ride out the competitive storms and emerge victorious? As far as Pierre Lamond, a general partner with the Sequoia Capital venture firm is concerned, we’ve already reached the saturation point.

“Very soon there will be enough social networking companies for each U.S. citizen,” he quipped during a discussion at the Red Herring conference here. “How many of these can people belong to?”

As for the broader topic of Web 2.0 (define) companies Lamond remained pessimistic. “We’re in Web 2.0 bubble in my opinion,” he groused. This from a partner at the firm that was an early investor in the likes of Yahoo, Google, YouTube and LinkedIn. Lamond fears the advertising on TV and billboards along Silicon Valley’s main Highway 101 hyping various Web firms are a bad sign, a reminder of the excessive spending ahead of profitability that characterized the dot-com bust at the turn of the century.

Mark Jung, former chief operating officer at Fox Interactive, also raised some red flags. At Fox, Jung was responsible for several Internet properties, including what became the wildly successful MySpace. For all the growth in user generated pages, Jung isn’t sure they’ll be sufficiently monetized.

He said publishers haven’t quite figured out how to capitalize on the passion of bloggers and other user-generated content sites. “There’s an assumption that the user publisher “thinks like a large publisher and is after profit,” said Jung. “In general, they don’t. It’s not always about money, but ego, personal fame and having an individual voice, not cash flow.”

In a traditional publishing model, the publisher controls the content and sets the ad rates. But in a Web 2.0 world, Jung said “the aggregator or publisher may not be in charge or in control of the inventory.”

Jung also said that as user generated content grows unabated, publishers and Web sites can’t even be sure of their architecture requirements or when and how much content is being posted. “What should your storage and network costs be when there are a hundred million unique pieces of content that could light up [i.e., become widely popular] at anytime? What if the content is offensive? Is a manual screening of a million pages realistic? If not, how could potential liability be covered?”

Jung didn’t offer any answers, then said it’s long past time for the industry to come together and address some of these issues. “As the long tail expands, we as aggregators become victims of our success,” he said. “Anxiety is building and tempers are beginning to flare.”

As for profitability, Jung had one shining example of a highly successful company that deals in user generated content: eBay. But he noted eBay really flips the model around. “eBay is different because it shares revenue with the consumer; in fact, the consumer pays eBay,”

Max Levchin, CEO of Slide and a co-founder of PayPal, which is now an eBay company, agreed with Jung in a later talk. “eBay has it down, everyone is making money right and left,” he said.

And there may come a day when participants in social networks want to see some of the green. Today users don’t get paid for creating profiles in MySpace or Facebook. But Jung wondered aloud whether competition or some other development will lead users to expect payment for posting their content.

“Today they don’t realize they should care, but when they do, you’ll see a huge structural shift,” said Jung. “If they’re not on your site, you don’t have a site.”

This article was first published on InternetNews.com. To read the full article, click here.