Hard to comprehend the extraordinary $200 million investment in Facebook by Digital Sky Technologies, a private Russian internet investment group. As reported in the Financial Times, it values Facebook at $10 billion. It's extraordinary because it suggests Facebook is still relying on bail outs while it struggles to make a profit.
As reported in Information Week, analysts warn that outfits like gaming companies that use Facebook might make money but the Facebook business model doesn't allow the social networking site to make any profits. The report from ContentNextMedia found that "excitement over virtual currency has been driven mostly by the novelty of it and interest 'could come to a screeching halt'. "
National Post blogger Drew Hasselback quotes Bob Ackerman, co-founder and managing director of Allegis Capital stating the obvious about the Russian deal. "There is a very high level of future expectation built into that valuation. The fundamental challenge for all of these social network companies is: How do they convert traffic and consumer interest into revenue and earnings? The jury is still out." And as Hasselback points out, Time Warner's decision to get rid of AOL is a reminder of how quickly these valuations in the online world can evaporate.
As Doug deGrood from AdAge points out, the social networking might be unsustainable commercially. "Who knows, maybe some really smart person will figure out how to open the revenue floodgates for Facebook, et al. Currently, the only thing they're generating is more users, which requires more bandwidth, which requires more capital, which, at some point (soon?) will require a boatload of ad revenue to satisfy the VC folks who ponied up the money for this worldwide digital kegger in the first place."
Looking at the problem, it seems to me the only way for Facebook is to start charging rent.
Still, in the meantime you can't deny the impact these social networking sites are having. Regardless of whether or not they make a profit, they are threatening or challenging industries. Sites like Facebook and Twitter will change the way companies communicate with the public. Word of mouth has always been an important tool for getting the word out on a business but social networking sites take that to a new level.
As BusinessWeek reports, that might make the $10 billion valuation look like chicken feed.
I agree with you. Facebook indeed must charge for rent, however, they really still gain profit for a lot of people register everyday, I myself just got registered just because of word of mouth. You may want to check out Travel Credit Cards.