Will social networks on the Web ever make money?

In the last week or so, there have been a number of events that bring up the big question: Will Web-based social networks ever become significant businesses? Or, put another way: Do these social networks--Twitter, Facebook, LinkedIn, MySpace--have the ability to 'monetise' their audiences?

My answer: While today, these may not look like great businesses (which hasn't stopped investors' willingness to fund them), I'm convinced that the daily interactions of their vast memberships--and their users' willingness to share their interests, tastes, relationships and intentions, and the massive amounts of data around users' behavior--will eventually lead to substantial revenues and profits. But I don't think that those revenues will come just from the Web advertising standards of banners and contextual search links.

Last Friday, Twitter announced that it had received a third round of $35 million in funding, led by Benchmark Capital and Institutional Venture Partners. Sure, Twitter is growing exponentially (over 900 per cent in a year), but the company has had very little (if any) revenue.

In an interview with Wired.com, IVP General Partner Todd Chaffee essentially says that he expects that Twitter is "turning into a very large media property." Twitter co-founder Biz Stone's announcement on Twitter's official blog admits that the next step is "to begin building revenue-generating products."

Also, the Associated Press recently carried a story that Facebook's true value fell way short of the $15 billion implied in the 2007 investment made by Microsoft. Facebook's own internal appraisal priced its privately held stock at about $3.7 in value. This revelation came from confidential information from a lawsuit settlement.

From the outside, it looks like most of Facebook's revenue appear to be coming from its two ad deals with Microsoft, its own local/national ads on users' pages and members paying for their virtual gifts such as Happy Birthday cakes, Champagne Bottles and Valentine's cookies.

This week, controversy erupted over changes in Facebook's terms of service, which indicate that it would retain users' content and licenses after an account has been terminated. Users' concern, when the changes were pointed out by the blog Consumerist, is understandable. Each of us as Facebook members counts on the privacy of our friend lists, our personal info and our daily status updates.

Yesterday, Facebook did an about-face, and in its official blog, CEO Mark Zuckerberg said the social networking site will revert to its previous terms.

No matter what the outcome, Facebook is taking another step to find a way to monetize the information and communications between its 175 million members, of which Zuckerberg says in the blog: "If it were a country, it would be the sixth most populated country in the world."

LinkedIn, the social network focused on connecting business people, is trying to find a path to becoming a business itself. On Saturday, Erick Schonfeld of TechCrunch reported that "As the Economy Sours, LinkedIn's Popularity Grows," writing, "Part of what's driving all of the activity is people looking for jobs and helping friends who are out of work."

Given the huge growth in usage but the paltry growth in revenue, a lot of people wonder if social networks could be like airlines: Tons of people use them, but they don't make money.

Of the group, MySpace seems to have significant revenue because it's replete with banners for national advertisers, and it's become an effective vehicle for marketers such as McDonald's, Toyota and Sony. Add on top of that the site's contextual search deal with Google, and MySpace looks like the revenue winner--at least for now. The other social networks, however, have yet to find their place in the marketing mix.

No one's figured out the monetization answer yet, but it's likely to be one that takes advantage of the unique network effect and virtual interactions from the tens (and hundreds) of millions of members.

Already, these members are every day demonstrating consensus around films, music, restaurants, TV programs, etc. And they have the potential to give advertisers permission to offer them everything from credit cards to coupons to cameras.

Even though Facebook's Beacon--a flawed program to show information about its members' online purchases--ultimately failed, some confidential method of sharing people's purchases and the things they're thinking about purchasing could be useful to Facebook's members as well as to its advertisers.

But of course, it has to allow members to opt in or opt out and preserve the privacy they have come to expect from social networks. Eventually, however, if the offers are selective and well-targeted, members will view them as useful.

Data is just as likely to be as big a piece of the business equation as advertising. Facebook, LinkedIn, MySpace and Twitter already possess billions of pieces of useful data that can infer so much about what's happening--and what's going to happen--in consumer society.

Compared to samples from surveys and focus groups taken outside of a retail store, on the phone or behind a two-way mirror, this data can provide a census of the views and interests of major segments of the world's population--incredibly valuable. And, the data, if properly "washed," doesn't have to invade anyone's privacy.

Also, when the economy turns up, LinkedIn's info on people--both those who have a job and those who are looking--will be a valuable resource for employers and job seekers alike. Already, it's a powerful utility for people to make connections that will lead to business opportunities--another potential "deep pocket" to fill LinkedIn's coffers.

Clearly, social networks have changed how each of us communicates, shares information and connects with other people. They have become powerful forces for good, building bridges between people and even useful as a tool to counter terrorism and repressive governments.

And our involvement through social networks is only going to continue. Despite the naysayers, I believe that if social networks continue to build the audience and create useful ways for their members to give information and get information, the dollars will follow.

Michael J. Wolf is a former president and chief operating officer of MTV Networks.