How long can social media survive without cash?

I attended a seminar recently where the founder of a niche social networking site was extolling the many features of his creation. After half an hour gushing about the great ways people can use his site to get recommendations and make personal connections - and make no mistake, the site is pretty cool - a lady casually raised her hand and asked him, since he was encouraging people to set up their own 'Web 2.0' properties, how he was earning money, since very few people can afford to throw themselves into such a large-scale venture without earning enough to pay the bills.

The only answer he could stammer out was that he was funded by venture capital. The correct answer, which everybody in the room knew already, was that he didn't really care how the site got monetized in the long run as he set the site up because he was transfixed by the idea of social media and what he was aiming to do in the long term was build a popular website that somebody with deep pockets would take off his hands in exchange for an obscene amount of money.

This problem of how to monetize a website seems to be a common theme for social media sites. Founded by people who are interested in innovation and new ways to use the internet, as these properties start to mature they are faced with the ongoing problem of how to sustain themselves. Some properties such as Second Life or Habbo Hotel were designed around the idea of a marketplace. Participants in these virtual worlds buy and sell objects like in the real world, and in the case of Second Life, entrepreneurs using the site have become millionaires trading in Linden Dollars, the currency of Second Life which can be exchanged for real dollars, presumably at a commission.

Many Web 2.0 properties such as Flickr and YouTube have been bought by larger internet companies and folded into larger portals. Flickr makes Yahoo some money through subscriptions. Google is still working on ways to get adverts converting on YouTube.

Much has been made of advertising on MySpace and Facebook, but recent figures suggest that advertisers are cutting back their spend on social media because it does not convert – the people making money off these social media properties are participants, not advertisers. Although overall spending on advertising on social media is growing, the scale of the growth is slowing down despite the number of sites on which to advertise growing rapidly. These sites are constantly in the media through speculation as to how they will continue to grow when advertisers are cutting back their spending on social media advertising and increasingly turning towards social media marketing instead.

Today, as I was teasing out the ideas in this post, I came across a post on Search Engine Journal about the possibility of Twitter including Google ads on their site. Currently Twitter, despite being wildly popular, is funded by venture capital. They either need to sell or to find a way to make money from their service.

As more and more people begin to use social media in their daily lives and more and more businesses come to rely on social networking for marketing and branding purposes, it becomes ever more crucial to the internet economy that these sites reach financial maturity. But, how do they get there?

One model would be subscription-based, where sites such as Bebo, Facebook and MySpace start charging us for the service, perhaps adding tiered subscriptions depending on what features are used so for example, basic social networking where you can build a profile and find your friends is a minimum charge, but making use of photo albums, video, live chat and RSS feeds will cost more. This would probably cause users to choose one service rather than spreading themselves out across the internet as they do now. Maybe for a little more you would be allowed to network or chat to people on another network.

Another possibility is that the viable sites get bought up by larger properties so that we are left with two or three or four large portal sites with the full umbrella of services underneath so you could choose Google’s services which might include social networking via Orkut, photo sharing via Picasa, video sharing on YouTube, blogging via Blogger and instant messaging on GTalk. Maybe they’d even buy Twitter and include microblogging. Or, alternatively, you could sign up to Yahoo and get, amongst other services, Yahoo Messenger, Flickr and Yahoo Answers and the social network attached to Answers.

Under both of these scenarios, however, the vast majority of sites will eventually fold.

Personally, I would hope that all of these great social media sites find a way to become financially viable because I think the internet benefits from choice and the more places and ways people have to interact online the better it is for everyone.