Blowing bubbles

Tony Blair called it the "new industrial revolution" while co-founder of CNN Robert Wussler hailed it "the third broadcasting revolution". Now, one burst bubble later, has the public already grown bored with the 'second coming' of the internet? John Parnell investigates.

User-generated content and communication form the cornerstone of the growth of the web 2.0 phenomenon. Video and photo-sharing, social networking and voice over internet protocol (VoIP) are the main success stories to date, although the accomplishments have tended to be in the popularity stakes rather then the financial.

Facebook claims to have 67 million users which is impressive even compared to MySpace's 110 million-strong subscriber base. However, with 2007 revenues amounting to just US$150 million, the company is generating around $2 per user, per year.

The most astounding fact however, is that Microsoft, undeterred by these figures, paid $240 million for a stake of just 1.6%. While media wags and impressionable types were quick to note that the deal theoretically valued the company at a staggering $15bn, the sensationalist headlines ultimately proved misleading.

The reality is that Microsoft actually bought exclusive rights to distribute ads through Facebook till 2011, along with its tiny stake. The motives behind the misleading structure of the deal are highly strategic.

Some have speculated that the over-hyped headline valuation was fabricated by Microsoft to scare off any other interested parties.

Microsoft may simply be marking out its territory, but there are two other potential scenarios playing out here. The first is a testing zone. If Microsoft is sincere about expanding its media and content-based interests, it now has a massively popular platform with which to hone its strategy.

With Facebook bearing many of the hallmarks of a typical 2.0 service, the site offers a perfect test bed. With its buy-in, the software giant has also gained direct access to regular users of the service.

Should Microsoft perfect a Facebook-based business model by 2011 and use its relationship to cement the tie-up permanently, it could prove a very lucrative move.

In theory, social networking websites offer advertisers unique brand building opportunities. However, in reality, many web 2.0 sites are not attracting the right audiences for advertisers.

Facebook was originally a student only offering and still boasts a large student base. This group may not yet have formed lifelong brand allegiances but in the short-term they have little disposable income.

Other sites have been written off by some US analysts as attracting "shut-ins, people that spend 20 hours a day on their PC and come from low-income groups". Not exactly a key demographic for marketers.

Meanwhile, Facebook remains the eighth most popular website in the world with MySpace at six and YouTube number three. The combined revenue of these three companies is just $900m, compared to the $16bn-plus revenues generated by Google in 2007.

While the number of internet subscribers in the Middle East continues to grow, those looking to make money from the medium in the region have an opportunity to use success stories like Google and those with the reverse fortunes, as a guide when pursuing new business.

Western social networking sites have proved successful in the region with Facebook in particular appearing in the top ten most visited sites across the Middle East.

As internet user demographics continue to evolve, these sites will cease to be as important and localised Arabic-language services should take a leading role.

The content of these sites will be tailored for the local users but lessons for the business models can still be learned from developments internationally.

A common theme that linked the corporate casualties of the 2000 dotcom bust was the lack of a sustainable business model.

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