The headline says Social Networking is Not a Business*, with an asterisk. Below, right under the introduction, is “*but it might be soon.” That’s the lead story in the latest MIT Technology Review (it’s free, but registration is required to read the story). The lead goes as follows:

Web 2.0–the dream of the user-built, user-centered, user-run Internet–has delivered on just about every promise except profit. Will its most prominent example, social networking, ever make any money?

I’ve seen Facebook at work with college students. Wow. And with high school kids. Wow again. It’s like a magnet. A couple of years ago they modified handling what appeared on the wall, the kids threw their hands up in protest, Facebook did a quick double take. I’ve seen on campuses how Facebook is as important as cell phones. Just the photo tagging alone is magnet enough, and that’s trivial compared with the rest.

But Facebook is supposed to lose $150 million this year. MySpace revenue fell $100 million short of projections last year.

The MIT Technology Review story, by Bryant Urstadt, details some of the behind-the-scenes providers in social networking, such as KickApps and Ning. And lots of users; users everywhere. The story ticks off numbers such as 35 million unique U.S. visitors to Facebook in a month, 72 million for MySpace and 22 million for Bebo. Ning has more than a quarter of a million sites.

Reminds me of the castaway on a raft in the middle of the ocean: “Water, water, everywhere, Nor any drop to drink.” The big social networking sites have users everywhere, but not a lot of revenue. Money, yes; but it’s investment money, capital, not sales. Microsoft paid $240 million for a 1.6 percent stake in Facebook. Ning, founded by uber-entrepreneur Marc Andreessen, got $104 million in venture capital.

The story is an in-depth analysis, seven pages in its Web version. A lot deeper than my summary here. But I like this sort-of summary near the end of it.

The ghosts of vanished giants haunt social networking. So many formerly great Internet companies are struggling or dead. Consider CompuServe, AOL, Netscape, Napster–even Yahoo. Lycos, a search engine that was sold to Terra Networks in 2000 for $12.5 billion, was sold to a Korean firm for $95 million four years later.

What CompuServe and many of the others have in common is that they were portals; gateways to the Web. Facebook wants to be something similar: more than just a useful and fun social tool but the first page people open on the Web and the platform they use for all their other communication on the Internet.

As would-be portals, however, social-networking sites are vulnerable to one of the problems that brought down those earlier Internet businesses. The portals were “walled gardens” where inexperienced Internet users congregated for a time but where they became restless at last–leaving for the wider, wilder Web. Facebook and MySpace understand this and are now struggling to achieve an appropriate balance between openness and control.

They’re also struggling with faddishness. Danah Boyd, a doctoral candidate at the University of California, Berkeley, studies social networking as a cultural phenomenon. She describes online hot spots as though they were popular pubs. “It’s supercool when all of your friends go there,” she says. “Then all sorts of other people come in. Even if the pub doesn’t start feeling physically crowded, it starts feeling socially crowded when your ex is at the other end of the bar talking to some creep who brought his fellow gang members. How long until you say, ‘Enough–I’m outta here’ ?”

So that link is Technology Review: Social Networking Is Not a Business* and it does require registration, but it’s free.

Tim BerryTim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Follow him on Twitter @Timberry.