Jonathan Abrams is keeping quiet about how he is going to generate revenue from his Web site, Friendster, which specializes in social networking. Abrams is a 33-year-old Canadian software developer whose experiences include being laid off by Netscape and then moving from one start-up to another.
In 2002, Abrams was unemployed, not doing well financially, and certainly not looking to start another business when he developed the idea for Friendster. He quickly coded a working prototype and watched in amazement as his Web site took off. The buzz around social networking start-ups has been on the rise.
A number of high-end venture capital firms, including Sequoia and Mayfield, have invested more than $40 million into social networking start-ups such as LinkedIn, Spoke, and Tribe Networks. Friendster received over $13 million in venture capital from Kleiner, Perkins, Caufield, Byers, and Benchmark Capital, which reportedly valued the company at $53 million-a startling figure for a company that had yet to generate even a single dime in revenue. A year after making its public debut, Friendster was one of the largest social networking Web sites, attracting over 5 million users and receiving more than 50,000 page views per day. The question is how do efficiency metrics, such as Web traffic and page views, turn into cash flow? Everyone is wondering how Friendster is going to begin generating revenue.
The majority of Abrams's competitors make their money by extracting fees from their subscribers. Friendster is going to continue to let its subscribers meet for free but plans to charge them for premium services such as the ability to customize their profile page. The company also has plans to extend beyond social networking to an array of value-added services such as friendbased job referrals and classmate searches. Abrams is also looking into using his high-traffic Web site to tap into the growing Internet advertising market.
Abrams does not appear concerned about generating revenue or about potential competition. "Match.com has been around eight years, has 12 million users, and has spent many millions of dollars on advertising to get them," he said. "We're a year old, we've spent zero dollars on advertising, and in a year or less, we'll be bigger than them-it's a given." The future of Friendster is uncertain. Google offered to buy Friendster for $30 million even though there are signs, both statistical and anecdotal, that Friendster's popularity may have peaked.
Questions
1. How could you use e-business metrics to place a value on Friendster?
2. Why would a venture capital company value Friendster at $53 million when the company has yet to generate any revenue?
3. Why would Google be interested in buying Friendster for $30 million when the company has yet to generate any revenue?
4. Identify Friendster's e-business model and explain how the company can generate revenue.
5. Explain the e-business benefits and challenges facing Friendster.