Main challenges [Web 2.0 - Social Networking Websites] 
It appears that the exact reasons that made social networking sites extremely popular with users are making it very hard to earn big profits for website owners. The main reasons are:
Most notably – User Generated Content (UGC). Users are encouraged to post text, audio and video content to be viewed by other users. Obviously, many users post content that belongs to others and is protected by copyright laws, or alternatively – they create their own content based on existing works (such doing video makeovers, remixes etc.) As a result, this creates a lot of illegal content and no advertiser will want their ad to be displayed on a page which contains such illegal material.
Lack or censorship. Users are allowed to use the website’s resources based on an end-user agreement, and usually no follow-up check of the user’s activity is performed. The business model behind such websites does not provide for an army of censors to control every bit of information that is uploaded every day. In fact, it is hard to imagine how the tens of thousands of videos uploaded by YouTube or other websites’ users every day can be verified. As such, content containing nudity, violence, sexually explicit or copyrighted material can easily end up on the website. The peer censorship based on other users reporting illegal content to site administrators may not be as effective as one would desire and besides, it is a post factum one – the content will have spent some time online before it is reported. This only adds to advertisers’ concerns about having their ads shown next to unknown content. In addition, censorship is most likely to cost the website a share of its users, because for many the uncontrolled environment is a deciding factor of choosing the service. As soon as users find that their content is erased for whatever reason, there are good chances that they will switch to a less popular website with less stringent controls.
Historically, most social networking websites have been free. This includes both signing up for membership and accessing other users’ content. As soon as users are required to pay for some service that they have got used to accessing for free, a significant portion of the user base is likely to turn to a competing website where such services are still free. And in case of mega-popular websites with tens of millions of users, this share may also constitute millions.
Historically, most social networking websites have contained little, if any, advertising. Websites where advertising doesn’t exist or where it is unobtrusive, will usually win over those where users see an excessive number of banners, pop-up windows and other ads. Pop-up ads have become the plague of the internet and users try to avoid it at all costs. Increasing the amount of promotional content on social networking websites may drive away users, limiting the revenue generating potential of advertising on users’ pages.
These factors raise barriers to effective exploitation of the tens of millions users as paying consumers. As soon as some effort is made in generating revenue with traditional means, a portion of users is likely to leave forever. Besides, some other problems emerge when an effort is made to turn social networking websites into profitable enterprises:
- Potential for copyright infringement, with the following implications:
- Possible lawsuits from copyright holderes;
- Content screening may be required (at least removal of content in question), slowing down content distribution, raising costs and losing audience/users;
- As mentioned above, advertisers are unwilling to have their ads associated with illegal content;
- Potential for lawsuits by children’s rights organisations or parents whose children may have been exposed to content containing violence, illegal substance abuse, sexually explicit content etc.
- Investors may be unwilling to contribute their capital to a website which may be sued by numerous copyright holders or other stakeholders (the acquisition of YouTube by Google disproves this point, but not every company is as bold as Google).
Thus, the efforts to make these websites more profitable may fail, costing the websites its audience and reputation, if done in a hurry without performing a detailed study of their users first.
As some analysts point out (quite correctly): “Social networking sites are relatively easy to build. If users keep their profiles updated – churn and dormancy are always an issue – then MySpace will remain critical to people’s social lives. If not, the site may possibly only last a few years.” Jon Gibs from Nielsen//NetRatings also notes that “the concept of <…> ‘social networking’ is not enough. In this competitive marketplace, sites also have to provide consumers with distinct content they can identify with. <…> The social networking sites that are seeing strong growth have developed a unique online presence that is continually refreshed by user generated content. <…> This promotes ongoing consumer interest and visitor loyalty. However, while these sites have seen explosive growth over the past 12 months, this is a fickle youth audience, and the masses that have rushed to these sites, could turn their attention elsewhere. The question that remains is ‘how strong are the social networks that consumers are building on these sites?’”
The target audience of social networking websites is a young population familiar and very comfortable with using modern information technologies. These young people can easily migrate between websites and represent an inherently unstable audience, who can be easily driven away by excessive advertising, censorship or requirements to pay for services. Turning this audience into a source of revenue (either direct or indirect) will take a lot of innovation and perseverance. It costs little to set up a social networking website, and it isn’t very hard to increase traffic to the website (the model has been tried and YouTube proved that it is possible to attain multi-million audience in a matter of months, beating MySpace in terms of time to achieve a similar audience). But no social networking website has reported any substantial revenues (at least not for the audiences they serve) so far, suggesting that converting users into cash is harder than it seems.
Next: Web 2.0 - Social Networking Websites: Conclusions.
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