It needs to be made abundantly clear that the rate at which a website attracts new users cannot alone be used to make valuations. While it is a good place to start in analyzing the potential value of a site, even a constant exponential increase in unique visitors does not ensure a site’s founders that they soon will be swimming in pools of money while drinking champagne aboard double-decker private jets.
The impetus for this clarification is the alarming rate at which Twitter is gaining users. Twitter had 55% more unique visitors February of this year than it did in January, while growth in March was a disturbing 131%! Good for Twitter, but this will not translate into any money for Biz Stone, one of the site’s founders, until the microblogging platform is monetized.
A potential argument is that once there is a critical mass of users, any interent service will eventually make money. “Eventually” is debatable, but monetizing a business is harder than one might think. In fact, two of stories recently covered by TechGeist are great examples of just how difficult it is to turn unique visits into cash. YouTube costs Google $1.65 million a day, despite its apparant untouchable status as the most trafficked video site in the world. Skype speaks more to this point: despite the hundreds of millions of people who have used the popular VoIP service over the years, eBay has been forced to spin it off as its own IPO.
One would think that even if eBay has been unable to turn a profit off of massively successful software, the evil geniuses at Google would have had some success with YouTube. But the fact that neither of these huge services are yet to become profitable speaks to how growth does not confer monetary gain. But even more importantly, the longer users are accustomed to not paying for something, the less likely they are to eventually pay for it once the heads of a company decide that it’s not free anymore. Twitter, YouTube, Skype, and all the other high growth services around, are going to have to do something quite clever if they’re to start actually making money.
Update: For those saying otherwise, there is no data to suggest that Skype is profitable. 21% profit margins tell us nothing, especially when one considers the massive overhead Skype must have to pay for users who don’t give them any cash for services like SkypeOut.
