Year End - Social networks struggled, thrived in 2007

The year closes with the market in a fascinating state of flux.

High drama enveloped social networking companies during 2007 as they pursued significant opportunities and stumbled over mighty obstacles.

As the year draws to a close, many crucial questions about the good and the bad of social networks remain unanswered, with the market in a fascinating state of flux.

Will social networking sites fulfill their potential to become major and vibrant advertising vehicles? Or will they fall short if privacy concerns about intrusive and stealthy ad tracking drive users away, and if illegal and vulgar content scares off advertisers?

Another cliffhanger that 2007 leaves us with: Will social networking sites displace portals and search engines as users' preferred Web hubs? Or will users sour on the social network experience if they feel vulnerable to criminals and stalkers at these sites?

One thing that did become clear in 2007 was that the social network format, originally a hit with teens, has struck a chord with users of all ages, and thus these sites now harbor greater ambitions than simply being virtual meeting places.

"This was the year in which social networking gained legitimacy and credibility as a phenomenon that's here to stay and that's a big deal," said industry analyst Greg Sterling of Sterling Market Intelligence.

Sites such as Facebook, MySpace, LinkedIn and Bebo -- along with many others that sprouted up to cater to specific interests and demographics -- found they could offer most services, content and applications their users are interested in.

That's why most major social networks have opened their platforms, as Facebook did in May, so external developers can create applications for their sites. Facebook now has more than 7,000. For users, it's not just about communicating with friends but about possibly making their social network profile their most important and relevant Web page.

"The major development in 2007 was the emergence of the social platform: It's the evolution of social networking from a closed application that is fixed and defined by the vendor to an extensible platform that can support an ecosystem of third-party vendors," said Ray Valdes, a Gartner analyst. "It accelerates the evolution of these sites and allows them to address a wider range of requirements: different types of users and of usage scenarios."

As this became amply evident in 2007, Internet giants such as Google, Microsoft and Yahoo reacted uncomfortably, seeing sites such as Facebook neatly solving a problem that has stumped them: providing their users with a unified experience across their different online services.

Google, Yahoo and Microsoft for years have provided services for hosting photos, videos and blogs and for communicating via e-mail and instant messaging, but they have failed to find an efficient, organic way to tie them together. At a site such as Facebook, these services orbit around each person's account. Google, Microsoft and Yahoo all launched social networks in recent years but didn't make them the center of their online services universe.

Now, Google, Yahoo and Microsoft are scrambling to unify their consumer online services, retroactively attempting to stitch a social network across them.

"The social platform allows the application to evolve and adapt and be integrated with other applications. The user will log in to their profile page and see they have new messages, or a photo has been uploaded, so [the profile] becomes the new center of gravity for the person's Web experience," Valdes said.

This year, Yahoo said it would phase out its disappointing Yahoo 360 social network and it began experimenting with a new one called Yahoo Mash, hoping to mesh its services together. Meanwhile, Google launched its OpenSocial common APIs for social networking applications, a move some consider an attempt to undercut the momentum of Facebook's development platform. Google also has launched Google Profile, a service to give people a single badge to tie together their Google services.

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Microsoft also reacted and opened its wallet, paying US$240 million for a 1.6 percent stake in Facebook, giving the social networking company an eye-popping valuation of US$15 billion, although Facebook's revenue this year will reportedly be around US$150 million. The deal extended an existing arrangement for Microsoft to provide online ads to Facebook.

Still, the threat from Facebook and similar sites to usurp the role of Web hubs, while real, shouldn't be overstated, Sterling said. Many services and content offered by search engines, portals and e-stores don't yet exist in social networking sites. Although this may change, at this point social networking sites generally focus more on entertainment and novelty, while search engines, portals and e-commerce sites lean toward utility, he said.

While others worry about them, social networking sites have their own challenges. Facebook and MySpace, in particular, have been in the crosshairs of law enforcement agencies worldwide, criticized for not doing enough to protect their members, especially teens, from predators. If this problem worsens, social networks could be in trouble.

"The value proposition of these sites that are mostly closed, walled gardens like Facebook is that they provide a cleaner environment for individuals to interact, compared with the open Web," Valdes said.

Safety isn't just about protecting members from criminals. Shortly after opening its platform, Facebook had to scramble and modify the program because some developers, eager to spur the adoption of their applications, designed them with self-promotion features that users complained were deceitful and triggered annoying and abusive actions, such as bulk unsolicited e-mails and intrusive message displays.

Lately, Facebook came under fire from members and privacy watchdog groups after launching an advertising program called Beacon, which it has had to modify twice in response to criticism that it is difficult to manage and understand and too intrusive in its tracking of users' actions in affiliated sites.

Even after the modifications, which included letting users completely opt out, issues remain with Beacon. Experts point to the program as an example of how social networking sites can miss the mark when trying to exploit their gold mine of user data for improving their advertising targeting.

"[Social networking sites] need to hold user privacy in high regard because, while the users voluntarily put a large amount of information [about themselves] on the sites, the key word to remember is 'voluntarily,'" said Stefan Berteau, a Computer Associates security researcher who has been at the forefront of scrutinizing Beacon.

Just because members of a social network share personal information there doesn't mean they have given the site carte blanche to share their information with third parties, he said. "It needs to be the users' choice what information they share with whom," Berteau said. "We believe there are ways to do very effective targeted advertising in a way that respects user privacy."

Whatever ends up happening, the dynamics, trends, opportunities and challenges seen in social networking in 2007 will be fascinating to see develop in 2008, Sterling said.

"It's one of the most interesting and important things happening on the Internet, because you've got large groups of people sharing information, coming together, and this emerging culture of participation where people are contributing content. It's a very interesting, fascinating and important area, in many respects as important as search, which had formerly been the dominant topic of discussion," Sterling said.