Social networking's explosive growth to level out in five years

Virtual communities and online social networking sites are providing a new, powerful and extremely popular medium for human connection. In a new report independent market analyst Datamonitor, a premium business information company specializing in industry analysis, expects global active memberships in social networking sites to reach 230 million at the end of 2007. Notwithstanding the fact that many users have multiple memberships, this represents an extraordinary cultural trend. The report, The Future of Social Networking: understanding market strategic and technological developments, says infrastructure providers, social network providers and wireless players stand to profit largely in the near term.

"For social networking services, barriers to entry are virtually non-existent, and both competition and innovation are ferocious," says Ri Pierce-Grove, Technology Analyst at Datamonitor and author of this report.

"Users have a vast array of options, from Titanic generalists like MySpace and Facebook to tiny individual networks on DIY platforms like Ning. This year revenues from social networking services should reach US$965 million growing to US$2.4 billion by 2012."

Explosive growth in social networking will plateau by 2012; earlier for the United States

Social networking is growing around the world, everywhere people have Internet connections. Most large social networking services, especially those which allow the distribution of content like video, have a very long tail of geographic distribution.

According to Datamonitor, by year end 2007 Asia Pacific will account for 35% of the world's social networking memberships. Europe, the Middle East and Africa (EMEA) will hold 28%, North America 25% whilst the Caribbean and Latin America (CALA) will account for 12%. Adoption curves vary dramatically by region, but Datamonitor expects membership growth in all regions to have peaked by 2009 and to have levelled out by 2012.

Currently, there are two strains of thought about this market, both strongly influenced by memories of the e-commerce boom at the beginning of the century. At the moment, prevailing sentiment is excitement combined with anxiety. Players fear missing the next Google, the next Yahoo. But mixed with this exuberance is a thread of cynicism. Investors remember how few Internet start-ups survived the market downturn, and are repelled by what they see as overconfidence. The bulk of social networking sites are wise to postpone any consideration of an IPO.

"A sane approach to this market requires balancing the two perspectives," says Pierce-Grove. "The extraordinary proliferation of online social networks is fuelled by real innovation and is substantially changing the way we communicate. However, the hothouse atmosphere of easy capital, media attention, and user curiosity which stimulates creativity will not be sustained indefinitely. All players therefore must develop a two-pronged strategy in order to survive the extremes of heat and eventual chill which this market will undergo."

A value chain is emerging

The business of creating a social network and providing the infrastructure on which it runs are beginning to separate. Firms are bringing not just social networks, but social networking platforms to the market. Specialists are becoming involved creating the "look and feel" of social networking sites for a broad range of clientele. Datamonitor expects this trend to continue, and advises technology providers to look for ways to support social networking services in the key areas of scalability and availability.

Consolidation is inevitable

Media properties, search firms, and other commercial entities will look to lock down the new constellations of audiences brought together by social networking services. Market experimentation will continue as operators seek the optimal combination of features and functions as well as more sustainable operational models. However, the sites themselves will not necessarily consolidate; special interest social networking services will continue to play a valuable role.

"As the market becomes more crowded, it will become harder for social networking sites to remain independent. Acquisition can solve scalability issues, improve content and search capabilities, and extend visibility and reach," concludes Pierce-Grove.