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Why the Friendster bubble 'has peaked – will pop'

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The good times must be returning to the blighted technology industry. Silicon Valley's VCs are doing what they love best, and throwing investments at start-ups which don't know how to make money themselves.

This is factored into the Venture Capital firms' own business plans: in the golden years here, they made money by taking private companies public rather than investing long-term in risky but potentially young start-ups.

Friendster is a great example. It's the poster child for a clutch of new 'social networking' sites. Allegedly, Friendster was the recipient of $5 million from Kleiner Perkins Caufield and Byers, and allegedly too spurned a $30 million offer from Google. Kleiner Perkins' John Doerr, sits on the board of both. We say 'allegedly' because the inside sources for so many of these rumors tend to have an interest in hyping the space. Just like the old days.

And just like the old days, too, Friendster doesn't make any money. Nor do any of the other social networking start-ups.

This must rankle not a little with the start-ups who do make money from 'social software'. So we rang the founder of one of the largest, Friendfinder, Andrew Conru, to find out.

Despite its low profile, the Friendfinder network of twelve sites has over 20 million users, and typically 5,000 users in its chat rooms at any one time. (There are almost 4,000 as we write). And it generates a healthy profit - although Conru wouldn't say how much. He's also added social networking features to his sites. So naturally, these are competitors in one sense. But what did he think of the investment mania?

"It's a bubble. Social networks have been around for a long time," he says. "Friendster is feeding off the hype. People get excited about joining a network and use it for a couple of months but once they get to know people they'll use other communication like email or IM." He likens it to fads such as weblogging, which has a higher abandonment rate, or flash mobs.

It isn't just VCs who see an opportunity in the hype. Wiki-fiddlers, or HTML coders who have been unemployed since the last dot.com explosion, are also hopeful that this represents a change in fortune. But Friendfinder's CEO thinks they might all be disappointed.

"I'd like to see the conversion rate when Friendster starts charging for the service. How many people will pay even $10 or even $5 a month, when they have access to their Outlook Express inbox for free?"

"The technology is easy to mimic and very straightforward. The issue is will the hype of trying to get all your friends to join wear out?" A flaw in many of the networks' assumptions, he reckons, is that only a subset of one's friends will ever join a social network site. And at a certain point the networks themselves become redundant. "Once I know you, it's just as easy for me to contact you directly," he says. "A social network is simply a directory."

In other words, Friendster's obsolescence is built-in.

It's interesting to note that Friendfinder has an affiliate program that segments by region, religion and interests: there are separate locales for the Christian dating site BigChurch.com and Adult Friendfinder, for example. And while Friendfinder clearly likes users to be 'sticky', it's based on the assumption that users come and go.

Controversially, Conru reckons that Friendster's popularity peaked a month ago.

"It's a very romantic thing to get everyone in the world on the same network," he says, noting the difference in approach between his company and the techno-utopians. "Some people really want to let the network do our socializing. But once people have met other people, they get on with the rest of their lives."

Andrew's simple observation, we reckon, distinguishes his businesses' success from the many failures we'll soon see. When will VCs learn this? ®

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