Are ad-funded social networks like Facebook and Twitter on their last legs?

Facebook. Twitter. When you ask most people what ‘social media’ is, chances are it won’t be long until they mention one or both of those.

I’ve written before about how both of these are really just advertising businesses, but two things have happened recently that make me think their time might be up.

FacebookFacebook’s stock opened at $38.00. It’s currently trading at $19.00. Why is that important?

I think its important because Facebook is viewed as the Titanic of social networks — unsinkable. It’s where everyone is and therefore where everyone (should) spend their time online.

If the biggest social network can’t convince investors that an advertising-based business model works, what hope for everyone else. Which brings me to my next point.

TwitterTwitter as we know it wasn’t created by Twitter the company. Retweets, @mentions, even the Twitter 'bird’ were all created by passionate third parties who love the service. I’ve written before about how online communities like Twitter only really survive because of their hardcore of users.

With the most recent announcement for their upcoming API changes Twitter seems hell-bent on ignoring the people who make the service great.

Why?I think this has happened for a number of reasons. Social networks need critical mass to be even vaguely viable, and the easiest way to achieve this is to build something cool and give it away for free.

This works well for a while as numbers build, but free doesn’t pay salaries.

Nobody wins. The company doesn’t win because they have no way of making money, and you don’t win because you’ve only got a guest pass to a tool that has become really important to your every day life.

I don’t know if there’s a real alternative — perhaps not one that looks like Facebook or Twitter, but there are a couple of things that I think could emerge over the next few years.

App.net is a paid-for unification of the best bits of Twitter and Facebook. Bootstrap funded by its users it charges $50 a year for membership. They had a funding goal of $500,000 which they met, just. I signed up myself and it feels a lot like Twitter did when I first joined. The barrier for them will be reaching any form of critical mass [1. By critical mass I mean millions of users] when users have to pay.

Maybe the future isn’t in social networks as a destination for people to go and spend time, but in a set of social tools that complement businesses with a real revenue stream — like Amazon (who actually sell things) and Moneysupermarket.com who operate an affiliate model.

The real commercial value in Facebook or Twitter is their social graph [2. Think: 'everything they know about you and your friends.] Imagine if Facebook made money by licensing out what they know about you. By becoming a social media Dunnhumby [3. The company who worked with Tesco to develop the first Clubcard] for anyone running a business that relies on knowing everything about their customers.

I could see a future where Facebook and Twitter make money by acting as a data provider instead of an advertising business.